I occasionally get email requests asking how I define the trend, so to save on future email replies here’s the short answer…
It seems that perhaps many people assume I use an EMA, given that the charts shown in my newsletter typically display an EMA(20). That’s not my trend definition though.
I use fairly standard definitions.
- An uptrend is a sequence of higher swing highs and higher swing lows.
- A downtrend is a sequence of lower swing highs and lower swing lows.
So, let’s look quickly at how this works.
A swing high is simply any turning point where rising price changes to falling price. I define a swing high (SH) as a price bar high, preceded by two lower highs (LH) and followed by two lower highs (LH), as per the following diagram:
The Swing High is candle C. All other candles reference this one.
- Candle A has a high which is LOWER THAN candle C’s high.
- Candle B has a high which is LOWER THAN candle C’s high.
- Candle D has a high which is LOWER THAN candle C’s high.
- Candle E has a high which is LOWER THAN candle C’s high.
Likewise for the swing low.