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If you hit the google search looking for the term "Trend", one of the first results should be "A general direction in which something is developing or changing". The trend is a dominant bias in any aspect of life.
For example, we could say that the trend for classic 19th-century men's caps is strongly dominant these days. And that basically means that a lot of demand is going on for 19th-century men's caps that make them a theme these days, weeks, or months.
Demand is always the main driver for any product. Price and supply are the other parts of the equation. The interaction between the three is constantly changing and makes up the market.
Understanding Market Trends
In the financial markets (whether in Forex, Stocks, or any other asset class), any financial instrument price is driven by demand and supply.
The instrument is said to be in an uptrend when there is enough demand to make it move higher for a period of time.
What creates those trends are some major underlying fundamental and economic factors. Major factors like monetary policy outlook can impact securities persistently for a period of time, creating long-term trends.
Technical analysis is not concerned with the factors behind a trend, or the reasons behind the change in the prices of the instrument under analysis.
The reasons behind the price movement can vary widely, from political, economical, investors' expectations and emotions, and many more. In most cases, these factors, and their interpretation can't be accurately expected or gauged.
Technical analysis is concerned with the price itself as it reflects all these factors (price discounts everything) and therefore no additional information is necessary.
The Cornerstone of Technical Analysis
The most basic and fundamental assumption that technical analysis relies on is that the prices of freely traded securities that have sufficient trading volume move in trends and trends tend to continue rather than reverse.
Technical analysis is the art of identifying a trend at an early stage and maintaining a trade position until evidence indicates that the trend has reversed.
Simply stated, a trend is a directional movement of the price that can be to the upside, downside, or just horizontally (sideways).
The directional trend is a dominant motion in one direction that is interrupted by smaller moves in the opposite direction, these opposite moves are called corrections or pullbacks (we will discuss corrections further later in this tutorial).
In many instances, a trend can be spotted with bare eyes. However, for professional technicians and this technical analysis tutorial, it's not just about the general directional move. The practitioner needs to be more specific, and use structured methods for trend identification.
An uptrend, also called a bullish trend, in its general definition is a directional move to the upside that can be spotted visually. Technically, an uptrend should have a distinctive structure of consecutive waves, where each wave surpasses the prior wave.
Uptrend Definition:
An uptrend is a series of higher highs (peaks) and higher lows (troughs). Where each high surpasses the previous high, and each low is above or equal to the prior low. Each major upside wave is followed by a downside correction.
[Image: Uptrend structure showing higher highs and higher lows]
Image: Uptrend structure with labeled peaks and troughs
A Downtrend, also called a bearish trend is the exact opposite of an uptrend. It is a series of lower highs and lower lows. Where each low surpasses the previous low and each high is lower or equal to the prior high.
[Image: Downtrend structure showing lower highs and lower lows]
Image: Downtrend structure example
Before moving to a real-life trend example, we need to explain three more key concepts: support & resistance, breakouts, and corrections.
When the price movement goes undefined, where a technician can't spot any series of uniform higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend), then it is a sideways trend.
When the highs and lows are mixed without a clear sequence, and they appear roughly near the same level, that would result in a horizontal movement and a shape that looks similar to a rectangle. In that case, the market is said to be sideways, flat, ranging, or trendless. All names have the same meaning.
[Image: Sideways trend showing horizontal price movement within range]
Image: Sideways/ranging market example
Trends are fractal in nature. This means that within a larger trend, there are smaller trends moving in different directions.
For example, a daily chart might show a clear uptrend, but if you zoom into a 4-hour chart, you might see both uptrends and downtrends within that larger daily uptrend.
Multiple Timeframe Analysis
Professional traders analyze multiple timeframes to understand the complete picture:
Understanding the fractal nature of trends helps traders avoid confusion and make better trading decisions by recognizing that short-term counter-trend moves are normal within larger trends.
Corrections, also called retracements or pullbacks, are temporary price moves against the prevailing trend. They are a natural and healthy part of any trend.
During an uptrend, corrections move downward temporarily before the uptrend resumes. During a downtrend, corrections move upward temporarily before the downtrend resumes.
Corrections are important for traders because they offer opportunities to enter trades in the direction of the main trend at better prices with reduced risk.
[Image: Uptrend with corrections/pullbacks marked]
Image: Trend with corrections showing entry opportunities
A trend structure break occurs when the characteristic pattern of higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend) is violated.
This is often the first sign that a trend may be weakening or reversing. However, a single structure break doesn't always mean the trend has completely reversed – it could be a larger correction or the beginning of a sideways consolidation.
⚠️ Identifying Trend Structure Breaks
In an uptrend: A structure break occurs when price makes a lower low than the previous low.
In a downtrend: A structure break occurs when price makes a higher high than the previous high.
Professional traders watch for trend structure breaks as potential signals to:
The troughs and peaks that the price establishes while trending are support and resistance levels.
These levels are extremely important as they reflect a change of equilibrium between supply and demand, indicating a shift of psychology from selling interest to buying interest or from buying interest to selling interest.
Support and resistance determine when trends have reversed in the past and are a clue as to when they will reverse in the future.
Support is a level below the current price where demand gets strong enough to exceed supply, forcing the price to move back higher.
For instance, if supply is higher than demand, the price of an instrument falls. As the price reaches a support level below, demand increases again to exceed supply forcing the price to reverse direction and move higher.
Resistance is a level above the current price where supply gets strong enough to exceed demand, forcing the price to move back lower.
If the price was rising due to higher demand, the area at which the price reverses to the downside reflects a change from higher demand to higher supply and thus the price reverses direction, making this level resistance.
[Image: Chart showing support and resistance levels]
Image: Support and resistance - Technical Analysis Tutorial
Support Becomes Resistance (and vice versa)
Resistance usually turns to support when a breakout completes. The opposite is true when a breakout below support materializes – support usually turns into resistance. This is a very important phenomenon in technical analysis.
When the price forms multiple highs or lows near but not at the exact level, then the whole area should be marked as support or resistance, and it is called a support zone or resistance zone.
[Image: Chart showing support and resistance zones]
Image: Support and resistance zones example
A breakout is simply a move beyond a price level – typically support or resistance. A breakout usually signals a major move ahead or a change of a trend.
Many technicians have their own methodology for identifying a valid breakout. We prefer the closing technique to confirm a valid breakout.
Simply stated, the price must close above or below a specific level on the time interval being analyzed to confirm a valid breakout.
For some traders, a breakout above or below a level is merely the price ability to trade above or below that level. For example, if a trader identifies 1.3000 as an important level for the EURUSD, and the price trades just above that level at 1.3001, he/she might consider this a valid breakout. Although this approach might be valid for some, it's not optimal.
Alternative Breakout Methods
Another method traders use is based on the price ability to move a minimum percentage points beyond a certain level. An arbitrary number of 1 or 2 percent is common.
However, it is more efficient to decide on this percentage based on the nature of the underlying instrument under analysis. For example, some instruments are more volatile than others and may require a wider filter of 3 percent.
A false breakout is simply when the price of an instrument successfully breaks below/above support or resistance but fails to maintain the move for a sufficient distance, and then moves back in the opposite direction.
Specialist breakout is a form of false breakout. It is called specialist because it is believed that this breakout is a result of manipulation from big players in the market, such as big market makers. When the price breaks a significant resistance or support level, it triggers stop-loss orders placed above or below that level, then moves back in the opposite direction leaving traders with a loss.
Let's examine a real-life example of a downtrend on the NYMEX Crude Oil Daily Chart. This chart example is intended to help you identify trends correctly (the same procedure goes for an uptrend).
It might look confusing at first sight, however, if you start reading the chart from the left-hand side and move with the price action it should make sense in no time.
[Image: NYMEX Crude Oil Daily Chart showing downtrend with labeled lower highs and lower lows]
Image: Real downtrend example with structure analysis
If you start from the left-hand side of the chart and move forward with the price action, you will notice the clear structure of lower highs and lower lows (downtrend), which was maintained for the whole period we examined.
Identifying Valid Breakouts
Note that in mid-October, there was a move higher beyond the prior swing high. But, for us, that wasn't a valid breakout as the price marginally closed above the previous high. Therefore the structure of the downtrend (lower highs and lower lows) was still intact.
Rule of thumb: For the breakout to be valid, it should be clear and noticeable. If it doesn't scream a breakout, do not take it.
Visit our performance archive to see more real-world examples of trends, support, resistance, and breakouts in action across various currency pairs and timeframes.