Raghee Horner* Founder / Lead Trader of EZ2TradeSoftware.com and Author Focus: Trading education and charting strategies * Not employed by or affiliated with eSignal

1. Find the trend: Short and long term.
2. Find potential reversals within the trend.

I use two tools to accomplish this. The first is a Trendline tool, and the second is a Fibonacci Retracement tool. I believe in these two time-tested tools and feel that they are the best of the traditional methods. And, now, we can couple them with today's technology; namely we can automate these two functions within eSignal.

Two of my favorite chart patterns are Minor Highs and Minor Lows. These patterns work seamlessly with Trendlines and Fibonacci Retracements. Minor Highs and Minor Lows also confirm candlestick patterns that I like to see when setting up potential reversals.

Minor Highs and Minor Lows are not complex patterns. In fact, with a little practice, they seem to pop out of your charts. Because an uptrend is a series of higher lows and a downtrend is a series of lower highs, I find that Minor Highs and Minor Lows allow me to identify the individual highs and lows within the overall trend. Consider this: An uptrend is simply support while a downtrend is resistance.

The concept of Minor Highs and Minor Lows is certainly nothing new. I first began testing these patterns when I read about them back in late 1989.

When looking for a Minor High, you are looking for a candle (or bar) that is preceded by a candle with a lower high and lower low and followed by a candle with a lower high and lower low.

A Minor Low would then be the opposite of what I just described; that is, you are looking for a candle (or bar) that is preceded by a candle with a higher high and higher low and followed by a candle with a higher high and higher low.

These patterns consist of three candles, end-of-day or intraday. Ignore inside ranges. (Inside ranges [also known as "inside days"] are those candles whose trading range is within the previous day's range.)

Let's take a look at the formation to get some clarity.

As you can see, we were alerted to this Minor High because prices first established a new high, marked by the "H" and "2". Once we establish a new high, we go back to the preceding candle to see whether it had a lower high and lower low. If it did, that is Day 1 of your pattern and the new high is Day 2.

Next we need to see a Day 3 candle that has a lower high and lower low compared to the range of Day 2. If we do, we have a confirmed Minor High.

Once you have identified these patterns you can then further confirm the potential for reversal with candlestick patterns, such as Dojis and Spinning Tops. (I highly recommend Steve Nison's books for learning more about these powerful formations.)

Of course, finding a Minor High or Minor Low pattern at key Fibonacci Levels can also be a powerful way to confirm reversals, the subject I will reserve for discussion at another time.

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