Chart Analysis · Lesson 4 · Beginner
Recognizing the trend: higher highs, lower lows and the range trap
You define up-, down- and sideways trends from the swing sequence without indicators and know when to stay on the sidelines.
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Trend without an indicator
Murphy, Elder and Goodman define trend identically: an uptrend makes higher highs and higher lows, a downtrend lower highs and lower lows. A range has horizontal peaks and troughs.
The break
The turning point is the first break of the sequence. When an uptrend no longer makes a new high and then takes out a previous low, the structure flips. This is the most robust way to read a trend there is.
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The key points at a glance
- Uptrend equals higher highs and higher lows, downtrend equals lower highs and lower lows.
- The first break of this sequence is the turning point.
- At least a third of the time is range, where chop with leverage and funding really costs money.
Deep dive
Defining a trend without an indicator: the swing sequence
The most robust trend definition needs no indicator: you read only the sequence of swing highs and swing lows. Murphy, Elder and Goodman define trend identically, because this reading describes the pure supply-demand structure.
- Uptrend: higher highs and higher lows.
- Downtrend: lower highs and lower lows.
- Range: horizontal peaks and troughs.
- Indicators lag, structure does not.
Where exactly does a trend flip? The first break of the sequence
The turning point is the first break of the swing sequence. First, in an uptrend, a new high fails, that is an early warning. The reversal is only confirmed once price then undercuts the previous swing low.
- A failed higher high is the warning.
- A broken swing low is the confirmation.
- This way you trade neither too early against the trend nor too late.
- The rule works identically on every timeframe.
The range trap: why sideways is the most expensive market environment
Murphy estimates that markets spend at least a third of the time in a trading range. That is exactly where trend-following systems get torn apart by whipsaws, and with leverage plus funding costs the damage adds up brutally.
- Every breakout draws traders in and stops them out on the pullback.
- Standing aside is a position.
- Mark the upper and lower boundary, wait for a close outside.
- At most, trade the edges against the boundary, with a tight stop.
Sources: Murphy, Elder, Goodman
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