The Importance of Higher Highs and Lower Lows

Careful study and a disciplined approach to trading are essential to reduce potential losses. To learn more about the role of higher highs and lower lows in shaping trading strategies, you can download this PDF file. However, it is important to note that the MACD is not a perfect indicator, and it can produce unreliable trading signals. The MACD is considered a lagging easymarkets indicator, because moving averages are based off of historical data. Similarly, a selling opportunity arises when the price, in an uptrend, makes a higher high and a lower low and then comes back to the initial high. Identifying lower highs and higher lows in a pattern by which to base trading strategy is again fairly rare, though certainly not unheard of.

Just above its previous day’s low (first blue line), the market turned. Later on, price rose above its former intraday high (second blue line) and set new all-time highs. There was an upward trend on the daily chart supporting the setup. For a positive divergence, traders would look at the lows on the indicator and price action. If the price is making higher lows but the RSI shows lower lows, this is considered a bullish signal. And if the price is making higher highs, while the RSI makes lower highs, this is a negative or bearish signal.

  1. It means we have to apply our strategy in the direction of the trend and we should avoid moves against the trend.
  2. If there is a discrepancy between what is shown on the oscillator, and what is shown on the price chart, this is a divergence.
  3. In an uptrend, it identifies selling opportunities after a higher high and lower low, while in a downtrend, it seeks buying opportunities after a lower low and higher high.
  4. Careful study and a disciplined approach to trading are essential to reduce potential losses.
  5. Traders should look for supporting signals from technical indicators, such as a bearish divergence, low trading volume, or oversold conditions.

From the above chart, we can see that the techncial indicator – in this case the stochastic oscillator – has not reached a lower low. This means that there is a bullish divergence, as the downward momentum is weakening and could soon reverse upward. To start looking for a divergence, you should first see whether the price action has reached a higher high or a lower low. It is helpful to draw lines on your price chart in order to see whether this has happened. For example, in the below price chart, we can see that the price has reached a lower low. Similarly, let’s say we have a downtrend that got to a low (L), then followed by a correction to a high (H).

Higher High/Lower Low patterns in countertrend strategies

A high in the crypto market potentially refers to a local high, a longer-term swing high, or an all-time high. There is also a high during each trading session, which is represented by the upper shadow of a Japanese candlestick. For example, a new high is set for the trading day when the average gain is higher than the previous day. In forex trading, “higher lows” refers to a bullish signal in which the price of a currency pair creates a new low, that is higher than the previous – thus a higher low. To identify higher highs in a chart, you would look for upward price movements that reach new highs without being preceded by a lower low. The swing high and swing low method as demonstrated above shows you how to capture the small but very significant movements in price action.

Is higher highs and higher lows bullish?

If an uptrend is established, we will take a long position when the market retraces from the third higher high towards the second higher low. The stop-loss in this strategy will be below the second higher low. The rule to establish an uptrend is to have at least 3 higher highs. Likewise, to establish a downtrend a minimum of 3 lower lows are needed. Typically, in a downtrend, the closing of a particular candle remains lower than the closing of the previous candle.

Trendline breakout with a big bullish candlestick also indicates a trend reversal. After trend reversal, we will look for buy opportunities on the chart and will open a buy trade according to a specific trading strategy. The content provided by Binomo Blog does not include financial advice, guidance or recommendations to take, or not to take, any trades, investments or decisions in relation to any matter. The content provided is impersonal and not adapted to any specific client, trader, or business. Results are not guaranteed and may vary from person to person. There are inherent risks involved with trading, including the loss of your investment.

What is a Higher High/Lower Low trading strategy?

The two-week holding period corresponds to the same return as any random two-week period. Step 3 – Place a stop loss order above the wick on the top of the recent candlestick forming the swing high. Effective stop loss placement is the key to avoiding losses if the movement of price goes against your position and a trend continues. For example, if you are trading on a 1-hour time frame you may consider existing after a profit of 40 to 50 pips. Similarly, if you are trading on a daily scale you may exit your trade after making a profit of 60 to 80 pips.

In this article, we will create a simple yet effective trading strategy to trade both up trending and down trending markets using higher highs and lower lows. Higher lows can be used as a trading signal, as they suggest that the trend will likely continue in an upward direction and traders may look for an opportunity to buy at these levels. To identify higher lows in a chart, you would look for upward price movements that reach new lows without being preceded by a lower low. The swing high and swing low also alerts you to potential breaks of support and resistance levels. For intraday traders, the above chart can reveal quite some information. For example, starting with the first flat on the left side, you can see that after the swing low is formed, price tends to move higher.

The platform also includes access to powerful technical indicators like the Relative Strength Index, Bollinger Bands, Ichimoku Cloud, and the Stochastic RSI. Here is how using higher highs and higher lows or lower lows and lower highs can help traders determine the underlying trend and how that may impact the future value of the asset. A local low refers to a low during a minor trend, typically on the daily or lower timeframes. A swing low references a dominant market low during a secondary trend. Swing lows can remain support levels for long periods of time. All-time lows can typically remain lows several years, and some all-time lows are permanent due to exponential price growth.

SignalRadar shows live trades being executed by various trading strategies. Most traders have heard about Dow theory and higher highs and lower lows. This article is a quick recap of this very important trading topic. If you want the Amibroker code or the code in plain English, you can order it by clicking on the green banner below. You also get access to over 150 other trading strategies with Amibroker code (some in Tradestation) and all the rules in plain English (for Python trading strategy backtests).

The swing high and low methods can help you to identify mainly the support and resistance levels. When price breaches previous swing low or high point and follows up with another swing high or a swing low, price continues the trend. To put this in perspective, when price breaks the resistance level and forms a swing low, it means that buyers are in control. Similarly, when price breaks the support level and forms a swing high, it means that sellers are in control. Price is forming Lower lows and lower highs consecutively in the EURJPY currency pair.

What Are Highs And Lows In Trading? Swing Highs And Swing Lows Explained

However, it’s not powerful enough on its own to use as a trading signal. The first row shows that the one-day average gain is a tiny 0.01 (we are holding from the close until the next day’s close). A holding period of two weeks (ten trading days) has an average of 0.23%.