FX Academy – Article by Adam Lemon

Trading Higher Lows, Lower Highs

Hello Traders,

I felt like starting a new thread today on a topic that I do plan to write a course about soon. 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. 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.

Trading Higher Lows, Lower Highs Page 1|5

FX Academy – Article by Adam Lemon

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.

Practice 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 practice 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.

Bringing these three principles together, let's look and see how we might have identified a couple of the swing highs or lows shown in
the AUD/USD chart above.

Trading Higher Lows, Lower Highs Page 2|5

FX Academy – Article by Adam Lemon

Here is the chart marked with numerical labels.

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 don’t 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.

Trading Higher Lows, Lower Highs Page 3|5

FX Academy – Article by Adam Lemon

Let's continue by looking at another example from the same chart. See the image below:

First of all, we have a higher high that was formed by two consecutive doji candles, signifying a trend change might be about to happen.
The price then fell during the next candle, which was bearish. There were then two small candles that were pulling back, trying to rise,
forming upper wicks. The fact that these candles were small and had upper wicks were suggestive that the primary move would remain
downwards, and that this was just a temporary pull back.

We then get to the lower high marked at 1. It was almost a pin bar. There was no way to know that this was going to be the swing high,
but when the next candle printed at 2 this was very suggestive that we were now going to get a move down. Note also how the high of
candle 1 pretty much equaled the low of the two consecutive dojis I mentioned earlier. This is an example of support becoming
resistance.

It was safe to go short here, and the price did indeed fall for the next few candles, before forming a higher low.

A bullish pin bar was formed at 3, which turned out to be the swing low. The very next candle at 4, its high was broken by another
candle with a significant lower wick. Note that the next candle also was not very big, so you could have waited until even after that
candle to enter and still have not missed much at all.

Adam, can you recommend any good ways to filter the trades you might task with this system? Do you trade it in multiple time frames,
and if so, which do you think work best in Forex generally?

I think we can all use some good recommendations along those lines.... would be very helpful.

Trading Higher Lows, Lower Highs Page 4|5

FX Academy – Article by Adam Lemon

Great. First of all, yes, trading this kind of strategy using multiple time frames should definitely increase profitability, because you trade
with a tighter stop loss and so your reward to risk ratio will be larger on some of your winning trades.

I personally like to use the daily charts to identify opportunities, but then use the 15 minute chart to enter with a tight stop loss. As I
said, this should definitely be more profitable than just using the daily chart, but not everyone has the time to sit in front of the screen
all day when there is an opportunity. So you can trade it just off a higher time frame such as the daily.

Let's look at an example. Below is a daily chart of EUR/JPY. See how we made a first higher low a few days ago with an inside candle
that was also a pin candle, marked at 1:

Now you could have just gone high at the break of the high of the daily candle at 1 with a stop loss under the swing low on the daily
chart, and you would be in profit now. The problem is that your stop loss would be 50 pips. That is not so very big especially for this
pair, but you could probably get a better entry. Here's how: when the high of 1 is broken, wait for the price to rise than fall back into
the area of candle 1. When that happens, wait for a higher low to form on the M15 chart. We got one shown below marked at 1.

This would have been a losing trade. Then there was another opportunity at 2. This would currently be in profit by 84 pips at the time
of writing, with the risk actually being less than 10 pips. If you had only entered from the daily chart, you would be up about 80 pips
with a risk of 50. So your reward would be a factor of 1.6, but if you had used the 15 minute method for a precise entry, your reward
would be a factor of about 8.4, although you would have had a loss, so you would be up 7.4 in total. Now you can see why even if you
have a few more losses, using a smaller time frame to try to find more precise entries can greatly improve your overall profitability.

Trading Higher Lows, Lower Highs Page 5|5