When you have price moving across time due to supply and demand,then this creates trends. This section is a discussion about trends, how they form and how many types of trends and what kind of structure trends have.
It is important for you to understand the structure of trends so you will not depend on any indicator to tell you if the trend is up or down because understanding what a trend is, the structure of a trend, what signals to look to tell you that a new trend may be starting and previous one ending is one key knowledge you require as a price action trader.
And you only need to use price action to tell you if a trend is up, down or sideways.
As I’ve mentioned above, there are 3 types of trends. In simple terms, a trend is when price is either moving up, down or sideways.
- So when price is moving up, it’s called an uptrend.
- When price is moving down, it’s called downtrend.
- When price is moving sideways, it’s called and sideways
Now each of these 3 trend types have certain price structure about them that tells you whether the market is in an uptrend, downtrend or sideways trend.
These structures are derived from the Dow Theory. But I will explain it in here briefly.
The Dow Theory Of Trends Summarized
The theory in simple terms says that:
- when price is in an uptrend, prices will be making increasing higher highs and higher lows until a higher low gets intercepted, then that signals the end of the uptrend and the beginning of a downtrend.
- For downtrend, prices will be making increasing lower highs and lower lows until a lower low is intercepted and that signals an end of the downtrend and a beginning of an uptrend.
Structure of An Uptrend (Bull) Market
With an uptrend market, prices will be making higher highs (HH) and Higher Lows (HL), see chart below for clarity:
Structure of A Downtrend (Bear) Market
Prices will be making Lower Highs (LH) and Lower Lows (LL). The chart shown below is a really ideal case, see chart below for clarity:
But you know that in reality, the market is not like that, it’s more like this chart shown below:
The chart above shows an initial downtrend and along the way there is a false uptrend which does not last and price moves down and then eventually another uptrend moves is happening because another lower high has been intersected(which signals end of downtrend).
This is how you use price action to identify trends. You should know this stuff.
Because the market is not perfect when these trends are happening, you should develop the skill to judge when a trend is still intact or when a trend is potentially reversing. And it’s pretty much price intersecting highs or lows.
Structure Of A Sideways/Ranging Market
For a ranging market, in an ideal scenario, you will see price moving in a range between a support and resistance level like shown below:
But what you see in the real world is not ideal as above, it’s more like this as shown below