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Higher highs and higher lows: defining a trend

Lesson 8 · about 7 min

"The trend is your friend" is the most repeated line in trading, and almost nobody who repeats it can say precisely what a trend is. This lesson gives you a definition you can apply to any chart in seconds, and one you can use to tell when a trend has ended rather than just feeling that it has.

Trend structure: higher highs against lower lowsTwo zigzag price paths side by side; the left one steps upward with each peak and trough above the last, the right one steps downward with each peak and trough below the last.UPTRENDhigher highs, higher lowsHHHHHHHLHLHLDOWNTRENDlower highs, lower lowsLHLHLHLLLLLLHH higher high, HL higher low, LH lower high, LL lower low.
How a trend is built. A trend is just a sequence of turning points. While each peak and each dip sits above the one before it the market is trending up; once both start landing below the previous ones the structure has turned down.

The definition

An uptrend is a sequence of higher highs and higher lows. A downtrend is a sequence of lower highs and lower lows. Anything else is not a trend; it is a range or a transition.

That is the whole definition. It is mechanical on purpose. Price pushes up, pulls back, pushes up further than before, pulls back but not as far as before. Each push sets a new high above the last one; each pullback bottoms above the last bottom.

 Uptrend: higher highs (HH) and higher lows (HL)

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

 Downtrend: lower highs (LH) and lower lows (LL)

\
 \     LH
  \    /\
   \  /  \     LH
    \/    \    /\
    LL     \  /  \     LH
            \/    \    /\
            LL     \  /  \
                    \/    \
                    LL     \
                            \

Notice that in a downtrend, the rallies are real. Price goes up for a while. But each rally tops out below the previous top, and each drop goes below the previous bottom. Sellers are winning the war even when buyers win a battle.

Why highs and lows, not slope

You could define a trend by drawing a line and checking whether it slopes up. The problem is that lines depend on where you start them, and two traders will draw different lines on the same chart. Highs and lows are on the chart already. Everyone sees the same ones. That makes the definition testable: either the last low is above the previous low or it is not.

It also gives you a clear rule for when a trend is in trouble. An uptrend is intact as long as pullbacks make higher lows. The first time a pullback goes below the previous low, the pattern is broken. That does not automatically mean a downtrend has started, but it means the uptrend is no longer proven. The next lesson on swing points makes this precise.

The three states

Every chart on every timeframe is in one of three states:

State Highs Lows What it means
Uptrend Higher Higher Buyers are winning and pullbacks are being bought.
Downtrend Lower Lower Sellers are winning and rallies are being sold.
Range Roughly equal Roughly equal Neither side can make progress; price bounces between a ceiling and a floor.

There is a fourth, messier state that beginners should learn to name: transition. Higher high but then a lower low, or lower low but then a higher high. Something is changing, and the chart has not yet decided into what. Transitions are where most beginners lose money, because they see a big candle and assume the new direction is settled.

Key idea: Uptrend means higher highs and higher lows. Downtrend means lower highs and lower lows. Neither means a range. If the last high and last low do not fit either pattern, the chart is in transition and has not decided.

An example in numbers

Swing highs and lows for a stock over two months, in order:

Swing Price Type
Low 40.00
High 46.00
Low 42.50 Higher low (above 40.00)
High 49.00 Higher high (above 46.00)
Low 45.00 Higher low (above 42.50)
High 51.50 Higher high (above 49.00)
Low 44.00 Lower low (below 45.00): uptrend broken
High 48.00 Lower high (below 51.50): downtrend forming

For six swings, everything fits the uptrend definition. At the seventh, the low of 44.00 undercuts the previous low of 45.00. That is the first crack. At the eighth, the rally stops at 48.00, below the previous high of 51.50. Now both conditions for a downtrend are met.

A trader who had been buying pullbacks would have stopped at swing seven, not because they predicted anything, but because the reason for buying pullbacks (higher lows) no longer held.

Trend depends on timeframe

The same market can be in an uptrend on the daily and a downtrend on the five-minute at the same moment. That is not a contradiction. The five-minute downtrend is a pullback inside the daily uptrend. You saw this in Module 1. When someone says "the trend is up," ask "on which timeframe?" The answer determines whether you are trading with the bigger flow or fighting it.

Try it: Take a daily chart and, without drawing anything, list the last six swing highs and swing lows with their prices. Label each as higher or lower than the one before. State in one word what the chart is doing: uptrend, downtrend, range or transition.

Recap

  • Uptrend: higher highs and higher lows. Downtrend: lower highs and lower lows.
  • If highs and lows are roughly level, it is a range; if they contradict, it is a transition.
  • Using highs and lows instead of sloped lines makes the definition objective and testable.
  • A trend is "broken" the first time a low undercuts the previous low (or a high fails to exceed the previous high in a downtrend).
  • Always name the timeframe when you name the trend.