Higher High – Forex Academy

Introduction

In forex, the dynamic channel trading is a profitable strategy that forms with standard trendlines. It indicates a potential move to identify the market direction both to the downside and upside. On the other hand, price action is a method to identify the price direction based on price behavior. Therefore, we can create a profitable trading strategy by reading the price action from any channel support and resistance level.

In general, traders use price channel as a technical analysis tool that helps to identify the potential market movement. The dynamic channel moves like a zigzag by creating lower lows and higher highs. In Forex trading, we usually have two types of dynamic channels:

An upward or ascending channel
Downward or descending channel

Dynamic Channel Identification

We can easily identify the dynamic channel by connecting the swing lows or swings highs they create. In an upwards dynamic channel, it will move with the price with a higher high formation.

Similarly, in a downward dynamic channel, it will move with the price by creating lower lows.

In the image above, we can see that the higher highs and the lower lows connected through straight lines. The dynamic price channel shows a significant movement from down to upside in the trend line. The trendline below the price may work as a dynamic support level, and the trendline above the price may work as a dynamic resistance level.

Besides the dynamic channel, we will use the concept of price action by measuring what buyers and sellers are doing in the market. Any slower and corrective movement from the dynamic channel support and resistance would indicate a possibility of a potential market reversal.

Later on, we will use the appropriate reversal candlestick from that area to enter a trade. In this trading strategy, we can make a profit when the price is trading within the channel, or it breaks out from the channel. However, we will filter out the unusual false movement by reading the price action.

Bullish Dynamic Channel Trading Strategy

In the bullish channel continuation trade setup, we will identify the price that is moving upside within the channel.

Identify the Price Location

Central banks and big financial institutes drive the price of a currency pair. Therefore, institutional traders focus on long timeframes mostly, as it provides the most reliable price direction. Therefore, we will move to the daily or weekly timeframe and identify the location of the price. We will consider channels that only meets the following condition:

⚠️ An upward channel should move within an uptrend above a key support level.

Entry

In an upside movement of a price channel, there will be new higher highs. Therefore, we need to identify a price channel where the price moves down towards channel support with a corrective speed. We will enter the trade as soon as the price rejects the channel support with a reversal candlestick formation.

Stop Loss

In a bullish channel trading, the stop loss would be below the reversal candlestick with 10 to 15 pips buffer.

Take Profit

The primary aim of the taking profit would be the immediate channel resistance. However, we have to read the price action to make a trading decision regarding the take profit.

If the price starts to move with an impulsive bullish pressure, it can go beyond the channel resistance. In that case, we can take some partial closing 10-15 pips below the channel resistance and wait for the price to test any event level.

Bearish Dynamic Channel Trading Strategy

In the bearish channel continuation trade setup, we will identify the price that is moving downside within the channel.

Identify the Price Location

Based on the price action context, we will move to the daily or weekly timeframe and identify the price’s location. We will consider channels that only meets the following conditions:

⚠️ A downward channel should move within a downtrend from a key resistance level.

Entry

In the downward price channel, there will be lower lows. Therefore, we need to identify a price channel where the price is moving down towards a channel resistance with a corrective speed. Therefore, we will read the price action and enter the trade as soon as it rejects the channel resistance with a reversal candlestick pattern.

Stop Loss

In the bearish channel trading, the stop loss would be above the reversal candlestick with 10 to 15 pips buffer.

Take Profit

The primary aim of the taking profit would be the immediate channel support. However, we have to read the price action to make a trading decision regarding the take profit.

If the price starts to move with an impulsive bearish pressure, it can go beyond the channel support. In that case, we can take some partial closing 10-15 pips above the channel support and close the rest of the amount at the next event level.

Channel Breakout Trading Strategy

In forex trading, when the price crossed (above or below) the channel, there is a profitable trading strategy. For making the trade sustainable, we need to identify the speed of the breakout. When institutions or banks enter the market, we see such massive breakout from the channel support or resistance.

Entry

After a massive breakout from a dynamic channel, we will wait for a correction. The correction indicates that the massive breakout would be strong. We will wait until the price moves to the channel support or resistance level with a corrective speed and enter the trade as soon as it rejects the level with a reversal candlestick formation.

Stop Loss

Setting a stop loss is similar to the channel continuation trade setup. You can put your stop loss above or below the reversal candlestick with 10 to 15 pips buffer.

Take Profit

The primary target of the channel breakout is the immediate event level. However, you can extend the take profit by reading the price action. If the power of the breakout is strong, the price may move beyond the immediate event level.

Conclusion

The Forex market is a competitive trading market where trade management is a key element for a forex trader. No trading strategy can assure you a confirmed profit. Therefore, it is recommended to use not more than 2% risk per trade and move the stop-loss at breakeven as soon as the price creates new lows or highs.

Introduction

There are millions of strategies out there in the market. Some work exceptionally well, while some fail miserably. Trading successfully is not about knowing several strategies, but about one strategy that works consistently. All professional traders are never in the hunt for trying out different strategies. They have expertise in a single strategy and know when to apply it and when not to.

Here, in this article, we shall be walking you through a simple yet extremely strategy that both day and positional traders can apply. Besides, we will enlighten you on the dos and don’ts of the strategy.

Understanding a Trend

The most evident state of the market is a trend. It is indeed the best state to trade as one can easily bet on the market’s direction. In technical terms, the trend is the state of the market, where the price makes higher-highs/higher-lows or lower-lows/lower-highs.

A trend alone can be of different types – based on the pattern. The above image of a trend is how an ideal trend looks like. However, the number of occurrences of this type of trend is very less. Apart from the ideal trending market, we can have other types of the same state.

Figure 1: In this type, the market breaks about the Support and Resistance (purple line), retraces through the line, and then makes another higher high.

Figure 2: Here, the market makes a HH by breaking about the S&R (purple line), pulls back insignificantly, away from the S&R, and makes a higher high.

Figure 3: The market made HH passing through the S&R, retraced a little, tried to make a higher high, and failed. Later, it retraced more than the previous time, and then successfully made a HH.

What is the ‘Higher High Failure’ Countertrend Strategy?

The “Higher High Failure” countertrend strategy is based on the third figure of the above image. It is named countertrend because the overall trend of the market is up, but the strategy is to take a short position.

According to the strategy, in an uptrend, if the market fails to make a higher high on the very first attempt, then one can prepare to go short on the security.

Logic

In a sequence of higher highs and higher lows, if the market fails to break above the recent HH, it is an indication that the trend is preparing for another push down before heading up. The failure also indicates that the buyers are not strong enough to push the market higher with one retracement. Since the buyers are slowing down, one can swing down from the seller before the market resumes its trend. Note that the length of this south wing depends on the strength difference of the buyers are sellers.

Trading the Higher High Failure Strategy

Consider the below chart of Euro / US Dollar on the 1H time frame. We can see that the market is in an uptrend making higher highs and higher lows.

The most recent higher high made by the market was 1.11834. The market then retraced to 1.1098, tried to make a new high from the previous one, but failed by leaving a wick on the top.

The failure to make a higher high indicates that the buyers are losing momentum, and as a result, the sellers could temporarily take over the market. In addition, the wick on the top at the resistance area signifies the strength of the sellers. Thus, right after the price shoots down at holds below the S&R (grey ray), one can go short on the pair.

Take Profit Placement

Since the buyers shot up from 1.10988 the previous, we can expect a reaction from the same level. Hence, 1.10988 would be the safest level to place the take profit level. If the sellers are strong in momentum, one can ride down until the S&R.

Stop Loss Placement

Stop-loss few pips above the wick can keep you away from getting stopped out. But it is risky to keep the stop loss right above the resistance level.

On the flip side, this strategy will work like a charm on a downtrend as well. For a downtrend, the strategy could be termed as a “Lower Low Failure” countertrend strategy. Let’s take an example of the same and understand how to trade a down-trending market.

In the below chart of GBP/CAD, we can see that the market is in a downtrend, making lower lows and lower highs. Level 1.70006 was the most recent LL. The market retraced to the S&R and tried to make a new LL but failed. During the failure to make a LL, a spinning top candle appeared, which was then followed by a bullish candle to close above the LL level. This confirms that the sellers are have temporarily faded out, and the buyers are going take over the market.

Take Profit Placement

Take profit can be placed at the price where the market tried to make a lower low previously. In this example, the TP would be at the S&R.

Stop Loss Placement

The safest stop loss for this strategy would be right below the price where it failed to make a LL.

Important Points to Note

The price should attempt to make a higher high and fail. The strategy cannot be considered for an equal high.
After the failure to make HH, the price should hold below the S&R level.
The strategy will not work if the price makes HH, holds, and then drops below the S&R.
Since it is countertrend trade, make sure to take profits at every hurdle.
The stop loss must be above the high of the higher high failure, NOT right at the resistance.

We hope you found the strategy interesting and useful. Do test it out in the live market and let us know the results in the comment section below. Cheers!