APH Following The Pattern Higher Lows And Lower Highs

"Anyway, a good thing can't come too fast so here is something else that works fairly well that might help you trade.

If you look at a chart and zoom out, you can see lots of points where the price really bounces. Its kind of like the price bounces along, and these are the points where the bounce happens. These are lows, if they are bottoms, and highs, if they are tops." Source 

For an example of what I mean, take a look at the chart below:

Of course, it is easy to identify these highs and lows after they form. It is another topic to identify them as they happen - and I will get back to that.

For now, I'll just point out that if there is an UPTREND, and you see a first lower high, this can be an EARLY SIGN that the trend is changing from UPTREND to DOWNTREND. Conversely, if there is a DOWNTREND, and you see a first higher low, that can be an EARLY SIGN that the trend is changing from DOWNTREND to UPTREND.

Of course, this might only be right a little over 50% of the time but that is not important - what is important is that it can give you an early signal, meaning you can have a tight stop loss of maybe 40 pips and aim for 100 pips plus when you are right.

Consider the fact that losing 40 half the time and winning 100 the other half of the time, is very nicely profitable, even if you are adjusting the risk per pip for volatility.

The first higher low could have given you an opportunity to go long, if you had identified it. You could have taken the first lower high as a signal to exit, which would have been nicely profitable. A short off that first lower high would not have worked out so well, but you can't win them all , and you don't need to either!

To show an example from the chart above:

So far, so good, but probably the hardest thing is to identify these highs and lows as they happen. It is very easy to look at a historical chart and see them, but charts tend to look very different in real time.

Practise does make perfect, especially when it comes to reading charts. So if you can use trade simulators such as forex tester or historical charts where you can't see the outcomes, that is a great way to practise spotting highs and lows.

Still, you need a place to get started . There are three things you can start doing to spot highs and lows, at around the close of each new candle:

1. If you are looking for a low, the candlestick that forms the start of that low is going to have - you guessed it - a low, and that low will be lower than the immediately preceding candlesticks. It really needs to be lower than at least the previous 2 candlesticks. If the low of the candlestick is touching a level that you expected to be significant support, maybe a level that was previously resistance, that is even better, but not essential.

2. If you are looking for a low to have formed, you want to see a bullish looking candlestick or combination of candlesticks form. For example, a pin bar followed by an engulfing bar, or a full-bodied inside bar.

3. You will want to see some momentum, so don't enter until the price breaks a significant high (if you are looking for a low to have formed), ideally on the next candle. Put your stop loss under the swing low.

So after a long run of red candles showing a strong downwards move, we are looking for a low to form, and we get the following:

1. A candle that is almost a bullish pin bar. If the top breaks the next candle, it might be good for the start of the low, although that would be a pretty aggressive entry. It does not look like a very good pin bar as the lower wick is not very long, so it might be better to wait and see.

2. The next bar is an inside bar and kind of a doji. It would be possible to enter long if the next candle breaks the high, with the stop under the low of candle 1.

3. We get an entry long according to 2, but are stopped out on the very next candle.

4. This candle looks like it might be a good candidate to form the swing low here. It makes a new low but closes very near its high, and most importantly, it engulfs the real bodies of the previous 4 candles. You could make a long entry just above its high on the very next candle. This would have been a winner as the previous candle did mark the low.

5. The price falls back but then produces a bullish outside candle, forming a higher low within this swing low. It did not break the very next candle, but did signify that the next likely turn was upwards.

The key thing to remember is that it usually takes a few candles to form a swing high or low. Try to look at the picture the candles are forming together and not just at individual candles. Most importantly, remember that you usually dont need to be in too much of a hurry. The most important thing is guessing where the absolute high or low is going to be and putting the stop just beyond that. The example above shows this. It was the low just before candle 4 that was key and even though it took a few days for the price to turn around, that low was never broken.