Multi-year trends are one thing, but traders also have to know what a market tends to do over the next several days or weeks. Statistical guidelines are a way to avoid making assumptions about market behavior that can lead to losses. For example, buying pullbacks in an uptrend is a reasonable approach, but how exactly should you define a pullback? Is it two down days, or three? If a market is in a downtrend, what should you look for in a rally to get short? Categorizing past price behavior is the first step in designing logical trading rules.

Let’s break down price action in the USD/CAD pair from Oct. 1, 2003 (closing price of 1.3469) through Sept. 28, 2007 (closing price of 0.9923), a period during which the U.S. dollar lost 26 percent relative to the Canadian dollar. We’ll quantify several useful aspects of this market’s behavior, including its runs of consecutive higher or lower highs, lows, and closes.