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Trends, Highs & Lows

Now let's try to clarify the above statements by defining the terms:

The Trend is: Up if successive Lows are higher than their predecessors. Down if successive Highs are lower than their predecessors. Flat if successive highs / lows are approximately level. Notes: The trend shown on this bar chart is down (the strength of the current bounce indicates that it might be turning up, but in the absence of a higher low, and as no major resistances have been broken, the trend is down). Highs and lows are defined below. The trend is judged by reviewing the medium-term chart (the objective being to "catch" medium-term price-swings).

Highs / Lows: A "High" occurs when the top of a price-bar is higher than the tops of the two preceding and two following price-bars (or three or more equal price-bar tops are higher than the two on either side) A "low" occurs when the bottom of a price-bar is lower than the bottoms of the two preceding and two following price-bars (or three or more equal price-bar bottoms are lower than the two on either side) Isolated highs and lows are referred to as "Minor resistance" (above the market) and " Minor support" (below the market). As noted above, minor resistance to an up-trend and minor support below the price in a down-trend are expected to break

In the above example it can be seen that the trend is up (because successive lows are higher) and the second correction held at the support provided by the first high.

So far so easy: the market moves in trends interspersed with counter-trend moves called corrections (which are often referred to as "Rallies" where the trend is down and the counter-trend move up). Minor support and resistance-levels are formed at the extremities of the sub-moves within the trend. Minor supports and resistances are expected to hold and break respectively in an up-trend, and vice-versa in a down-trend.

Now we arrive at the critical question: how do we identify the conditions which indicate that the trend is likely to change (or is in the process of changing) ? In other words, how do we distinguish trend reversals from corrections ?