Higher Highs and Lower Lows Indicator – A Beginner’s Guide to Trading this Strategy

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One of the most common patterns traders look for in technical analysis is a series of higher highs and lower lows or vice versa. This distinctive pattern signals an asset is trending strongly either up or down. By identifying higher highs and lower lows, traders can profit from entering trending moves early and riding price momentum.

In this post, we will break down what the higher highs lower lows indicator pattern is, how to identify it, the trading strategies and indicators used with this pattern, and real examples using stock charts. Understanding this formation is key knowledge for beginner traders getting started in technical analysis.

What is the Higher Highs Lower Lows Indicator?

The higher highs and lower lows pattern forms when an asset’s price is making a strong trend higher creating a series of rising peaks and valleys. Each successive peak is higher than the previous high point and each valley is lower than the prior valley.

Visually, the pattern takes on a stair-step type appearance as price steadily marches higher over a series of rotation points. Here is an example:

This distinctive price action alerts traders to a strong uptrend. The same pattern in reverse, with lower highs and higher lows, signals a potential downtrend.

How Traders Identify the Higher Highs Lower Lows Pattern

There are two components traders look for to identify higher highs and lower lows:

1. Higher highs – Each subsequent peak in price during the pattern must be higher than the previous peak. So the highest point becomes progressively greater over a series of rotations.

2. Lower lows – Each correction decline must halt above the prior valley or low point. So the lows form a sequence of higher troughs.

The alternating sequence of higher rally peaks and shallower retracement valleys forms the distinctive stairstep price action. Traders will then enter long positions to trade with the upward momentum.

Trading Strategies Using Higher Highs Lower Lows

Here are some trading strategies to consider when you spot the higher highs/lower lows pattern forming:

Enter on throwback – Enter long after price breaks above a previous high then pulls back to retest the breakout level as new support.
Trade the corrections – Buying the dips as price corrects from each higher high can capture much of the upside.
Use moving average – Entering when price bounces off a rising 50-day moving average offers an objective entry rather than visually identifying turning points.
Scale in size – Add incrementally to positions as the trend progresses rather than entering in one large chunk.
Book partial profits – Trail stop losses higher to lock in profits as the trend extends. Avoid exiting the entire trade prematurely.

The key with higher highs/lower lows is riding upside momentum as long as the pattern remains intact. Traders utilize various entry triggers and take profit methods while aiming to maximize capturing the trend.

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Indicators to Confirm the Higher Highs Lower Lows Pattern

While the pattern can be identified visually on a price chart, these indicators can further confirm a valid higher high/lower low sequence is forming:

Moving Averages – Price staying consistently above rising 50 or 200-day moving averages supports an upward trend run.
MACD – Moving Average Convergence Divergence crossing above zero and sloping upward affirms upward momentum.
RSI – Relative Strength Index hitting higher highs with each peak confirms bullish momentum rather than overbought readings.
Positive volume – Rising volume on rally legs and lighter selling volume on pullbacks suggests strong uptrend.
Support – Lows consistently finding support at moving averages or prior breakout levels verifies higher lows.

Using indicators helps novice traders avoid mistaking ordinary price fluctuations for a bona fide higher high lower low uptrend pattern developing.

Real Example of Trading Higher Highs Lower Lows

Let’s walk through an example of trading higher highs and lower lows using this stock chart:

As circled, we can see initial signs of the pattern forming as price makes a first higher high and higher low sequence off the lows. The uptrend accelerates with a strong breakout to new highs.

We can enter on a throwback to the breakout level during the first correction, then add on dips from each subsequent higher high while trailing our stop loss level higher as the uptrend progresses.

This allows capturing a large portion of the upside momentum by buying into the pattern early and sticking with it while the sequence of higher highs and higher lows remains intact through multiple market cycles.

Benefits of Trading the Higher Highs Lower Lows Pattern

Here are some benefits traders can realize by trading with this high probability price formation:

Clearly defined pattern is easy to spot visually on the chart.
Lets you trade in the direction of strong momentum.
High probability pattern that occurs frequently across asset classes.
Capture large gains by entering early in emerging trend.
Defined exit strategy when sequence breaks.

The pattern provides logical points for entering and exiting trades based on the stair-step price structure as long as the market remains in trend mode.

Downsides and Risks of Trading Higher Highs Lower Lows

Of course, no pattern delivers perfect predictive accuracy. Here are some risks to keep in mind:

Requires practice and screen time to reliably identify the sequence early.
Early entries require wider stops increasing potential loss if pattern fails.
Losing streaks will occur when pattern breaks unexpectedly.
Harder to trade by pattern alone on very short timeframes under 15 minutes.

While higher highs and lower lows offer a probabilistic edge, traders must employ sound risk management given the potential for the pattern to unexpectedly breakdown.

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Conclusion: The Importance of Trading Higher Highs Lower Lows

Learning to recognize and trade the higher highs/lower lows pattern is foundational knowledge for traders looking to profit from trend-following strategies. Here are some key lessons:

Higher highs lower lows form a staircase pattern signaling strong uptrend momentum.
Entries are possible on throwbacks and dips using various indicators for confirmation.
Let profits from early entries in the pattern ride while sequence remains intact.
Set stop losses on a closing basis to avoid premature exit.
Be willing to exit with discipline when the sequence of peaks and troughs breaks.

While no single strategy works all the time, integrating higher highs/lower lows into your trading toolbox can provide reliable signals for entering young uptrends early with defined exit rules. Mastering analysis of this high probability pattern should be priority for any developing trader.