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Using Minor Highs and Minor Lows to Pinpoint
Reversals
Smart trading need not be complex. I believe in the philosophy
of simplifying whenever possible. I also believe in using
charting principles that are applicable to any market and
any time frame. The cornerstone of my trading can be summarized
in two easy steps:
1) Find the trend: Short and long term.
2) Find potential reversals within the trend.
A simple, no frills approach.
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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