Trends and market structure

In simple terms

Prices rarely move in straight lines. They rise, pull back, rise again, or drift sideways. Technical analysts describe this market structure using the turning points on a chart.

• A swing high is a peak: a high with lower highs on either side.
• A swing low is a trough: a low with higher lows on either side.

The sequence of swing highs and lows defines the trend.

Three kinds of structure

Making it objective

Different people looking at the same chart often see different swings. To make trend calls consistent, use a rule. For example:

• a swing high is a high that the price later falls at least 5% from, and
• a swing low is a low that the price later rises at least 5% from.

The percentage chosen changes the answer: a 2% rule finds many small swings; a 10% rule finds only big ones. Choosing and writing down the rule, as the chart process lesson recommends, makes your observations repeatable and testable.

Trends depend on the timeframe

A trend on a daily chart is not the same as one on a weekly or monthly chart. A share can be:

• in a downtrend over the last three weeks,
• in a range over the last six months,
• and in an uptrend over the last five years.

All three can be true at once. Say which timeframe you mean whenever you describe a trend, as the timeframes lesson explains.

Does a trend tend to continue?

Many traders believe "the trend is your friend". Research on some markets has found modest tendencies for past price moves to continue over certain horizons, often called momentum, and for some to reverse over others, but these effects are small, vary over time, and are often eroded by trading costs. They do not make any individual trend predictable.

Two points are clear:

• A trend's length alone does not make it more likely to continue. A share that has risen for two years can fall the next day.
• Trends end, often without warning. The structure breaks only after the turning point has passed.

Why it matters

Trend and structure are the vocabulary of almost all chart analysis: support and resistance, breakouts, indicators and patterns all refer to them. Describing them clearly, with an explicit rule and timeframe, separates useful observation from guesswork. It also helps investors understand price behaviour during bull and bear markets.

Limitations

Trend descriptions are always backward-looking: a trend is confirmed only after several swings, by which time much of the move may be over. Swing definitions involve choices that change the answer. And identifying a trend does not tell you how long it will last.

Common mistakes

• Calling a trend without a rule, so the call changes with your mood.
• Ignoring the timeframe.
• Assuming a long trend must continue, or that it is "due" to reverse.
• Treating one lower low as proof of a new downtrend.

Try it yourself

1. Choose a share and open its daily chart for the last year.
2. Using a 5% rule, mark each swing high and swing low.
3. Label each part of the year as uptrend, downtrend or range.
4. Repeat with a 10% rule and a weekly chart, and note how the labels change.