Determining the trend is an important part of technical analysis. Price patterns, support and resistance levels, moving averages, and trendlines are tools that are used to determine the trend of a market.
A trend is just the direction of the market. Trends are not always moving in a straight direction like an arrow, but rather, they move in a zigzag motion almost like a staircase. Price will go up, go down, go up, go down, and then go up again. Each time the price goes up, it goes down for half the length it went up. Overtime, this will be categorized as an uptrend.
An uptrend is defined as a series of higher highs and higher lows. Placing only buy positions is the preferable way to trade an uptrend.
A downtrend is defined as a series of lower highs and lower lows. Placing only sell positions is the preferable way to trade a downtrend.
A flat market or a sideways trend is defined as a series of highs and lows of about the same level.
The market doesn’t just move in an upward and downward motion. In fact, what you will often find is that the market tends to move in a sideways motion a lot of times. When prices move in a sideways trend, this shows indecision between the buyers and sellers. The forces of supply and demand are balanced.
During an uptrend, each highs and lows is usually successively higher. Which means that each high is higher than the previous high and each low is higher than the previous low. For this trend to continue, each successive support level must be at the same level or higher. Each successive resistance level must be at least higher than the previous one. If the next low is lower than the previous low, then this will not be an uptrend anymore.
The same is true for the downtrend. Each successive resistance level must be at least the same level as the previous one or lower, and each successive support level must be at least the same level or lower than the previous one.
An uptrend is still considered an uptrend until the previous low is broken.
Looking at the image above, this is still considered an uptrend. Each low is either at the same level or higher. This uptrend will be a downtrend once the previous low is broken.
The same applies for a downtrend. The image above is still considered a downtrend unless the previous high is broken.
Above is an example of an uptrend rally followed by a period of indecision where the market was without a trend. Price eventually breaks out of the sideways market and reverses into the downtrend.