2. The Market That Wouldn’t Go His Way

The chart that looked too high

John Fitzgerald Doe disliked the feeling that he had missed out. That morning, he felt exactly that.

A stock he had been watching for weeks had climbed to yet another high. The chart seemed to be climbing almost without pause. John leaned back, adjusted his watch, and narrowed his eyes.

“It’s gone too far,” he said aloud.

The price had been rising for days. John believed a serious pullback had to come sooner or later. In his mind, the question was not whether it would happen, but when.

There was just one small problem: the market had not yet shown a clear sign that it actually wanted to turn.

John decided first and looked for reasons later

John opened his trading platform. The stock was trading higher than it had a few days earlier, and that alone seemed like enough. He opened a short position, betting that the price would fall.

At first, everything seemed fine. The price pulled back for a few minutes, and John nodded with satisfaction.

“Told you,” he muttered.

Then the price began to rise again. It reached the previous high, paused for a moment, and pushed above it. John pulled his laptop closer.

“This has to be the final push,” he thought.

But the price did not turn down after making the new high. It dipped slightly, then rose again. John’s position became increasingly uncomfortable. Instead of examining what the chart was telling him, he kept inventing reasons why the market should still prove him right.

A simple question

John eventually called Mark, the acquaintance he had spoken with about support and resistance.

“How much higher do you think it can go?” John asked.

“Why do you think it should fall?” Mark replied.

“Because it has already gone up so much.”

“Is that a fact you can read from the chart—or a feeling?”

John did not answer immediately.

“Look at the highs and lows,” Mark continued. “I’m not asking whether the price feels cheap or expensive. I’m asking what structure the market is showing.”

John looked at the chart again. In the recent swings, each pullback had ended higher than the previous one, and each new rise had moved above the earlier high. What he saw as an overextended price still looked, on the chart, like an uptrend.

The story told by highs and lows

Mark asked John to mark the chart’s important turning points. Not every small wiggle—only the highs and lows that revealed the structure of the move.

John noticed that the price had made a higher high, then pulled back but stopped above the previous low. It then rose again and reached another higher high.

“These are called higher highs and higher lows,” Mark said. “When that structure repeats consistently, it is an important sign of an uptrend.”

“And a downtrend?” John asked.

“Typically, you’ll see lower highs and lower lows. In a sideways market, price may move within a range without forming a clear sequence of higher or lower turning points.”

John nodded. This was much more useful than simply declaring a price too expensive.

A pullback is not automatically a reversal

“But does that mean every decline is just a correction?” John asked.

“No. And every rise does not prove that a trend will last forever,” Mark replied. “The point is not to draw a sweeping conclusion from one move. Look at how it fits into the broader structure.”

Even an uptrend can pull back. That pullback alone does not mean the trend is over. But if previous lows give way and the market begins to form a different structure, that can be a warning sign. Timeframe, volatility, and the trader’s own method all matter.

John understood that a trend was not an arrow guaranteeing the direction of the next candles. It was a summary of the market’s movement so far. It helped him interpret the context, but it could not promise what would happen in the next minute.

The decision John did not like

John returned to his open position. The question was no longer whether he personally thought the price was high. He needed to decide whether the chart still supported his original trade idea and how much loss he was willing to accept.

According to his trading rules, the reason for his short entry no longer held. He closed the position and accepted the loss. He did not like it. But this time, he did not try to convince the market that he was right.

Later, the stock continued to rise, then entered a larger correction days afterward. John briefly wondered whether he had been right after all.

Then he remembered the difference: the price might eventually fall, but that would not automatically make his earlier short entry a good decision. He had to evaluate the decision using the information and rules available at the time, not the outcome he could only see afterward.

John’s new map

Over the following days, John began looking at charts differently. First, he tried to understand the direction: was the structure rising, falling, or moving sideways? Only then did he look for support, resistance, and potential entry situations.

Not all his decisions became correct. Sometimes a trend broke; sometimes a breakout proved false. But he was less likely to confuse his own expectations with the signals visible on the chart.

John realized that the market did not rise because he thought a reversal was overdue, and it did not fall because he thought it had risen too far. His job was not to declare what ought to happen. It was to observe what was happening and adapt his decisions accordingly.

The lesson behind the story

An uptrend is typically characterized by higher highs and higher lows; a downtrend by lower highs and lower lows. A sideways market may move within a range without a clear direction.

A price does not have to fall just because it has risen a lot. A pullback alone does not prove a trend reversal. To interpret a trend, consider the structure of highs and lows, the chosen timeframe, and your own trading rules together.

John’s second mistake was not reading the market. It was searching the chart for evidence that confirmed his prior opinion.

Continue learning

The Academy’s lessons on trends, market structure, higher and lower highs and lows, and support and resistance zones can help organize this way of thinking. In the next story, John can explore what happens when price breaks through an important zone—and why not every breakout is a genuine one.

Important note

This story is for educational purposes only and does not constitute investment advice. Trading involves the risk of loss. Recognizing trends does not guarantee successful trading.