Trading 101: Higher Lows
The trend is your friend until the end - but you have to understand what the trend actually is, and how to spot its end.
Markets are unpredictable by nature, but there are recognizable patterns they tend to display under certain circumstances. One of the most noteworthy characteristics of a bull run (or a shorter-term rally) is higher lows and higher highs. This is part of the structure of the market, and has good psychological reasons behind it.
Higher Lows, Higher Highs
No market goes straight up, or straight down. Along the way, there are regular corrections and pullbacks, bounces and counter-trend rallies.
As should be clear from the chart above, however, these tend to fit within a certain overall framework, depending on the nature of the trend.
An uptrend (rather than a ranging market, or one which is chopping around without clear direction) features a series of higher lows, and higher highs. When the price makes a new high and pulls back, it does not drop lower than the previous low, before rallying again and putting in a new high.
It's easy to see technical analysis (TA) as a series of obscure lines drawn on charts, but in reality, this pattern is telling a very simple story.
When the price hits new highs, some traders take profits and sell, pushing the price back down. However, smart money then buys those pullbacks because these traders anticipate higher prices to come and think they are getting a bargain. A bull market is defined by these higher lows and higher highs, which signal increasing confidence, as traders are willing to buy at higher and higher prices, and also target higher and higher selling points.
What Happens At The Top?
At some point, of course, the price rises so high that sufficient traders are unwilling to accept the risk of buying at those levels, at which point the market turns. Then, the reverse applies: A series of lower highs suggests that traders in the aggregate are expecting lower prices, and therefore they think it's smart to sell a temporary bounce before they lose the opportunity.
When watching markets to understand whether an asset is in an uptrend or not, pay attention to swing bottoms: The lows that the market periodically puts in. So long as a low does not break the previous low, the uptrend is intact, and a new high can be expected.
The pattern won't last forever, but in terms of understanding the overall direction of the market, this helps keep things simple. Remember, though, that there are two parts to the famous traders' saying:
The trend is your friend
Until the end.
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