The lesson in full
Prices never move in straight lines. They zigzag. A trend is the general direction of those zigzags.
Uptrend: each peak is higher than the last, and each dip stops higher than the last. Higher highs, higher lows.
Downtrend: lower highs and lower lows. Every bounce fails below the last one. Sellers are in charge.
Sideways: price bounces between a floor and a ceiling. Neither side is winning, and markets spend a lot of time like this.
Real example: from March 2009 to early 2020, the S&P 500 kept making higher highs and higher lows, climbing from under 800 to over 3,000.
- Common mistake
Mistake: calling a new trend from one big candle. One candle is a moment; a trend needs a series of higher (or lower) peaks and dips.
- Key takeaway
Up: higher highs and higher lows. Down: lower highs and lower lows. Neither: sideways. Read the trend before anything else.
Quick check
- Higher highs and higher lows is called... An uptrendPeaks and dips that each stop higher than the last: that's an uptrend by definition.
- In a sideways market... Buyers and sellers are evenly matchedPrice bounces between a floor and a ceiling because neither side can win.
- Why zoom out on a chart? To see the bigger trendA dip on a short chart can sit inside a big uptrend you only see when you zoom out.
- One huge green candle appears in a downtrend. What does it prove? Not much: one candle isn't a trendTrends are a series of peaks and dips. One candle can't make that series alone.
Words in this lesson
Reading Charts
- What is a candle, really?
- Line, bar and candle charts
- Trends: the walk of price
- Floors and ceilings
- Breakouts and fakeouts
- Timeframes: zoom in, zoom out
- Three candle patterns worth knowing
- Moving averages
- Momentum and the RSI
- Volume: how many voted