i. Swing highs and lows are formed because price moves in phases.
ii. This allows traders to identify trends as well as spot trend reversals.
What is HH HL and LL LH?
HH HL stands for Higher Highs Higher Lows and LL LH stands for Lower Lows Lower Highs. This is nothing but a pattern of price movement.
The price of a currency is said to be in a trend when it either moves in one direction for a substantial period of time.
When the price of a currency is rising it is said to be in an uptrend whereas if the price is declining it is said to be in a downtrend.
Trending moves are something every trader seeks to spot and ride right from its beginning till its end. But how are such trends spotted?
The price of a currency does not keep moving in one direction constantly. During uptrends or downtrends price movement seems like a flight of staircase.
When observing an ascending staircase, the top part of each step seems higher than the top of the previous step while its base also seems higher than the previous step.
In a descending staircase, each step’s base seems lower than the previous step’s base while its top part also seems lower than that of the previous step.
Applying this observation of steps on the price charts of currency pairs, we can find some similarities in the manner in which price moves.
In uptrends, price is observed to be moving like an ascending staircase, with each high being formed higher than the previous high and each low also being formed higher than the previous low.
In downtrends, price is observed to be moving like a descending staircase, with each low being formed lower than the previous low and each high also being formed lower than the previous high.
How to identify HH HL and LL LH on charts?
HH LH and LL LH are patterns that make an uptrend or a downtrend easy to understand.
Price movement is random, hence once HH HL or LL LH is spotted on the price chart of a currency pair, trends can be clearly established.
On close observation of a price chart, the formation of HH HL or LL LH can be spotted but traders use trendlines to make it even more convenient
Price moves in a series of legs, some price legs will take the price higher on the chart, while some will take the price lower.
Trendlines are used to mark the highs and lows of these price legs. Connecting highs and lows of price legs will make the pattern of HH HL clear in the uptrend and LL LH clear in the downtrend.
Why are HH HL and LL LH formed?
The price of currency pairs moves in a random manner. One cannot accurately predict the future movement of price.
But we know that price moves on the basis of the sentiment or psychology of the market participants.
Every price movement has some perceived bias on the basis of which trades are taken in that direction.
Somewhere someone was bullish on the currency pair and price moved higher or someone was bearish and the price declined. Even though price movement is random it is caused by an action taken by someone.
Whenever a trend begins, there are two groups of traders, first that have already entered the trade and are riding the trend, second, those that have missed out and are waiting for an opportunity to enter.
When the price has already moved in either direction, some traders exit trades looking to book profits, they are not sure whether the trend will continue further.
In an uptrend, traders will exit by selling their position and in a downtrend, traders will exit by buying their position.
In certain trends, there were also some traders that initiated a position hoping the price to move in one particular direction but the trend was formed in another direction.
These traders will look to exit fearing that the price may further move and increase their loss.
All this leads to price moving in the opposite direction of the first leg of price movement. A new leg of price movement is formed taking the price in the opposite direction.
In such cases, the traders that were confident about the trend of the first leg will see this as an opportunity to add more to their already existing position and will either buy or sell heavily as the price is at a discount for them. This leads to price experiencing another leg of movement.
In an uptrend, the price will go on to move further above the high of the previous price leg or price swing. And in a downtrend, the price will fall further below the low of the previous price swing.
This mass psychology will continue till the trend is strong. Price will keep moving either higher or lower making higher highs and higher lows or lower lows and lower highs respectively.
How to trade swing highs and lows?
There are many methods that traders use to incorporate this in their trading plan and take trading decisions.
The most common strategy is to enter at the previous high and stop loss at the low at which price moved after swing high was formed, during an uptrend.
While during a downtrend, traders will enter at the previous low and place their stop loss at the high at which the price moved after the low was formed.
Traders even combine this with the Fibonacci retracement tool to enter into trades. Traders will first mark the price swing that took the price either higher or lower.
Traders would then apply the Fibonacci retracement from the initial point of the swing to the final point i.e. either high or low.
Entry is taken when the price reaches the 50% retracement level in direction of the trend of the previous price swing.
This pattern of HH HL and LL LH also helps traders in spotting reversals that take place in the price of currency pairs.
After a swing high or a swing low is formed it is not necessary that price retrace and then move in direction of the trend of the previous swing.
Once the price moves below the low of the previous swing, traders then know that the sentiment has shifted and hence they must also change their bias and trade accordingly.
It should be noted that these are just some strategies that traders apply in their trading plan. These are developed only after lots of time spent in observation and practice.
Hence, traders that spend time analyzing price charts of currency pairs can devise their own strategies to trade.
Do you trade swing lows and highs?
The swing highs and lows method is something that I personally use while I trade, do you too? Let me know.
Let me know about your experience with this method, the strategy that you use and how has it worked out for you.
Do share this blog post with others and also, feel free to ask your questions or queries in the comments section below and I will get back to it for sure.