In this blog post , you will learn how the market moves, and how you can find high probability setups during up-trending and down-trending markets .
In fact , there are three types of markets :
- Upwards (an up-trending market)
- Downward (a down-trending market)
- Sideways (a range-bound market)
An up-trending market
This is a market that is generally going up, despite periodic price corrections.
The overall slope of the market is upward. So, when the market goes up, we call it an uptrend. But what does an uptrend look like?
Well, an uptrend shows consecutive higher swing highs and higher swing lows.
Look at the illustration in the chart below:
The swing highs and swing lows are consecutively higher; each consecutive swing low does not violate the previous swing low, and each consecutive swing high exceeds the previous swing high.Every trending market moves in waves and has two distinguishable kinds of waves (swings):
The impulse waves and corrective waves (retracements or pullbacks).
The impulse waves move in the direction of the trend, while the corrective swings move in the opposite direction.So, in an uptrend, the impulse waves move in the upward direction and are characterized by large bullish candles that typically close near sessions’ highs.
The retracement swings (corrective waves) move downward and are characterized by smaller candles, generally drifting lower without much conviction.Look at the illustration in the chart below:
why do we have the impulse and retracement waves in an up-trending market?
Well, in an up-trending market, traders aim to buy low and sell high.
That is, they aim to catch the low of a price correction to buy at a discounted price, with the hope that the price will turn and continue with the uptrend.
This buying momentum after a correction drives the price up, creating the next impulse swing.Look at the illustration in the chart below:
As you can see, after pushing the price up, they try to take profits by closing their trades.
This creates a selling pressure that causes the price to decline a bit — the corrective wave — before buyers come in again to cause the next impulse wave.
A down-trending market
A down-trending market is marked by consecutive lower swing lows and lower swing highs : each consecutive swing low is lower than the preceding one, and each consecutive swing high does not violate the previous swing high.See the illustration in the chart below:
why do impulse and retracement waves form in a down-trending market?
In a down-trending market, traders aim to sell at the peak and take profit (buyback) when the price falls lower.
That is, they aim to catch the high of a price rally (correction) and sell at the peak price, with the hope that the price will turn and continue the downtrend.
This selling momentum after a correction drives the price down, creating the next downward impulse swing.Look at the illustration below:
How do you identify where impulse and retracement waves will likely end during an up-trending or a down-trending market?
As I said earlier, an uptrend is characterized by a series of higher swing highs and higher swing lows.
So, when the market is generally moving upwards, we look at rising swing highs and swing lows and mark the swing points, as those swing points can be the reference points for new impulse and corrective waves.
Look at the illustration below:
Notice from the chart that once the market breaks a previous swing high level, the level becomes a reference point for corrective moves in the future.
So, when buyers close their trades, and the market pulls back, it falls to that previous high level which now acts as a support level.
Knowing this, experienced traders look for buying opportunities at previous highs that act as support. The same thing happens in down-trending markets.
When the market is moving downwards, lower lows become a reference point where a future retracement move can end, and a new impulse swing begins.Look at the chart below:
As you can see in the chart, there’s a clear downtrend.
Sellers are in control, and when they break a low swing level (support level), the level becomes a reference point.
When the price rallies (retraces) to that level, it acts as a resistance level where a new downward impulse wave can start from.
Now, let’s recap what we have learned so far:
- An up-trending market consists of a series of bullish impulse moves in line with the uptrend, and bearish retracement moves against the trend.
- A down-trending market consists of a series of bearish impulse moves in line with the downtrend, and bullish retracement moves against the trend.
This knowledge will help you understand how the market moves and what buyers and sellers are doing.
But how do you confirm the beginning of an impulse move after identifying the level where it will likely start from?
How to know when an impulse wave is about to begin ?
To confirm the beginning of an impulse at a support or resistance level, look out for reversal candlestick patterns, such as pin bars, engulfing bars, and Doji.
These price action patterns will indicate that a retracement move is about to end and an impulse move is beginning.Look at the chart below:
As you can see, this is a clear uptrend, with bullish impulse swings followed by bearish retracement swings.If you use previous swing highs as reference points, you will be able to identify where future impulse swings would start.
But this is not quite enough because you will need to confirm that a new impulse wave is beginning before you can place a trade.
As you can see on the chart, the confirmation was a clear pin bar that was formed when the price fell to the previous swing high level, which is our reference point that now acts as a support level.
The formation of this pin bar showed that sellers were rejected, and buyers took control of the market, indicating the end of the retracement move and the beginning of a new impulse move.The next impulse move was confirmed by a clear inside bar that indicated indecision in the market.
The breakout of the inside bar tells us that buyers have decided to push the market up again.Let’s look at another chart below:
As you can see on the chart, the market is moving upward, making higher highs and higher lows.By using the previous high points (resistance levels) as reference points, we can identify potential support levels where future impulse moves can start from.
But to confirm the end of the retracement move and the beginning of the impulse move, we need a clear price action signal.In this example, the engulfing bar was the price action signal that indicated the end of the retracement move and the beginning of the next impulse move.
The formation of the candlestick pattern at this reference point tells us that buyers engulfed sellers, so we know that a new impulse move is likely to begin.See another example below:
As you can see in this example, buyers are clearly dominating the market: the price is moving upward, creating a series of bullish impulse moves (in line with the trend) and bearish retracement moves (against the trend).
As usual, we use the reference points to identify where the future impulse move is likely to begin.
But knowing a potential reversal level is not enough for us to place a trade there.
We need confirmation from the market that the next impulse wave is about to start.
In this example, the market formed a nice Doji candlestick.
A Doji indicates indecision or a pause. The fact that the market paused at this reference is an indication that the buyers have matched the sellers .
The breakout of the Doji is a clear signal that buyers have overpowered the sellers and are starting a new impulse move.
Notice that the second impulse move was confirmed by a pin bar, and the third impulse move was confirmed by a Doji and a pin bar candlestick.So, how do you know when a bearish impulse wave is about to start in a down-trending market?We use the same techniques, only that the direction is changed.
The impulse swing is downward, while the retracement is upward. See the chart below:
As you can see in this chart, sellers are dominating since the market is making lower lows and lower highs.
In other words, the market is creating bearish impulse swings in line with the direction of the downtrend and bullish corrective swings (rallies) against the trend. To identify the levels where future bearish impulse moves may begin, we use previous lows as reference points.
But we have to wait for the market to confirm the beginning of a downward impulse before we place a sell order.As I said earlier, we use candlestick patterns, such as pin bars, engulfing bars, and dojis, which are reversal patterns to confirm the end of retracement moves and the beginning of a new impulse move.
In this case, we will look for bearish reversal candlestick patterns.In the chart above, the market is moving downwards, creating lower lows and lower highs.
By using the lows as reference points, we can predict the level where future impulse moves may start from.
At that level, we have a clear bearish pin bar that confirms the end of the upward retracement move and the beginning of the first downward impulse move.
The second pin bar confirmed the beginning of the last bearish impulse move.See another example in the chart below:
You can see that the market is trending down, which means that sellers are dominating the market.
When the market retraced to the reference point, it formed a clear engulfing bar that indicated the end of the retracement move and the beginning of another impulse move.As you can see, by using previous swing points as reference areas and combining that with candlestick patterns, we can anticipate when a new impulse swing is beginning so that we enter a high-probability trade.
I hope today’s lesson will give you an idea about up-trending and down-trending markets, and how they move. if you want to get more knowledge i invite to visit my free telegram channel where I offer 2 to 3 free live forex signals per week and so much more .