Identifying Trends

"The trend is your friend — until it ends." Before you trade, you need to know what the market is doing right now.

The Three Market States

1. Uptrend — Price makes higher highs (HH) and higher lows (HL)
2. Downtrend — Price makes lower highs (LH) and lower lows (LL)
3. Range — Price oscillates between horizontal support and resistance

Anatomy of an Uptrend

         HH
        /  \
   HH  /    \
  / \ /     HL
 /   HL
HL

Each swing high is higher than the last. Each pullback (swing low) stays above the previous low. Buyers are in control.

Anatomy of a Downtrend

The mirror image: each swing low is lower, and each bounce fails to reach the prior high. Sellers are in control.

How to Mark Structure

1. Zoom out to a higher timeframe (4H or Daily)
2. Connect the obvious swing highs and swing lows
3. Label them: HH, HL, LH, LL
4. When a HL gets broken — the trend may be shifting

Trendlines

Draw a line connecting:

• Two or more HLs in an uptrend (ascending trendline)
• Two or more LHs in a downtrend (descending trendline)

A clean break of the trendline with volume is an early sign of a potential reversal.

Moving Averages as Trend Filters

• Price above the 200 EMA → generally bullish
• Price below the 200 EMA → generally bearish
• Price between 50 and 200 EMA → indecisive / transitioning

Trading with the Trend

The simplest edge in trading: trade in the direction of the higher-timeframe trend.

• In an uptrend → look for long setups at pullbacks to support/demand
• In a downtrend → look for short setups at rallies into resistance/supply
• In a range → fade the extremes or wait for a breakout

Key Takeaway

Identify the trend first, then find your entry. Fighting the trend is the most expensive mistake in trading.