Trading Price Action – High Low Analysis
It is not uncommon to see 5+ indicators on the screen of many traders. If this is helping them make money I will be the first to say keep on doing what works for you. However, more often than not this is not the case and traders become frustrated as lagging indicators give signals which are followed by whipsaw price action and losses. I am certainly not saying that trading price action is an easy way to profit from the market because the reality is that trading is not an easy way to make money – there are many highly intelligent traders and large institutions with untold resources out there who want to take our money.
These large institutions are moving the markets and all we can do as retail traders is look for the footprint of these mammoth traders. Simple high low analysis – reading price action – gives an insight into the prevailing market sentiment at any given time. Fractal high lows show areas where order flow is often placed and keeps us in touch with the pulse of the market.
Price action chart example using high low analysis
If you are unsure what higher highs and lower lows are then this may be of assistance. The following video shows how price action traders can utilise high/low analysis when following the Forex market. This was done using the Forextester backtesting platform which I use for all discretionary backtesting analysis.
As an example the following EUR/USD 5 minute timeframe Forex chart has been marked up with analysis of nothing but highs and lows. There is a 20 period EMA which gives a loose concept of trend but aside from this the price action is all that is referenced.
Lets run through the chart analysis and discuss what is happening on the chart:
- London open has a defined range and the initial move to the downside breaks a fractal low but does not take out the ultimate daily low. There is a good chance that quite a few traders are short at this stage as the previous trend was down.
- Price takes out the range highs and clears the stops above the swing high as traders position themselves long and others have stop losses hit. One thing for sure is that price is moving higher.
- There subsequently follows a series of higher lows and highs. Shorting the market while this strong trend is in full flow would most likely result in losses in the context of the timeframe we are analysing. Each pullback against the trend is quickly met with eager buyers (not entirely true as a high frequency trading computer have no emotion and probably makes up a large percentage of the market- but I digress…).
- The series of highs is broken when a head and shoulders pattern forms and then breaks to the downside. This is not to say the trend has ended and price will now fall through the floor but in terms of our higher low/high count the market is now breaking structure.The break of structure gave a small downside move and price then starts moving to the upside.
- As price approaches the breaking area from the head and shoulders anyone trading this pattern who had not taken a profit would now be looking at a break even trade if they close the position or the potential for drawdown if it moves higher. The main point here though is that price breaks a fractal high as it could not make another push lower.
- Series of higher lows and highs is broken.
- Series of lower highs/lows broken. There then follows a continuation of higher lows/highs before price hits, and moves, slightly beyond a clear resistance area/prior swing high and subsequently reverses slightly lower and closes the next candle under the resistance.
- Price will often do this and then move higher but there is another technical element in play here - the ascending trend line.
- The trend line then breaks to the downside which was an interesting short setup knowing that there were potentially trapped longs after the break of resistance… This is after all a zero sum game.
- Price moves all the way down to the swing low previous support formed near step 7. This area gives a small amount of support before price makes a new low. The resulting move comes with strong momentum as stops are taken out and new short positions are filled.
This is all done in hindsight but gives a real world perspective of what is really happening during each step in terms of highs and lows. There is a short video now which runs through some of these steps as I am well aware that the chart below if cluttered with the text additions. Please do not see this as a reason to go out and start trading every high/low break as you will probably blow your account. One thing you can do is test this approach yourself on a demo account with no money at risk and see if it gives you a new perspective.