Price structure: reading trends, ranges and key levels
Technical analysis is a descriptive tool, not a forecasting tool. Describe accurately first, then judge.
Define a trend by structure, not by feel
A trend can be defined entirely objectively. An uptrend is a sequence of higher highs and higher lows; a downtrend is a sequence of lower highs and lower lows; when neither holds, the market is in a range. That definition comes from Dow Theory's basic description of market structure and remains the starting point of most technical frameworks today.
Apply it to USD/JPY in mid-October 2026: price oscillated between 157.60 and 159.00 with neither a run of higher highs nor a run of lower lows. That is a range, not a trend. The logic inside a range differs from a trend: trade the reversal near the boundaries rather than chasing the breakout.
Key levels are zones, not lines
Support and resistance are zones where price previously traded heavily and where orders therefore accumulate. Their width depends on the volatility of the time: wide when volatility is high, narrow when it is low. Treating a key level as a line accurate to the last decimal causes two errors — entering while price is still some distance from the real zone, and being stopped out by a few pips of overshoot just before price resumes in the original direction.
The reference levels for EUR/USD in mid-October 2026 were 1.1150 (the 14 October close was 1.1151) and 1.1250. Those numbers are analytical examples, not precise buy and sell points.
Is a breakout valid? Three conditions
- Where it closes: trading through a level intraday but closing back inside is a spike; a close beyond the level is the minimum requirement for a breakout
- Follow-through confirmation: whether correlated assets move in the same direction. When the dollar index breaks out, for example, does the front-end Treasury yield rise with it?
- The retest: after the break, can price hold the original key level on a pullback?
Only when at least two of the three are met should you treat it as a breakout; otherwise treat it as movement inside the range. 15 October 2026 provides a ready-made case: after US CPI, the dollar index spiked and gold lost 4,100 dollars, but gold then rebounded quickly from 4,130 dollars while the dollar index gave back most of its gain into the close — a textbook spike rather than a breakout.
What technical analysis can and cannot do
Technical analysis is good at describing states and risk locations; it is poor at forecasting direction. Academic research offers some support for that split: in a 2012 study published in the Journal of Financial Economics, Moskowitz, Ooi and Pedersen found that returns over the past 1 to 12 months positively predict returns over the following month across a range of asset classes — a phenomenon known as time series momentum. But that is not the same as "a pattern necessarily produces an outcome": the first is a statistical regularity, the second is overfitting.
A more robust use is therefore this: use structure to decide where you will admit you are wrong, and use momentum-type evidence to decide whether the trade is worth taking — rather than using a pattern to forecast a target price.
Turning structure into a trading plan
Structural analysis should output three specific numbers: the entry, the stop (the structural level at which the current view is invalidated), and the target. The stop must be set by structure, not by how much you are willing to lose. Lesson 08 explains how to derive position size from the stop distance.
Lesson summary and self-check
- Trends are defined by the structure of highs and lows and can be judged objectively; when neither holds, the market is ranging.
- Support and resistance are zones whose width matches the volatility of the period.
- Breakout validity rests on the closing level, follow-through confirmation and the retest.
- Technical analysis is a descriptive tool; time series momentum has empirical support, but pattern prediction does not.
Self-check: (1) USD/JPY is oscillating between 157.60 and 159.00 — which market state is that, and what logic should you trade with? (2) Why does price touching 1.1150 once not constitute a break below it?