1. Low highs

These are a very basic component of a price chart, but understanding them is the foundation for future pattern analysis.

Higher highs, lower lows lower

First, if you see a higher high or lower low means the market is trending up or down, we will analyze more closely the strength of the trend based on these highs. next part.

Lower highs, lower lows higher

When you see the appearance of these highs and troughs, these are early warning signs that the market is likely to change direction.

The illustration below shows that at the end of the downtrend, the price did not make lower lows, and even then made higher highs and put a trail on the downtrend. If you look at this chart as a rectangular candle, you will easily recognize the head and shoulders reversal or the cup and handle pattern.

2. The strength of the trend: the length and slope of the trend wave

The strength of a trend is determined by the individual trend wavelengths between low highs. Specifically, you should observe the length and slope of each individual wave to get a sense of the strength of the trend.

Most traditional charting analysis focuses on the highs, but it is important to understand what happens between these highs.

See the example below to better understand the problem

The trend wavelengths are marked with black arrows, you can see that the first wave is quite long and very steep, reflecting the very strong bullish momentum. After the first pullback is the second trend wave, however, this wave has been significantly shortened. In the third trend wave, its length is further shortened and only slightly higher than the second pullback, so the new high is only a very small distance from the previous top. Besides, candlesticks also have very long shadows, appearing with a fairly thick frequency, indicating quite a strong price rejection.

Combining all of this together we can see that the price momentum is over and the previous uptrend is coming to an end.

3. Trend strength: depth of pullbacks

While determining the strength and the possibility of a trend reversal, not only push waves but also information from pullbacks are also important.

The illustrated chart below shows an uptrend with multiple compression zones and rallies, but at the end of the trend, the pullback of overwhelming magnitude indicates a transfer of control between the sellers and buyers.

When pullbacks in a short and shallow trend, the price momentum is still strong and the trend is likely to continue high, and vice versa, if these rallies occur frequently with increased magnitude, the trend is signaled. strength, prepare to reverse.