Trend and market structure

Imagine walking into a café and, before you order, looking around the room. Where is the queue? Is there a free table? Is somebody about to leave? It takes two seconds and saves you a quarter of an hour standing in the wrong place. A stock chart works the same way: before you calculate anything, look at the room. This lesson teaches exactly that: reading the picture of the market itself, with no indicators, no overlays and no one else's opinion.

What you will learn

• to recognise the three states of a market: uptrend, downtrend and consolidation,
• to find highs and lows in a way that does not depend on your mood,
• to tell the first warning sign from the confirmation that a trend has ended.

Three kinds of market

At any given moment every chart is in one of three states: an uptrend, a downtrend or a consolidation. Recognising which one you are looking at is the technical analyst's first decision. It determines whether you look for buying opportunities at all, or whether it is better to put the coffee down and wait.

• Uptrend: each new high and each new low sit above the previous ones.
• Downtrend: highs and lows keep getting lower.
• Consolidation: price moves in a horizontal channel, and highs and lows roughly repeat.

It sounds trivial, but it is the foundation of the whole course. The indicators in the lessons ahead are just different ways of measuring what you can already see with the naked eye.

What is a high and what is a low

The market does not move in a straight line. Price goes up, pulls back, goes up again. Every such pullback leaves a mark on the chart: a local high (swing high) or a local low (swing low).

To avoid depending on your mood, it helps to adopt a simple, mechanical rule. For example: a high is a candle whose maximum is higher than the maxima of the two candles to its left and the two to its right. A low is its mirror image. Two candles on each side is a convention, not a law of nature. On a weekly chart one is often enough, on an hourly one it is better to use three or four. What matters is that you pick one rule and stick to it throughout the analysis.

Keep one important detail in mind: you only recognise a high after the fact, once price has fallen for a few candles after it. That is not a flaw of the method but its nature. A chart describes what has happened, not what will happen.

When a trend ends

An uptrend does not end because price falls for a single day. The market breathes, so pullbacks are normal. The first warning sign is a high that fails to exceed the previous one. Price tried to go higher and could not, which means buyers are losing strength. The confirmation is a low that drops below the previous low. Only then has the market structure changed: the series of higher lows has been broken.

For a downtrend everything works the other way around. The first sign is a low that does not go lower than the previous one. The confirmation is a high above the previous high.

Note the order: warning first, confirmation second. The first is early and unreliable, the second late but more certain. The whole art lies in knowing which stage you are at and how much risk you are willing to take.

The timeframe matters

The same chart can show an uptrend on the weekly timeframe and a downtrend on the daily one. There is no contradiction: the daily chart describes a pullback within a bigger move. So always start with the wider perspective and only then move down to shorter timeframes. The wide window tells you where the market is heading, the narrow one hints when to pull over for a rest.

Chart example: Microsoft (MSFT), weekly chart

A good example is Microsoft on a weekly chart for 2021–2024. In 2021 the shares built a series of higher highs and higher lows, and the top of the trend came in the autumn, around 340 dollars. In 2022 each new high was lower and the lows kept sliding, down to around 215 dollars. That is a classic downtrend inside a bigger bull market. In 2023 price climbed back above the previous high, so the structure turned upward again.

Take that chart and ask yourself three questions: where was the first warning sign, where was the confirmation, and how much of the price had already gone by then? The exercise shows the main trait of structure analysis well: the confirming signal arrives late, but sometimes it protects you from a much bigger loss.

How it fails

• Subjectivity. Two people can mark different highs on the same chart. That is why the mechanical rule at the start of the lesson matters so much.
• Consolidation. In a sideways market higher highs and lower lows alternate, and reading structure mechanically produces a string of false alarms.
• Lag. The confirmation that a trend has ended comes only after price has already fallen. That is the price of certainty.
• Noise on short timeframes. On minute charts the structure changes so often that it stops meaning anything.

Check yourself

1. How do we define an uptrend?
2. How does the first warning sign of a trend ending differ from its confirmation?
3. How do you tell a consolidation from a trend?
4. Why do we start the analysis from the higher timeframe?
5. Why can a high not be recognised at the moment it forms?

Next lesson

Lesson 2. Support and resistance: you now know where the market is heading. But where does it stop? There are places on the chart where price comes back like a boomerang, and even a beginner can find them. In the next lesson I will show you how to mark them without drawing a line at every candle.

Educational material, not investment advice.