Trading recent new highs and recent new lows

Every trader knows the feeling when they spot a great trading opportunity but fail to take it, only for price to shoot off and create, what would have been, the perfect trade. Whilst there is no point focusing negatively on these missed trades, there are some scenarios where we can ensure that we are ready to enter the market when the same setup occurs. Since markets (and the patterns and trade-setups that they create) are cyclical, it is very likely that a similar scenario will occur in the near future where you can anticipate how to best enter the trade based on your previous experience.

The confusion of price charts moving higher or lower

One of these opportunities can be when markets move to recent new highs or recent new lows. In forex terminology, a recent high or low can be one which was formed an hour ago or even, on the higher timeframes, one which was formed several months or even years ago. Whichever timeframe you prefer to have your price charts, the situation where price breaks a recent high or low can be fairly confusing as a trading signal. Should we buy/sell the currency that has broken this recent high or is it just as likely to encounter significant pressure in the opposite direction to turn against us if we do this?

Three factors to take in to consideration trading new highs/lows

There are three important factors when treading price breakouts of a previous high or low level. The key factor if to establish the significance of the support level, has the previous price spike simply occurred as part of intraday trading or is it part of a wider support and resistance zone with an established history? If it is a more recent occurrence, would a break of the previous support or resistance that caused the original high/low be in-keeping with the underlying daily trend?

A second factor will be for forex traders to assume that the break of this level is the start of a more significant move in this direction. This default opinion is created as soon as a price bar has breached, and closed, beyond the furthest peak of the recent high/low. A breach of even the most significant historical support level would suggest that traders orders around this area are becoming thinner and do not guarantee a price reversal.

The final factor is to look around the market to ensure that the external variables are stable. This includes checking to ensure that no large news releases have been or are imminently due to be made, that the currency pairs are being traded during active market hours and that the pair is not stuck in a lengthy sideways channel.

Trading the new high/low

Once these factors have been established the setup is the simple part. Looking historically, over any timeframe and almost any forex pair, it should become obvious to a trader that price repeatedly demonstrates one significant move almost every time a price bar closes beyond a recent high or low. Within 3-6 bars of this signal bar, price will generally return almost immediately to the precise previous high/low. The explanations for this pattern are numerous, including the closing of losing trades and the testing (‘flipping’) of the support/resistance zone.

By waiting to place a limit order at the precise level of the previous high or low once this has been broken by the current price, not only will forex traders get a better price but it will ensure that they maximize their profits on the next move higher or lower.