Trending versus ranging markets
How to tell whether price is moving in a direction or bouncing between levels, and why the difference changes which strategies make sense.
What a trend looks like
An uptrend makes a series of higher highs and higher lows. A downtrend makes lower highs and lower lows. Trends can last for weeks or months, and they often pause in pullbacks that can look like reversals if you are not paying attention to the wider structure.
What a range looks like
A range is a period when price moves between a clear high and a clear low without making sustained progress. Ranges are common after big moves, around quiet holidays and before scheduled releases. Breakouts from ranges can be strong, but many breakouts fail and return into the range.
Why the distinction matters
Strategies that buy dips work well in uptrends and badly in ranges where dips keep failing. Strategies that buy breakouts work in trends and suffer many small losses in ranges. Averaging into a position as price moves against you, which is the basis of a ladder, can be especially dangerous in a strong trend that does not stop. Identify the market state before you choose the approach, and be willing to stand aside.
Key takeaways
- Trends show higher highs and higher lows, or the reverse.
- Ranges have a clear ceiling and floor and many false breakouts.
- Match your approach to the market state, and do not force trades when the state is unclear.