Trends and Market Structure

Swings

A swing high is a peak with lower highs on either side; a swing low is a trough with higher lows on either side. Mark them on a daily chart and the market resolves into a zigzag. That zigzag is the structure, and everything else on the chart is detail inside it.

Trend definitions

• Uptrend: each swing high is above the last, and each swing low is above the last.
• Downtrend: each swing high is below the last, and each swing low is below the last.
• Range: swings stay between roughly the same high and low.
• Any timeframe can be in any state; the daily can trend while the hourly ranges.

Change of structure

An uptrend is in doubt when price fails to make a higher high, and it is broken when price makes a lower low, below the last swing low. That break is the earliest objective sign that the trend has changed, and it is where many trend traders exit or reverse. The mirror applies to downtrends. Waiting for the break rather than guessing the top is what separates structure reading from prediction.

Trading with structure

In an uptrend, buy pullbacks towards the last swing low with a stop below it, and target the region of the last swing high or beyond. In a downtrend, do the reverse. In a range, buy near the bottom and sell near the top with stops outside. The direction of the higher timeframe's structure is the filter: trade in its direction on the lower timeframe.

Key takeaways

• Mark swing highs and lows; the zigzag is the structure.
• Higher highs and higher lows is an uptrend; the reverse is a downtrend.
• A break of the last swing low ends an uptrend objectively.
• Trade pullbacks in the direction of the higher timeframe's structure.