Technical Analysis Foundations: Trend Structure and Market Context

Start With Price Structure (Not Indicators)

Trend identification begins with the sequence of swing points on price: swing highs and swing lows. A trend is simply an organized pattern of these swings. Your job is to label the structure consistently before you draw lines or look for entries.

The Three Market States

• Uptrend: higher highs (HH) and higher lows (HL).
• Downtrend: lower highs (LH) and lower lows (LL).
• Range: price oscillates between boundaries; swing highs and lows form at similar levels (no sustained HH/HL or LL/LH sequence).

Important: a single higher high does not automatically mean “uptrend.” You need a sequence: at least one HH and one HL in the correct order, and ideally more than one cycle.

Swings, Pullbacks, and How to Mark Swing Points

Trends are made of impulses (pushes in the trend direction) and pullbacks (retracements against the trend). To analyze structure, you must mark swing points in a repeatable way.

A Consistent Swing-Point Rule (Fractal Method)

Use a simple, consistent definition so two people looking at the same chart can agree most of the time.

• Swing high: a high with at least N bars on each side that have lower highs.
• Swing low: a low with at least N bars on each side that have higher lows.

Common choices: N=2 (more sensitive) or N=3 (filters noise). Pick one and stick to it for the timeframe you are analyzing.

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Step-by-Step: Marking Swings and Labeling Trend

1. Choose your swing sensitivity: decide N (e.g., 2) and do not change it mid-analysis.
2. Scan left to right: mark confirmed swing highs and swing lows only after they form (avoid guessing).
3. Connect the sequence: write HH/HL/LH/LL above/below each swing point.
4. Classify the state:
   • Uptrend if you see HH + HL repeating.
   • Downtrend if you see LL + LH repeating.
   • Range if swings stall at similar levels and breakouts fail.
5. Note the “last meaningful swing”: the most recent swing low in an uptrend (or swing high in a downtrend) is often the structural level that must hold for the trend to remain intact.

Impulse vs. Pullback: What to Measure

Once swings are marked, evaluate the relationship between pushes and pullbacks:

• Distance: how far impulses travel compared to pullbacks.
• Time: how long impulses take vs. pullbacks (fast push + slow pullback often signals strength).
• Overlap: heavy overlap between swings often suggests range or weakening trend.

Trend Structure Examples (Swing Logic)

Uptrend Example (HH/HL)

Suppose price forms a swing low at 100, rallies to a swing high at 120, pulls back to 110 (higher low), then rallies to 130 (higher high). The sequence is:

• Low 100 → High 120 → Low 110 (HL) → High 130 (HH)

This is an uptrend because the pullback low (110) is higher than the prior swing low (100), and the new swing high (130) exceeds the prior swing high (120).

Downtrend Example (LL/LH)

Price forms a swing high at 200, drops to 180, bounces to 190 (lower high), then drops to 170 (lower low). The sequence is:

• High 200 → Low 180 → High 190 (LH) → Low 170 (LL)

This is a downtrend because the bounce fails below the prior swing high and price makes a new low.

Range Example (Horizontal Swings)

Price repeatedly turns near 50 on the upside and near 40 on the downside. Swings are present, but highs are not rising and lows are not falling. Label it as a range until a breakout holds and structure changes (e.g., range high breaks and then becomes a higher low on retest).

Multi-Timeframe Market Context (Bias → Alignment → Entry)

Trend structure matters more when you know where you are in the bigger picture. A practical framework is: identify the higher-timeframe bias, then align lower-timeframe decisions with it.

Definitions: Bias and Execution Timeframe

• Bias timeframe (higher timeframe): where you decide the primary market state (uptrend/downtrend/range).
• Execution timeframe (lower timeframe): where you time entries using the same swing logic, but with more detail.

Example pairings (not mandatory): 1D bias with 4H execution; 4H bias with 1H execution; 1H bias with 15m execution.

Step-by-Step: Multi-Timeframe Alignment

1. Start on the higher timeframe: mark swings using your chosen method and classify the state (uptrend/downtrend/range).
2. Define the bias:
   • Uptrend bias if higher timeframe shows HH/HL and the last higher-timeframe swing low is holding.
   • Downtrend bias if LL/LH and the last swing high is holding as resistance.
   • Neutral/range bias if structure is sideways and breakouts are failing.
3. Drop to the execution timeframe: mark swings again (same rules, but more frequent swings).
4. Only take setups that agree with bias:
   • Higher-timeframe uptrend: prefer buying pullbacks (execution timeframe HLs) rather than shorting rallies.
   • Higher-timeframe downtrend: prefer selling rallies (execution timeframe LHs) rather than buying dips.
   • Higher-timeframe range: be selective; favor mean-reversion at boundaries or wait for a confirmed structural break.
5. Use structure to invalidate: in an uptrend, a break below the most recent execution-timeframe swing low often invalidates a long idea; in a downtrend, a break above the most recent swing high often invalidates a short idea.

When Timeframes Disagree

• Higher timeframe trending, lower timeframe ranging: treat the range as a pullback/consolidation; look for a structural break in the trend direction (e.g., range breaks upward in higher-timeframe uptrend).
• Higher timeframe ranging, lower timeframe trending: assume the lower-timeframe trend may be a swing inside the range; be quicker to take profits and watch for failure at range boundaries.

Trendlines: Rules That Prevent “Forced Fits”

Trendlines are visual tools to summarize swing structure. They are only meaningful if they respect real swing points and are not drawn to “make the chart look trending.”

Rules for Drawing a Valid Trendline

• Anchor to swings, not random wicks: use confirmed swing lows for an uptrend line and confirmed swing highs for a downtrend line.
• Minimum touch count: two touches define a line; three or more touches increase reliability (provided touches are distinct swings).
• Slope realism: avoid extremely steep lines that only fit a short burst. If a line is so steep that minor noise breaks it repeatedly, it is not a stable trendline.
• No forced fits: do not rotate the line to capture every candle. If you must “cheat” the anchor points, the market is likely ranging or transitioning.
• Prefer the body cluster when wicks are erratic: if wicks are unusually long, consider anchoring to the general turning area (but remain consistent in your method).

Step-by-Step: Drawing an Uptrend Line

1. Identify at least two confirmed swing lows that form a HL sequence.
2. Draw a line connecting the first two swing lows.
3. Extend the line to the right.
4. Check whether a third swing low respects the line (touches or comes close and reacts).
5. If price cuts through repeatedly with no reaction, remove the line and reassess structure (possible range or trend weakening).

Channels: Adding Symmetry to Trend Analysis

A channel pairs a trendline with a parallel line on the opposite side of price action, capturing the “lane” price tends to travel within.

Rules for Drawing a Channel

• Build from the trendline first: draw the primary trendline using swing lows (uptrend) or swing highs (downtrend).
• Copy parallel through the opposite swing: in an uptrend, place the parallel line through a prominent swing high; in a downtrend, through a prominent swing low.
• Respect matters more than perfection: multiple reactions near the channel boundaries are more important than exact touches.
• Do not “curve” a channel: if you need multiple different slopes, the trend is accelerating/decelerating or transitioning; treat it as a different structure.

How to Interpret Channel Behavior

• Healthy trend: price oscillates between midline and boundary with orderly pullbacks.
• Momentum phase: price rides the channel boundary (often the upper boundary in an uptrend) with shallow pullbacks.
• Exhaustion risk: repeated overshoots beyond the boundary followed by sharp snaps back can signal instability.

Trend Quality: Momentum vs. Grind, Pullback Depth, and Failed Swings

Two uptrends can look very different. Trend quality helps you decide whether to expect continuation, consolidation, or reversal risk.

Momentum Trend vs. Grinding Trend

• Momentum: impulses are large relative to pullbacks; pullbacks are brief; price often makes new highs quickly after a pullback.
• Grind: impulses are small; pullbacks are frequent; price overlaps prior swings; progress is slow and choppy.

Practical implication: momentum trends often reward continuation tactics (buying pullbacks), while grinding trends require more patience and tighter structural invalidation because noise is higher.

Depth of Pullbacks (Structural Read)

• Shallow pullbacks: price holds above the prior swing high (in an uptrend) or below the prior swing low (in a downtrend) more often; indicates strength.
• Deep pullbacks: price retraces into prior swing zones and tests earlier swing points; can still be a trend, but continuation is less certain.

Use structure rather than percentages: in an uptrend, a pullback that breaks below the most recent swing low is a structural warning (possible trend break or transition to range).

Failed Swings (Early Warning Signals)

A failed swing occurs when price attempts to extend the trend but cannot create a new swing extreme.

• Uptrend failure example: price makes a higher low, rallies, but forms a lower high (fails to make HH). This can precede a range or reversal.
• Downtrend failure example: price makes a lower high, drops, but forms a higher low (fails to make LL).

One failed swing is a warning, not a guarantee. Two failures plus a break of the key swing level often indicates a transition.

Exercises: Classify Trend State Using Swing Logic

For each exercise, do not use indicators. Mark swing highs/lows using a consistent N (choose 2 or 3). Then label the market state and justify it with HH/HL/LH/LL logic.

Exercise 1: Basic Classification (Text-Based)

You are given swing points in order (L=low, H=high):

L 100 → H 120 → L 110 → H 130 → L 118 → H 140

• Classify: uptrend/downtrend/range.
• Write the labels above each swing (HH/HL etc.).
• Identify the “last meaningful swing low” that must hold to keep the trend intact.

Exercise 2: Downtrend or Range?

H 200 → L 180 → H 190 → L 175 → H 188 → L 176

• Classify the state.
• Explain whether the last low is a LL or a failure to make LL.
• State what structural event would confirm a transition to range or reversal.

Exercise 3: Range With a Break Attempt

H 50 → L 40 → H 49 → L 41 → H 51 → L 42 → H 50

• Is this a confirmed uptrend, a range, or a range with a failed breakout?
• Point out which swing(s) suggest failure (or confirmation).

Exercise 4: Multi-Timeframe Alignment (Written Scenario)

Higher timeframe swings show: HH, HL, HH. On the lower timeframe, price is moving sideways with repeated equal highs and equal lows.

• State the higher-timeframe bias.
• Describe two acceptable lower-timeframe signals that would align with the bias using swing logic (e.g., break of range + higher low).
• Describe one lower-timeframe signal that would make you stand aside (e.g., break below the consolidation swing low).

Exercise 5: Draw Trendlines and Judge Trend Quality

On any chart you have access to:

1. Pick a segment you believe is trending.
2. Mark swings with N=2 or N=3.
3. Draw a trendline using two swing points and check for a third touch.
4. Add a parallel line to form a channel.
5. Write a short assessment of trend quality using: (a) momentum vs. grind, (b) pullback depth, (c) any failed swings.