Getting ahead of a shift in direction can be extremely lucrative.
Higher highs matter.
Higher lows matter.
There are many momentum signals that I use frequently – but one of my favorite changing momentum signals is when the market is falling, but then it stops. And to know when it stops and the momentum is then turning higher (rather than simply stopping), I look for a higher high than the prior day and a higher low than the prior day.
Many of you have likely heard me refer to this over time, and probably don’t have a good sense as to why I like this as a technical indicator that things are changing, so I’d like to explain the reason that I like both parts, but I also need BOTH parts, to give me that indication that momentum hasn’t just stopped to the downside, but also may be turning back to the upside.
First, let’s see a visual representation recently in AAPL, and what we are looking to see happen coming out of that formation:
The Higher Low, and What It Means
The higher low, from the buyer’s perspective, simply means that they don’t have to stop out of their position. When someone is trying to buy near lows, they often set a stop-loss at the prior low, so if a new low is not made, they don’t stop out, and this means that there is no selling pressure from someone currently long the stock.
The higher low, from a seller’s perspective, means that there’s no significant new sellers helping push the momentum in that direction. This means that if someone is bearish and trying to sell this stock to push it lower, they are now seeing support to the stock, which is the opposite of their bias.
The Higher High, and What It Means
The higher high, from the buyer’s perspective, means that there are now not just buyers below the prior day’s market prices, or at the prior day’s market prices, but now ABOVE the prior day’s market prices. Investors see value here and think that the market has gone too far. This means that they are now finding value above the price that the buyer recently found value and confirming the bias. And, more importantly, the buyer is starting to make money. This is bullish.
The higher high, from the seller’s perspective, is also telling them that other sellers may be exiting their positions as they start to see that the bearish biased trade is played out. It’s gone too far, too fast, or might simply be done with all together. At the very least, the bearish trade is over for the short-term. The bear isn’t making money today. This is what we often refer to as “anti-bearish”. It can cause other shorts to start covering their bearish positions.
At the end of the day, sometimes these combinations simply turn into a false signal, and that’s why I always like combining my technical signals with options. When I’m right, I get leverage, and when I’m wrong, I define my risk.
So, please go to https://optionhotline.com to review how I traditionally apply technical signals and probability analysis to my options trades. As always, if you have any questions, never hesitate to reach out.
See Related Articles on TradeWinsDaily.com
Chart of the Week: How to Trade Volatility
Telltale Signs To Pull The Trigger On A Trade￼
This Indicator Can Help Create A Winning Advantage–ADX
Auto-trading, or any broker or advisor-directed type of trading, is not supported or endorsed by TradeWins. For additional information on auto-trading, you may visit the SEC’s website: All About Auto-Trading, https://www.sec.gov/
TradeWins does not recommend or refer subscribers to broker-dealers. You should perform your own due diligence with respect to satisfactory broker-dealers and whether to open a brokerage account. You should always consult with your own professional advisers regarding equities and options on equities trading.
1. The information provided by the newsletters, trading, training and educational products related to various markets (collectively referred to as the “Services”) is not customized or personalized to any particular risk profile or tolerance. Nor is the information published by TradeWins Publishing (“TradeWins”) a customized or personalized recommendation to buy, sell, hold, or invest in particular financial products. The Services are intended to supplement your own research and analysis.
2. TradeWins’ Services are not a solicitation or offer to buy or sell any financial products, and the Services are not intended to provide money management advice or services.
3. Past performance is not necessarily indicative of future results. Trading and investing involve substantial risk. Trading on margin carries a high level of risk, and may not be suitable for all investors. Other than the refund policy detailed elsewhere, TradeWins does not make any guarantee or other promise as to any results that may be obtained from using the Services. No person subscribing for the Services (“Subscriber”) should make any investment decision without first consulting his or her own personal financial adviser, broker or consultant. TradeWins disclaims any and all liability in the event anything contained in the Services proves to be inaccurate, incomplete or unreliable, or results in any investment or other loss by a Subscriber.
4. You should trade or invest only “risk capital” money you can afford to lose. Trading stocks and stock options involves high risk and you can lose the entire principal amount invested or more.
5. All investments carry risk and all trading decisions made by a person remain the responsibility of that person. There is no guarantee that systems, indicators, or trading signals will result in profits or that they will not produce losses. Subscribers should fully understand all risks associated with any kind of trading or investing before engaging in such activities.
6. Some profit examples are based on hypothetical or simulated trading. This means the trades are not actual trades and instead are hypothetical trades based on real market prices at the time the recommendation is disseminated. No actual money is invested, nor are any trades executed. Hypothetical or simulated performance is not necessarily indicative of future results. Hypothetical performance results have many inherent limitations, some of which are described below. Also, the hypothetical results do not include the costs of subscriptions, commissions, or other fees. Because the trades underlying these examples have not actually been executed, the results may understate or overstate the impact of certain market factors, such as lack of liquidity. Simulated trading services in general are also designed with the benefit of hindsight, which may not be relevant to actual trading. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. TradeWins makes no representations or warranties that any account will or is likely to achieve profits similar to those shown.
7. No representation is being made that you will achieve profits or the same results as any person providing testimonial. No representation is being made that any person providing a testimonial is likely to continue to experience profitable trading after the date on which the testimonial was provided, and in fact the person providing the testimonial may have experienced losses.
8. The author experiences are not typical. The author is an experienced investor and your results will vary depending on risk tolerance, amount of risk capital utilized, size of trading position and other factors. Certain Subscribers may modify the author methods, or modify or ignore the rules or risk parameters, and any such actions are taken entirely at the Subscriber’s own election and for the Subscriber’s own risk.