Trends & Trendlines

The second core assumption of technical analysis is that prices move in trends, and identifying the trend is often considered the single most important judgment a technical trader makes. A famous piece of trading wisdom captures the reason: the trend is your friend. Trading in the direction of the prevailing trend is generally considered to put the odds in your favor. This builds directly on the highs and lows you learned to spot around support and resistance.

The three directions

• An uptrend is a series of higher highs and higher lows: each peak is higher than the last, and each pullback bottoms out higher than the previous one. Buyers are in control.
• A downtrend is the reverse: a series of lower highs and lower lows. Sellers are in control.
• A sideways or range-bound market has no clear direction, with price bouncing between roughly horizontal support and resistance.

The precise definition matters

Defining a trend by the pattern of highs and lows is more rigorous than eyeballing whether a chart looks like it is going up. An uptrend stays intact as long as price keeps making higher highs and higher lows. The first time it fails to make a new high, or breaks below a previous low, is the first concrete warning that the uptrend may be weakening or ending. This gives you objective criteria rather than a vague impression.

Drawing trendlines

A trendline is a straight line drawn to connect a series of price points, and it turns the abstract idea of a trend into something you can see and act on. In an uptrend, a trendline connects the successive higher lows, forming a rising line of support beneath price. In a downtrend, it connects the successive lower highs, forming a falling line of resistance above price. The line needs at least two points to draw and is considered more significant the more times price touches it and respects it.

A trend is not how a chart feels. It is a defined sequence of highs and lows, and it lasts until that sequence breaks.

Trend breaks and timeframes

When price decisively breaks through its trendline, traders watch it as a possible signal that the trend is changing, although like all signals it can fail. It is also important to know that trends exist at the same time across different timeframes. The classic Dow theory framework distinguishes a long-term primary trend, an intermediate trend, and a short-term trend, and these can point in different directions at once. A long-term uptrend can contain a short-term downtrend within it. This is why aligning your trading with the right timeframe, developed fully in the multiple-timeframe lesson, is so important.

The trend is the dominant force on a chart. The next lessons give you tools to measure and follow it, starting with the most widely used of all, moving averages.