The Science of Highs and Lows

[Tradewinds 12]

Looking at historical price bars and trend lines on a chart tell very little about the real behavior of price. All kinds of things happen intra-bar that are not readily apparent on a static, historical chart. For example, if the price bar had a lower low; did the price bar have a lower low at the open, and then shoot up and close higher? Did the price bar open high and close with a lower low? Did the lower low occur first or last? Was there a lower low with a close down or a close up? The answer to all those questions provide a more complete picture of what the price behavior really is.

 

Higher lows and lower highs can be particularly tricky. For example, let's say that you see a higher low on this current price bar or an indicator at the open of the bar, and take that as a signal that price is moving up, only to experience the bottom drop out during the last few seconds of the bar formation. You must understand at least two fundamental truths about highs and low's. Highs can't go any lower, and lows can't go any higher; but highs can go higher and lows can go lower. Think about it. Once a new price high has been made, that price high for the bar can't go lower. So if your strategy depends on a higher high being made, then once it's made, it's reliable information. The same with lower lows.

 

Higher lows are important information, but higher lows can not be certain until the open of the next bar. By then you may be to late. Plus you can't tell if that higher low will hold until the second bar. Let's say that this bar looks like it will have a higher low, so you watch it, but low's can go lower, so you don't know until the next bar opens whether it's really a higher low or not. But what do you do in the meantime? And how long do you wait to make a decision?

 

So it's very difficult to time higher low's and lower highs. This illustrates why the open of the next bar is so important, and that there may be a very short window of time when there is any certainty of anything. There are very short windows of certainty followed by longer periods of uncertainty.

[Jleon 10]

Looking at historical price bars and trend lines on a chart tell very little about the real behavior of price. All kinds of things happen intra-bar that are not readily apparent on a static, historical chart. For example, if the price bar had a lower low; did the price bar have a lower low at the open, and then shoot up and close higher? Did the price bar open high and close with a lower low? Did the lower low occur first or last? Was there a lower low with a close down or a close up? The answer to all those questions provide a more complete picture of what the price behavior really is.

 

Higher lows and lower highs can be particularly tricky. For example, let's say that you see a higher low on this current price bar or an indicator at the open of the bar, and take that as a signal that price is moving up, only to experience the bottom drop out during the last few seconds of the bar formation. You must understand at least two fundamental truths about highs and low's. Highs can't go any lower, and lows can't go any higher; but highs can go higher and lows can go lower. Think about it. Once a new price high has been made, that price high for the bar can't go lower. So if your strategy depends on a higher high being made, then once it's made, it's reliable information. The same with lower lows.

 

Higher lows are important information, but higher lows can not be certain until the open of the next bar. By then you may be to late. Plus you can't tell if that higher low will hold until the second bar. Let's say that this bar looks like it will have a higher low, so you watch it, but low's can go lower, so you don't know until the next bar opens whether it's really a higher low or not. But what do you do in the meantime? And how long do you wait to make a decision?

 

So it's very difficult to time higher low's and lower highs. This illustrates why the open of the next bar is so important, and that there may be a very short window of time when there is any certainty of anything. There are very short windows of certainty followed by longer periods of uncertainty.

 

H/H and L/L are great tools but need to used only when it is time to manage a trade. They have very little to do with the identification of a trade entry. It would be easier and probably more effective to throw a dart at a chart for entry rather than price bars. The best way to identify an entry is by staring at the order flow to gauge what side of the market is going to give and act on it.

[Tradewinds 12]

H/H and L/L are great tools but need to used only when it is time to manage a trade.

 

Please give an example and an explanation.

[Jleon 10]

Please give an example and an explanation.

 

Here is a video of me taking a short. I enter once I spotted the weakness in the market and managed the trade using L/H and L/L. TradeWithVolume's Channel - YouTube

 

 

Hope this helps!!

[Tradewinds 12]

One of the ultimate questions in trading is:

 

• Where is the Top? and
  
• Where is the bottom?
  

 

And the answer is, that you can never know for sure. But you can determine how probable it is that a bottom or top will occur under certain circumstances. And that is the best you can do.

 

So even though lows can go lower and highs can go higher, but highs can't go lower and lows can't go higher, you can guess at where the top and the bottom might be.

 

I like oscillating indicators because they will only stay on one side of the zero line for so long. Yes, sometimes they fail to go back over the zero line, but they will also only go in one direction for so long. So even if the oscillator fails to cross over the zero line in the opposite direction, it usually only goes in one direction for so long. So you can guess at where the price is in the wave cycle.

 

When I buy highs and sell lows, the profit report doesn't do very well. Oscillators keep me in sync with the price cycle.

[Jleon 10]

Lows often run into strength and pop high as highs snap from weakness and go lower. As long as you are in the right part of the cycle!!

[Tradewinds 12]

Lows often run into strength and pop high as highs snap from weakness and go lower. As long as you are in the right part of the cycle!!

 

Yes, there are strong highs and weak highs, and strong lows and weak lows. For example, you could get a price move down that is average, but a much greater than average selling volume. In that situation, sometimes price "coasts" lower from all that momentum built up from the selling.

 

How do you personally measure strength or weakness? I measure it mostly with the NYSE $TICK for trading the ES.

[Jleon 10]

Got ya. Sounds good!

 

I look at the order book and see how the orders are being taken at a particular area. This shows me if there is a lot of demand or supply there.

[TheNegotiator 13]

Looking at historical price bars and trend lines on a chart tell very little about the real behavior of price. All kinds of things happen intra-bar that are not readily apparent on a static, historical chart. For example, if the price bar had a lower low; did the price bar have a lower low at the open, and then shoot up and close higher? Did the price bar open high and close with a lower low? Did the lower low occur first or last? Was there a lower low with a close down or a close up? The answer to all those questions provide a more complete picture of what the price behavior really is.

 

I know this is slightly off topic, but it a really important point which people need to acknowledge when they are looking to see whether a strategy works or not. That's that looking simply at historical charts to get a feel for whether an idea is good or not can be very misleading. The eye tends to be drawn to where the strategy seems to have worked or at least clearly failed. So many things happen while trading that strategies can easily give signals which just get steam rolled in real time. Many people use backtesting(and forward testing) to really work out whether the strategy might work. I'd trial the strategy simulated to be sure though.

 

I think the strong or weak extremities as you put it, in order flow terms are rejections and tests, or responsive activity and the market drying up. They definitely will create different conditions after they have been put in.