Trend and range

Prices never move in a straight line; they swing up and down. Look at the tops and bottoms of those swings and almost any stretch of a chart falls into one of three shapes.

• Uptrend: each swing makes a higher high and a higher low. The price climbs in steps.
• Downtrend: the mirror image, lower highs and lower lows.
• Trading range (sideways): the highs stall at about the same price, the lows too, and the price bounces between them.

Bluefin Energy over 120 days shows all three. In the first two-week blocks the highs went 41.80, 43.03, 45.44, 47.75 and the lows 39.80, 40.86, 42.62, 44.70: an uptrend. Then the highs sat near 49.50 for two months, and then both stepped down.

These are descriptions of what the price did. They are not forecasts: on the last day of an uptrend, nothing on the chart announces it's the last day.

Daily candles are busy, so it helps to squeeze them into bigger blocks before judging the shape. Marc takes every 10 trading days of Bluefin Energy and keeps three numbers: the block's highest high, its lowest low and its last close. Twelve blocks cover 120 days.

Then read the highs and lows block by block:

• Blocks 1–4: highs 41.80, 43.03, 45.44, 47.75; lows 39.80, 40.86, 42.62, 44.70. Each step is one to two and a half dollars up: an uptrend.
• Blocks 5–8: highs 49.55, 49.60, 49.50, 49.40; lows between 45.15 and 45.67. Flat tops, flat bottoms: a trading range.
• Blocks 9–12: highs 45.45 → 39.20, lows 43.16 → 36.56, stepping down: a downtrend.

Blocks are one simple way to see swings without daily noise; there is no "correct" swing length. What matters is choosing one way and using it the same way every time, so you don't bend the picture toward what you hope to see.

Labelling a chart by eye invites wishful thinking: a hopeful buyer sees an uptrend everywhere. A fixed routine keeps you honest.

1. Fix the swing unit first, for example two-week blocks, and use it on every chart.
2. Write down the highs and lows of each block.
3. Compare direction: is each high above, below or level with the last one? Same for the lows.
4. Compare size: are the steps as big as the ones before, or just a few cents?
5. Label: uptrend, downtrend, range, or "not sure yet".

On Bluefin Energy this routine names blocks 1–4 an uptrend, 5–8 a range and 9–12 a downtrend. Step 4 is the one people skip, and it is what stops a 10-cent wobble from being called a new trend.

Remember what the label is: a description of the stretch behind you. It tells you what kind of market you were in, not what the next block will do.

The direction of one high or low isn't enough; look at the size of the step too.

Inside Bluefin Energy's range, block 8's high (49.40) was lower than block 7's (49.50), and its low was lower too (45.15 against 45.37). Read mechanically, that's "lower high, lower low", a downtrend. But the steps were 10 and 22 cents, while each step in the uptrend had been one to two and a half dollars. A few cents inside a range is noise, not a new trend.

The same goes for single closes. Block 7 closed at 49.25, near the top of the box, and looked strong. Its high was still below block 6's, and block 8 fell back to 45.37.

A careful habit: call a new trend only when the steps are clear in size and repeat. Until then, "not clear yet" is a fine answer, and it's cheaper than acting on a guess.

A trading rule is only as good as its whole record, after costs, across every kind of market it ran in.

Nora's rule: buy 100 Bluefin Energy shares when the close is the highest of the last 10 days, sell five days later, no stop, 4 dollars of costs per round trip (spread and commission, as in Where the money goes: spread, fees and slippage). Run one trade at a time over all 120 days:

• Uptrend (days 1–40): 4 trades, 3 wins: −55, +215, +66, +137. Net +363.
• Range (days 41–80): 3 trades, 0 wins: −221, −363, −151. Net −735.
• Downtrend (days 81–120): no trades, since there was never a new 10-day high.

Total: 363 − 735 + 0 = −372 dollars.

The trap is the screenshot. The good stretch is the one people share, so it is the one you see. A rule's record has to include the dull and the painful stretches too, or it isn't a record.

Every rule quietly assumes something about the market. "Buy a new 10-day closing high" assumes that strength tends to continue. That assumption fits one kind of market and fails in another.

• In an uptrend, a new 10-day high often comes in the middle of the climb: the next steps up can still follow, so the rule rides some of them.
• In a range, a new 10-day high is simply the top of the box, the place where the price kept turning back down. On Bluefin Energy the rule bought there three times (at 49.20, 49.30 and 47.91) and lost 221, 363 and 151 dollars after costs.
• In a downtrend, there was never a new 10-day high, so the rule did nothing.

The costs and the share were identical in all three stretches; only the shape of the market changed. Before using any rule, ask: what market does it assume, and what happens to it in the other two?

Fair conclusions stick to what the data shows. Nora's rule made 7 trades on Bluefin Energy: +363 in the uptrend, −735 in the range, none in the downtrend. Those numbers are facts. So is the pattern behind them: the result depended on the kind of market.

What 7 trades can't tell you is whether the rule works. Three wins out of four in the uptrend look impressive, but four trades are like a coin tossed four times. As this course keeps saying, judge a rule's numbers only on at least 30 trades, and more is better.

Two tempting conclusions fail:

• "It will win in the next uptrend": past wins on a handful of trades promise nothing.
• "Just use it in trends": that needs knowing you are in a trend while it happens, and a trend is clear only looking back.

The honest next step is to write the rule down and test it on many more trades, with costs, in trends and ranges alike.

Uptrend, downtrend and trading range are names for a stretch that is already over. They are useful: they tell you what kind of market a rule was tested in. They are not forecasts.

On Bluefin Energy, the last day of block 4 closed a clean uptrend: four higher highs, four higher lows. The next eight weeks were a flat box between about 45.50 and 49.50, where buying strength lost money three times. Nothing on the chart announced the change; it became clear only after a few blocks had formed.

So treat the label as context for a plan, never as permission to expect the next step. Your protection against being wrong is the stop from The stop: where it goes and why and the limit from Risk per trade: a small share of the account, not the label.

How it fits together: swings define the three shapes, a fixed routine and step size keep the label honest, and a rule's result depends on the shape it runs in. Next, Support, resistance and breakouts looks at the borders of a range and what happens when the price leaves them.