In recent posts I have explained to you that candlesticks tell us the story of price. Instead of a single candle, we’ll now look at the story of multiple candles.
As mentioned before; you should not just look at candles as patterns and that also applies to a series of candles moving in the same direction. This is not just a trend. We can extract much more information from this stuff when it comes to price action.
A trend is not just a series of candles that rise or fall together. If you look closely you can also see how strong a trend is.
Below you can see an example of a strong trend. All candles have the same color and they make higher highs and higher lows. This means that the tops and bottoms get higher with every candle.
With a downtrend this would be the other way around. The tops and bottoms of the candles then get lower and lower. Lower lows and lower highs.
In addition to strong trends there are also weak trends. The candles will still move in the same direction up or down. But you’ll often see indecision candles, the candles are not all the same color and they do not make consecutive higher highs and higher lows. Or lower lows and lower highs in a down trend.
Why is this important?
Buyers buy. That is what buyers do and when buyers buy, they push up price. And how does price move up? By making higher highs and higher lows.
As long as higher highs and higher lows are made, the price continues to rise. This means that buyers are completely in control and that the price is in a bullish trend.
Exactly the opposite applies to sellers.
Usually trends are messy and not always consistently show higher highs / higher lows or lower highs / lower lows. But for understanding price action it is very important that you can recognize trends.
And knowing when a trend is almost coming to an end is even more important. This allows you to close your trades at the right time. It also allows you to open trades when the price is about to turn around.
The health of a trend
What is the difference between a healthy and an unhealthy trend? In a healthy trend you see consistent higher highs / higher lows or lower high / lower lows. This does not have to be with every candle, as long as it is the majority.
The above trend is super healthy, but the trend below looks less fresh:
There is much less continuity in this trend. Lower lows and lower highs are not consistently made, and there is even some indecision in between.
So even though this is a down trend, the bears don’t seem to have much confidence.
How can you use this as a trader?
Assessing the health and strength of a trend can help you consider whether you could, for example, increase your position or change your target.
Suppose you bought an asset to go long and price is moving in the right direction with higher highs and higher lows. Then it could pay off to buy some more in such a healthy trend or to move your target a little further away.
On the other hand, by recognizing the health of a trade you can also get out of a trade earlier or take some profit.
Questions about highs and lows? Comment below.