In Forex markets, a higher high occurs when a currency pair closed higher than the day before’s high. This is a signal of traders’ confidence in the market trend and hints the upward trend can endure. A lower low occurs instead when a pair closed lower than the day before’s low, suggesting that traders’ confidence is reducing and the pair will likely decrease further. Higher highs and lower lows are helpful to traders when they follow Long or Short strategies.
The moving averages give a trader a clear graphical representation of price trends and show that there is extra evidence to trade Long or Short. Pairs whose charts show a series of higher highs (the price reaching a new high each time it trades up) and higher lows (the price staying above the previous low it made the last time it traded downwards ) are a signal of an uptrend .
Technical traders use these indicators to decide their entry points using the channel, buying when the pair hits the bottom of the channel or selling when it hits the top. Going short in an uptrend, even if they are in a trading channel and due a pullback, is risky as the overall direction of the pair is upward.
Traders can easily choose their maximum risk by placing their stop order just below the previous higher low. If the pair falls below it, it has effectively broken out of the upward trend, at least temporarily, and from a strategic point of view it is no longer useful to go long. Traders can also identify possible profit taking levels, when the pair moves back up to the top of the range and use these levels to place their stop orders.