The High-low trading strategy is a trend following technique that emphasize on entering trades at the lower highs (for downtrends) and higher lows (for uptrends) of the market.

To achieve higher probability of success and filtering the trade signals, traders usually combine the high-low strategy with other strategies such as support/resistance and price action patterns.

Since the high-low strategy follows the trend, you’ll have to begin by determining the market trend. If the market is ranging or whipsawed, you should not apply this strategy.

Example 1

On the above USD/CAD weekly chart, we’ve applied a trend line together with the high-low trading strategy.

On the chart, it can be seen that the market pulled up, creating a lower low (A). Consequently, higher highs were created as price continued to make higher lows, confirming an uptrend.

For this reason, we’ve connected the areas ‘A’ and ‘B’ with a trend line and extended it upwards for future reference.

As illustrated on the above chart, price created three consecutive higher lows (C, D & E). This occurred when price was rejected from the trend line and moved up each time to create a new higher high.

The higher low areas at the trend line offer long trading opportunities, which also tarries with the direction of the current trend. After making a long entry at the higher low areas, you may put your stop loss just below the trend line or below the previous lows.

Another importance of the high-low trading strategy is that it provides a good opportunity for building your trading account by allowing you to avoid erroneous trades.

Instead of jumping to place an order when price breaks out above previous highs or below previous lows, you may use this strategy to wait for a retrace and increase your profits.

During such situations, price often makes significant moves in the direction of the prevailing trend before retracing; therefore, running to catch up with the market could reduce the amount of profits you are expecting.

Example 2

On the above USD/JPY daily chart, you could have entered a long order when price broke out of the resistance level at A. Typically, we can say that the entry was successful as price travelled around 140 pips up.

Now, let’s discuss about the same scenario using the high-low trading strategy. The market initially broke the daily resistance level at A and retraced back for a while before creating a new high.

Waiting for a retrace and using the high-low strategy could be more profitable.

As can be seen on the chart, a large bullish pin bar formed at the end of the retracement (B). Thereafter, price continued to move upwards, creating a higher low.

Entering a long order at the break of the daily bullish pin bar (B) could have earned you more profits, which is more than 200 pips.

Placing trades on false breakouts is a common problem faced by many traders and they normally get frustrated when price starts moving contrary to their expectation.

However, if you follow the high-low strategy, you could limit such problems by waiting for retracements and other confirmations before placing trades.

You could also combine the high-low strategy with other trading tools and techniques, such as indicators and oscillators, to get better probabilities of winning trades.

Example 3

On the above EUR/JPY chart, we’ve added a 200-day period Simple Moving Average (SMA) and a Stochastic Oscillator. The market was initially trending downwards.

According to the high-low trading strategy, before entering a short order, we’ll have to wait for price to retrace and create a lower high.

Interestingly, price did exactly what we were waiting for: It created a lower high with a rejection from the 200 SMA (A). Similarly, the Stochastic Oscillator showed that the market was already in an overbought condition.

This was a perfect opportunity to enter a short order with some amazing results.

It is kind of “set and forget” strategy, which is another benefit of the high-low trading technique.

Avoiding to glue your eyes on the market for the whole day can assist you avoid false signals and get more time to complete other tasks. It’s an absolutely a better idea than suffering from overtrading frustrations.

Conclusion

The high-low strategy should not be used in a choppy market, a ranging or sidelined market, or when the market volume is extremely low.

Additionally, as a common safeguard, you also need to avoid trading during sensitive fundamental announcements, which normally lead to high volatile market conditions.

Nonetheless, the high-low strategy is a very simple method to understand, particularly for newbie traders. You will not have to calculate a lot of things or suck the market hard for profits.

You just need to sit and relax while waiting patiently for a perfect high-low set up. This way, you can build your trading account easily and without much hassles.

Has this strategy worked for you? Please let us know in the comment section below.