Updated: Apr 8, 2020
The most effective way to identify the current market situation (trend or range) is also the simplest one, it goes back to 18th century.
Simplicity is the ultimate sophistication.
Leonardo da Vinci
When price bounces twice on the same price level, it is the beginning of a range. Point 1 marks the top of the rally. The bounce on point 2 signals, that the sharp fall after point 1 was a correction of the previous rally and not a trend reversal. Bounce at point 3 confirms the range. Bounce on point 4 and 5 confirms the range ist still intact.
Uptrend / Downtrend
As shown on Fig. 2, fractals of lower highs and lower lows indicating a downtrend market situation. As long the market creates lower highs and lower lows the trend is intact. As soon price dives lower than the first lower low is the trend confirmed.
If price rises above last lower high, the trend is considered broken, therefore it is important to set your stop loss on the top of the last lower high.