Explainer
What is a trend in trading?
A trend is a sustained direction in price: an uptrend makes higher highs and higher lows, a downtrend makes lower highs and lower lows.
Updated
The usual definition
A trend is a stretch of the market where price keeps moving mostly one way. In an uptrend, each swing high is higher than the last and each swing low is higher than the last. In a downtrend, both are lower each time.
When price does neither, and bounces between a high and a low without making progress, traders call it a range or sideways market.
- Uptrend
- A run of higher swing highs and higher swing lows.
- Downtrend
- A run of lower swing highs and lower swing lows.
- Range
- A stretch where price moves between a high and a low without making new ones in a steady direction.
- Swing high, swing low
- A high or low that stands out from the candles around it.
What counts as a swing
The definition depends on swings, and swings need a rule. In our assumptions a short-term high is a high with a lower high on the candle immediately before it and the one immediately after it. A short-term low is the mirror. Both are 3-candle fractals.
Pick a looser or tighter rule and you get different swings, and so different trends. That is one reason two traders can look at one chart and disagree about whether it is trending.
Trend depends on the timeframe
A chart can be rising on the daily timeframe and falling on the 5-minute one at the same moment. Both statements are true. They describe different stretches of time.
So the first question about any trend is on what timeframe. A trade held for minutes cares about a different trend from a trade held for days.
A trend is a description of the past on one timeframe. It is not a promise that price will keep going.
Other ways people measure trend
Not everyone counts swings. Some use a moving average and call price above it an uptrend and price below it a downtrend. Some draw a line along the lows. Some use the direction of the daily close compared with a few days ago.
These methods agree some of the time and disagree at turning points. None of them is the true definition. Each is a rule, and the rule has to be chosen.
What a trend cannot tell you
Saying a market is in an uptrend describes what has happened. It does not say how long the trend will continue, or when it will end. Trends end, and the end is clear only afterwards.
If you use a trend as a filter, such as only taking long trades in an uptrend, write the trend rule exactly. Then test it on past data with costs. A trend filter that looks sensible on a chart can remove a lot of trades or very few, and you cannot tell which until you count.
The futures angle
Futures trade nearly around the clock, so decide what a day is. Our sessions open at 18:00 ET, and all of our clock times are America/New_York. A trend rule that crosses a session open or a contract roll has to say what it does there. On our runs no trade is held through a contract change.
A roll can leave a gap between contract months that is not a move anyone could trade, and a back-adjusted series can hide it. We run on raw prices. Replay it on real NQ data, free, in the Trade Lab.
Questions and answers
What is a trend in trading?
A sustained direction in price. An uptrend makes higher highs and higher lows. A downtrend makes lower highs and lower lows.
How do you identify a trend?
Common methods are counting swing highs and lows, comparing price with a moving average, or drawing a line along the lows or highs. Each is a rule, and different rules can disagree.
What is the difference between a trend and a range?
In a trend, price makes progress in one direction. In a range, price moves between a high and a low without making new ones in a steady direction.
Does a trend continue until it ends?
A trend describes the past. It can continue, pause or reverse, and it is usually clear that it has ended only afterwards.
Can a market be in an uptrend and a downtrend at once?
On different timeframes, yes. A market can be rising on the daily chart and falling on the 5-minute chart, because they cover different stretches of time.