Every chart is in one of two states: trending or ranging. Strategies that work beautifully in one fail in the other, so identifying the environment comes first.

Trends

An uptrend makes higher highs and higher lows. A downtrend makes lower highs and lower lows.

In a trend, the simplest approach is to trade with it: buy pullbacks in an uptrend, sell rallies in a downtrend. A trend is broken when the pattern of highs and lows breaks, for example an uptrend making a lower low.

Ranges

In a range, price oscillates between a ceiling (resistance) and a floor (support). Traders buy near the floor and sell near the ceiling, with stops just beyond them. Ranges end with a breakout, which is covered in its own lesson.

How to tell them apart

• Swing structure. Are highs and lows stepping in one direction, or repeating at similar levels?
• Moving averages. In trends they slope and price stays on one side; in ranges they flatten and price crosses them repeatedly.
• Higher timeframe. A range on the 15-minute chart may be a pullback inside a daily uptrend.

A rule that saves money

If you cannot tell which environment you are in, you are probably in a messy transition. That is a good time to wait.