Over the past few months, we have looked into the different indicators and charting tools that help us better understand price action. Today, we are going to take a step back and focus on the purest form of price and chart analysis: Trend and Wave analysis.

We will explore how the formation of swing highs and swing lows and trend wave analysis can help traders understand the overall market context. Every good chart analysis should start with an examination of trend and wave analysis, and we will show you how you should approach it using the recent price action of Gold Futures and T-Bonds ( 30-Year-old) Futures.

The Basics of Trend Analysis

Before we get into price analysis and chart studies, let’s take a look at the fundamentals. Every chart and trend pattern, including range markets – are made up of individual swing highs and swing lows.

A swing high is where a bullish trend move comes to a temporary end and retraces; a swing low shows the end of a bearish trend move. During an uptrend, the price usually makes higher highs and higher lows, and in a downtrend, the price makes lower highs and lower lows – this is a general market theory, and although it sounds too simplistic, we will see how this also applies to live market actions. Turning points are described by transitions when price fails to make a higher high during an uptrend or a lower low during a downtrend.

Analyzing the recent Gold Price Action

Let’s take a look at the price action in Gold over the past few months. We are starting on the daily timeframe, but these principles are universal and can apply to any timeframe and market. When we start on the left, we see that price was in a short-term downtrend, and then suddenly failed to make lower lows. The transition is apparent, and price slowly turned and started making higher lows. And once price started making higher highs, it foreshadowed the upside reversal.

Price then paused and consolidated. However, the selling pressure wasn’t enough to make the price go to lower lows. At the same time, it kept making higher highs – those signals indicated that the trend wasn’t over yet. At the top, it looked very different. Price failed to make higher highs and then even started making lower highs. The lows formed a support level, and on the break of that level, the price started the sell-off.

Right now, the price is still making lower lows, confirming the downtrend. However, the momentum seems to be slowing down. Nevertheless, as long as the price keeps making lower lows, the downtrend is confirmed by general market theory.

Treasury Bond Market Phases

The snapshot of T-bonds shows how those principles of the swing high and swing low analysis can be applied to different asset classes as well. We start on the left and see that price was making lower lows. However, the lows barely broke the previous lows which signaled a weak downtrend. Suddenly, the price made its first higher low, foreshadowing the uptrend. During the uptrend, the price kept making higher highs and higher lows.

At the top, we see the familiar pattern again, and price first made a lower high and then broke the support level. You can already see how the recent downtrend then slowly turned when price failed to make lower lows and the cycle repeated itself.

You can see how a deeper look into swing and wave analysis can help traders get a clearer understanding of price action and trend behavior. We recommend that traders start their chart analysis by looking at simple price charts first, before getting into the nitty gritty on the lower timeframes. Such an approach is ideal for the so-called top-down analysis where traders start on the higher timeframes and then work their way lower.

As an additional tip, we suggest you use the line graph for such an analysis. Particularly in the beginning, when getting rid of the information overload of candlestick charts can help traders better understand price action.

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.