I believe majority if not all of you heard about famous Higher Highs and Lower Lows. This is indeed one of major factors that helps not only filter out bad trades, but also quickly help Trader judge the situation on the market. Yet many people get it wrong. Let’s then jump into the details.
On the chart above, we see clear downtrend – it is represented by Lower Highs (LH) and Lower Lows (LL). Last High that precedes new low, is automatically treated as “Last Confirmed High”. When Market is breaking structure and goes above this level – we see first signal of potential shift to Bullish Sentiment. This is later confirmed by created Higher Low, which also is great place for entering Long Position.
Image above is presenting starting from left side of the chart, clear uptrend. Market is making Higher Highs as well as Higher Lows (HL) with further swings. We also see marked horizontal level “Last Confirmed Low”. This is basically the price at which last low in uptrend move was made – and importantly that leds to create new High by price. That’s why it’s called “Confirmed”. When Price broke the level of Last Confirmed Low and market makes Lower Low (LL), then we observe break of structure and potential shift of sentiment to Bearish. Therefore after creating by Market Lower High (eclipse area marked on chart), then we have a confirmation of sentiment shift what gives us also opportunity to enter Short Trade.
Of course things are not always so clear as presented on the examples above. Also please keep in mind Fractals Nature of Markets – on one timeframe like M30 we can have clear trend, but on higher timeframe it can be Trading Range (Consolidation). Spotting trend change on lower timeframe in the direction of trend from Higher Timeframe is one of the best ways to constantly grow your trading account.
You didn’t expect something so simple, am I right? Still though understanding market structure changes needs to become your habit, if you want to succeed as profitable trader.