What is a trend in trading?

The three types of trend

• Uptrend: higher highs and higher lows. Each decline stops above the previous one.
• Downtrend: lower highs and lower lows. Each bounce stalls below the previous one.
• Sideways or range-bound: price oscillates between support and resistance with no clear direction.

This way of defining a trend comes from Dow Theory, developed from the editorials Charles Dow wrote around 1900, and it remains the foundation of technical analysis. Its advantage is that it’s objective: it doesn’t depend on the impression a chart gives you, but on specific points anyone can mark.

An example with numbers

A sample stock sets a high at $23.50, pulls back to a low of $21.80, rises to a new high of $26.00, pulls back to $24.20, rises to $28.80 and pulls back to $26.90.

• Highs: 23.50 → 26.00 → 28.80, each one higher.
• Lows: 21.80 → 24.20 → 26.90, each one higher.

It’s an uptrend. The first objective warning would come if the price fails to clear $28.80 on the next push and then breaks below the last low of $26.90. That combination, a lower high followed by a lower low, breaks the sequence.

Trends within trends

Direction depends on the timeframe you’re looking at. A stock can be in an uptrend on the weekly chart, in a pullback on the daily and in a downtrend on the 15-minute chart, all at the same time. Dow distinguished the primary trend (months or years), secondary trends (corrections lasting weeks to a few months) and minor trends (days to a few weeks).

A common practice is to define the trend on the higher timeframe first and trade in its direction on the lower one. Tools like moving averages help you see the underlying direction at a glance, though always with some lag.

How to draw a trendline

A trendline makes the direction visible. In an uptrend, you draw it by connecting at least two rising lows and extending it to the right; in a downtrend, by connecting falling highs. A third touch that respects the line validates it.

In the example above, the line would connect the lows at $21.80 and $24.20, and the pullback to $26.90 should find support near it. It works like a sloping support level.

Two warnings: don’t adjust the line to fit every price, and remember that breaking a trendline doesn’t always change the trend; sometimes it only changes its pace. The sequence of highs and lows remains the main reference.

Common mistakes

• Seeing a trend where there’s a range: two green candles in a row don’t make a trend.
• Going against the trend on a hunch: believing something “has already gone up too much” isn’t a technical reason to expect a drop.
• Calling the end too soon: a normal pullback doesn’t break the trend as long as it holds above the last low (in an uptrend) or below the last high (in a downtrend).