How to trade higher highs and lower lows for consistent profit

One of the best ways to make consistent gains in the stock market is to trade in the direction of the underlying trend. A simple way to determine the direction is the price cycle/structure of the movement. Price moves in a disorderly manner, however, the structure of its movement can help traders build a broad outlook which, in turn, helps determine the direction of the underlying trend.

A price showing consistent or a directional move indicates a similar trend for future sessions. That said, this may not be true in every case, although one can still decode the underlying sentiment. The well-known price analyses are “Higher High, Higher low” and “Lower Low, Lower High”. They depict a basic structure but directly assist in developing a great strategy. (NIFTY METAL CHART)

Higher Highs, Higher Lows

When a price makes a new high crossing the previous high, while simultaneously not violating the recent reversal low, is known as a “Higher High, Higher Low” formation.

Herein, the security price continues to rise in the upward direction, making consistent highs, while witnessing healthy profit booking. This series of highs with minor dip form a structure which is widely recognized as “Higher High, Higher Low”.  It can also be considered as a “Rising Channel pattern”, which is developed on the idea of price moving in channel, consistently making higher highs and higher lows.

Lower Lows, Lower Highs

When a price makes a new low breaking the previous low, while not violating the recent reversal high, it results in a “Lower Low, Lower High” formation.   

The structure represents reversals that are being used to exit long positions. The price started to deteriorate after showing some relief rallies. It continues to show lower lows with mild recoveries. This is also similar to “Falling Channel Pattern” that exhibits downtrend in a channel pattern.

Trading Strategy

-- The reversal levels are considered as the stop loss for the trading position.

-- One can calculate the next high/ low by finding the difference of two highs/lows levels.

-- Unless a decisive breakdown does emerge with high volumes, the underneath trend may not change direction

-- The price formulating scenarios like Gap-up, Bullish Body candle, Substantial rise in volume during a positive close reflect a strong trend for the days ahead

-- In price action theory, the moving averages do support in establishing a 'confirm' signal. A strong up move supported by relevant moving averages shows the growing interest of market participants which indirectly translates into an indefinite price rise

-- The medium-term outlook may change on the basis of the strength of “Higher Highs, Higher Low”/”Lower Lows, Lower highs”