Three Market States: Highs and Lows
Uptrend = rising highs and rising lows; downtrend is the opposite; highs and lows that don't line up mean a range.
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Text version · Technical Analysis: Candles & Charts, lesson 9: “Three Market States: Highs and Lows”
Uptrend = rising highs and rising lows; downtrend is the opposite; highs and lows that don't line up mean a range.
A staircase stepping higher
Mark every swing high and low: a high above the previous high is an HH, a low above the previous low is an HL. HH + HL is an uptrend.
Three states
Market structure comes in just three kinds: higher highs and higher lows is an uptrend, lower highs and lower lows (LH + LL) is a downtrend, and a mix with no direction is a range. Identify the state first, then pick your method.
Fails to hold the latest low
In an uptrend, a close below the most recent higher low is a break of structure: the trend may be over, but that's not yet a reversal. Wait for new highs and lows to tell you.
Key takeaways
- Uptrend: higher highs (HH) + higher lows (HL). Downtrend: lower highs (LH) + lower lows (LL).
- When highs and lows don't share a direction, it's a range, and that's when trend-following methods fail most.
- In an uptrend, a close below the most recent higher low is a break of structure warning: the trend may be ending, but that doesn't mean an immediate reversal.
- A swing point is only confirmed after a few candles on its right side, so structure always lags a little. The more sensitive the setting, the more noise.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Choose "Up" and hover over any HL marker: according to the explanation card, at which bar is this low confirmed? How many bars after the low itself?
- Switch to "Choppy": what are the highs and lows labeled as? What does "Current structure" on the right say?
- Choose "Up → turn" and press ▶ to play from the start: on which bar does the "Break of structure" stamp appear? What color does the background turn first, and how long until it turns to downtrend?
- Drag "Swing sensitivity" from 3 to 2, then to 6: how does the number of "Confirmed swing points" change? Which end gets thrown off more easily by small wiggles?
Quiz and explanations
- 1. The last two highs went 105 → 110 and the last two lows 98 → 102. The market is…
- Answer: In an uptrend: highs and lows are both rising.HH + HL is an uptrend structure.
- 2. The last two highs went 110 → 106 and the last two lows 98 → 101. What's the most likely state?
- Answer: Lower highs, higher lows: a narrowing range with no clear direction.LH + HL don't point the same way, so it's a range that's narrowing.
- 3. In an uptrend, the most recent higher low is at $102 and today's close is $100.5. What's a sensible reading?
- Answer: The uptrend structure is broken; the trend may be ending, so be more careful.A break of structure is a warning, not a verdict. You need new highs and lows to tell whether it's turning into a downtrend.
Terms in this lesson
- market structure (Market Structure): Describing a trend by its highs and lows: higher highs and higher lows is an uptrend, lower highs and lower lows a downtrend, and a mix is a range.
- break of structure (Break of Structure): In an uptrend, a close below the latest higher low (or in a downtrend, above the latest lower high), a warning that the trend may be ending.
- swing high / low (Swing High / Low): A local high (or low) with several lower (or higher) candles on each side, confirmed only after the candles on its right have formed.