Trading Lower Highs and Lower Lows

The market has made some big moves lower as of late and at some point, if not by the time this article is published, it will move higher again. I assume you have heard the saying “the trend is your friend.”  Probably too many times, right? Well, there are several sayings and reminders when it comes to trading that stand the test of time and this is absolutely one of them. I like to start out MTM’s Group Coaching sessions by reminding traders to consider the trend that will put the odds on their side for a potentially successful trade.

Gain an Edge

As technical analysts and traders, we are always looking for an edge and to put the odds on our side. Finding an opportunity like a trend fits these criteria. An uptrend is an underlying that is setting higher pivot highs and higher pivot lows as seen below.

I consider these highs and lows to be pivot levels and substantial areas. I tell the class to be patient and look for bullish opportunities within the uptrend. I like to see pullbacks (buy setups) or pullbacks to support areas and for reversals. For a higher high that correlates with resistance, I automatically look for a two-bar bullish closes (two consecutive bullish closes) above that resistance level to confirm a break of resistance. The odds are resistance will hold even in an uptrend. But if it does not, it could be a stronger bullish sign. Of course, there is no guarantee any of these setups will work, but to me I am putting the odds on my side.

Current Conditions

On the flip side, as we have seen recently with this market, an underlying that is setting lower lows and lower highs is classified as a downtrend. Take a look at the chart below.

Look for bearish opportunities within the downtrend. I like to watch for rallies (sell setups) or rallies into resistance areas and for reversals. For a lower low that correlates with support, I look for two-bar bearish closes (two consecutive bearish closes) below that support level to put the odds on my side that the underlying will continue to move lower or at least not higher. Just like resistance, the odds are greater that support will hold even in a downtrend. But a break of that support level could be a bearish sign.

Drawing a Conclusion

The more you study and analyze chart patterns, the more you will see these pivot levels moving higher or lower that can guide you to make the better choice of what you believe the underlying will do next. The bottom line is to trade with the trend, be patient and put the odds on your side as much as you can. It can only improve your odds of being a successful and profitable trader.

John Kmiecik, Market Taker Mentoring

Trader Education