Before reading this lesson, you should have previously read through:

It is useful to be able to identify the different types of market conditions, as this can help you make trading decisions, such as in which direction you should trade or which particular strategy to use.

There are two types of market conditions: trending and ranging.

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Trending market

A trending market is when the price is clearly moving in one particular direction. If the price is moving up, then it is said to be in an uptrend; if the price is moving down, then it is said to be in a downtrend.

A trending market is when the price is clearly moving in either an uptrend or a downtrend.

Many traders trade in the direction of the trend because there is a higher probability of the trade being profitable. There is a distinct advantage for traders who identify a trend early on — entering the market when a trend is beginning to develop means it is more likely to return a profitable result.

Uptrend

The chart below demonstrates an uptrend. You can clearly see the price is moving up and that the uptrend is made from a series of peaks and troughs — the price does not move straight up, it moves up in waves. The peaks make the swing highs and the troughs make the swing lows.

Uptrend

number_1 Higher lows
number_2 Higher highs

In an uptrend, the market direction can be identified by a series of higher highs and higher lows.

Downtrend

In a downtrend, the price behaves in the same way, moving down in waves, with a series of peaks and troughs that make the highs and lows respectively. A downtrend can be identified by a series of lower lows and lower highs.

Downtrend

number_1 Lower lows
number_2 Lower highs

It is important to note that in an uptrend, not every candle is bullish and in a downtrend, not every candle is bearish; in a trending market the price is moving in an overall direction.

You can practice determining the trend direction in the following exercises:

Exercise 1: Determine the market direction Show exercise
Exercise 2: Determine the market direction Show exercise
Exercise 3: Determine the market direction Show exercise

Ranging market

The other type of market condition is a ranging market, sometimes referred to as a sideways market. You can see from the chart below that the price is moving within a range; there is no clear sustained uptrend or downtrend.

Ranging market

In a ranging market, the price moves within an upper boundary or resistance level, and a lower boundary or support level. The upper and lower levels may not always be exact or clear to observe, however what you will see is the price rising and falling within a maximum and minimum price zone.

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Determining a correction from a reversal

There is a distinct difference between a correction and a reversal and it is important to differentiate between the two.

A correction is when the market pulls back, but continues on in the trend direction. A reversal is when price completely reverses in the opposite direction of the trend.

Corrections

A correction — sometimes referred to as a retracement — is when the market moves in the direction of the trend, pulls back for a short time and then continues on in the original trend direction.

The charts below show a correction in an uptrend and in a downtrend, respectively.

Uptrend with correction

number_1 Confirmed uptrend
number_2 Correction to the downside

Downtrend with correction

number_1 Confirmed downtrend
number_2 Correction to the upside

You can practice finding price corrections in the following exercises:

Exercise 1: Identify the correction Show exercise
Exercise 2: Identify the correction Show exercise
Exercise 2: Identify the correction Show exercise

Reversals

A reversal is when the market direction changes completely and reverses the other way. The charts below illustrate a reversal to the downside and a reversal to the upside.

Uptrend break

number_1 Confirmed uptrend
number_2 Reversal to the downside

Downtrend break

number_1 Confirmed downtrend
number_2 Reversal to the upside

You can practice finding reversals in the following exercises:

Exercise 1: Identify the reversal Show exercise
Exercise 2: Identify the reversal Show exercise

Summary

So far you have learned ...

  • ... there are two types of market conditions: trending and ranging.
  • ... an uptrend can be identified as a series of higher highs and higher lows.
  • ... a downtrend can be identified as a series of lower highs and lower lows.
  • ... ranging is when the price is trading between an upper and lower boundary.
  • ... a correction – or retracement – is a temporary pull back when the price is trending.
  • ... a reversal is where the price direction changes completely and reverses in the opposite direction.

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  • To all those who have trouble understanding or remembering this (like me initially), let me try to help you with it. Higher lows and higher highs are used for an uptrend. Just remember the first word "higher" is used when the market moving upwards (uptrend). The second word "low" means the low point of the uptrend, while "high" means the high point.

    Thus it's the other way round for a downtrend: lower lows and lower highs. You need to know all these in order to draw trend lines happy
  • happy thanks for your advice yongchunpower. I hope that you are doing well.
  • Thus it's the other way round for a downtrend: lower lows and lower highs. You need to know all these in order to draw trend lines
  • Numa tendencia de alta, por exemplo, os pontos de entrada longos podem ser nas linhas de resistencia do grafico ou depois do rompimento de topos?
  • A high tendency, for example, the entry points can be long lines of resistance or the graph after the breakup of tops?
  • Hi,
    From the pictures above, I can easily find out if it is trending and ranging. Usually, how much candles we used to find out the market direction? For example, from the pictures above, there are about 70 candles used.
    Thanks.
  • It's not about the amount of the candles, but their relation to each other. Uptrend means: Higher highs, higher lows or in a downtrend lower lows and lower highs. These highs, lows can be single candles or swings as well.
  • I mean if we take last 50 candles only into consideration then the Higher highs, higher lows.....are different compared to last 200 candles. I hope my question is understandable. If not, please tell me.
  • If you have 200 candles i think it is easier for the eyes to switch to higher time frame and look at 50. There are no rules for these things and can vary from individual to individual. You need some visual getting used to in order to develop a feel for establishing trends. That is why it is good to attend coachings or at least watch the videos available to see how pros do it. It could take pages for one to describe what can be shown in a 30 sec video smile
  • Hi JHTAN,

    When trading you should concentrate on overall sentiment. We don't count number of candles. You can have a look at lows and highs and see it easily. You will gain experience when trading and then you can see what direction is.

    JHTAN, practise make perfect. Practise, practise, practise and practise. Open some chart, any timeframe and try to identify, I promise you that by practising you become able to determine market direction on your own very easily.
    Hope it helps.

    Adam
  • Cool info, but I can't see how this can be useful for forecasting. In all these examples we're looking at historical data...
  • Hi Treaz,
    you are exactly right, all we have is our experience about the past. Market does repeat itself, certain or better put many different patterns emerge every now and again. If we observe past behavior we can make safer assumptions about future price action. But of course we cannot be sure about the outcome and that is why money management is so important. We recently had a discussion about backtesting and relevance of historical data underneath a similar lesson like the one above, please have a read what our users had to say about it and feel free to join the debate:
    http://en.tradimo.com/co/53e1fe1d572b94ea3400001a/

    Regards.
    Peter
  • Hi Guys,
    I joined and I find all the discussions, that is Questions I wanted to ask and Answers to those questions.
    Thanks everybody
    I'll rather listen atleast for now
  • Welcome Muhtarrann,
    There's a huge amount of material available for you to study. Make sure you check out our trading courses as well!
    Regards.
    Peter

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