You analyze price bar trends by defining when a downtrend is relatively harmless and when an uptrend is relatively significant. The textbook uptrend is a series of up-day price bars (close higher than yesterday) that have higher highs and higher lows in a preponderance of the bars. A downtrend is a series of down-day bars characterized by lower lows and lower highs in most of the bars.

This chart depicts an uptrend — even though not every bar qualifies as belonging to an uptrend. You see lower lows, as well as several days on which the bar is a down day. Down days are colored black, and up days are gray. This figure demonstrates two points where textbook definitions of trends are relative:

  • Significance: What is a significant high? You determine the answer to that question. You can

    • Judge significance by eyeing the chart.

    • Specify rules, such as “a significant high is one that is x percent higher than the average of the past y highs.”

    • Use software to develop a “filter” that defines criteria like a “significant high.”

    In the preceding figure, two significant higher highs stand out. They each represent a 50 percent gain from the previous up day high. Also, every high is higher than the day before, but every significant high is higher than the highs that came before.

  • Preponderance: In addition to revealing that some bars in an uptrend can be net down days, the preceding figure illustrates that not every high in an uptrend has to be higher than the one before. You just need to identify a preponderance of higher highs and a preponderance of higher lows. Preponderance generally means “majority.”

    For example, a preponderance of higher highs may mean a simple majority, say six of ten bars, accompanied by six of ten higher lows. However, determining a preponderance is your call. Maybe you like seven out of ten. You can eyeball it or use software to develop a precise definition and backtest it on historical data.