We have established the fact that we need to examine, and determine the current market condition as the first step in our trading strategy.
We defined a downtrend ; When the market is making a lower lows and higher lows. (Price moves down – lower low, it retraces small, higher low, before continuing the movement down)
Uptrend; When the market is higher highs, and lower highs (Price moves up – higher high, and retraces a bit – lower high, before continuing the movement up)
But how do we know when a trend is failing or about to change?
Note; In an uptrend, the next higher low, must always be above the previous one, if there is a lower point, beneath the previous higher low, chances are that the trend is losing momentum and about to change.
In a downtrend, the next lower high must be lower than the previous lower high, else, trend is about to change.
Key Points to note
Uptrend ; Higher Highs, Lower Highs
Downtrend; Lower Lows, Higher Lows
We have established that when the market is trading continuously between 2 price areas, we can say the market is ranging.
Immediately the market breaks through a marked price point, chances are that the range is over.
The market is now about to trend.
The longer the range was, the more volatile the breakout would be.
As you proceed, you would learn how important and profitable it is to know these things and to trade them profitably.