Identifying Peaks and Troughs

In any endeavour we pursue there are usually a set of fundamentals that have to be learnt before we can expect any sort of payoff.  Martial artists spend hours doing set forms and stretches, public speakers record and listen to themselves before speaking in front of an audience. 

 

With stock market trading, one of the staple fundamentals is identifying peaks and troughs in price.  Why? 

 

1:  Peaks and troughs allow us to draw up and down trend lines, which give us simple entry and exit signals

 

2:  Dow Theory is based on peaks and troughs

 

3:  Price predictions using Elliott Wave Theory is based on peaks and troughs

 

Also, as a general rule:

 

Higher peaks and higher troughs mean the market is going up, and will likely continue.

Lower peaks and lower troughs mean the market is going down, and will likely continue.

 

So even though this is not the most interesting topic – trust me, if you get this now you will be glad you did!

 

The basis of peaks and troughs are up bars and down bars – recognising these help us know when a peak or trough is formed.  The following picture describes up and down bars, as well as outside and inside bars.  Click to enlarge:

 

 

Bar Types

 

  • An up bar is a bar that has a higher high and an equal or higher low than the previous bar.
  • A down bar is a bar that has a lower low and an equal or lower high than the previous bar.
  • An inside bar has a lower high and a higher low than the previous bar.
  • An outside bar has a higher high and a lower low than the previous bar. 

 

Why do I colour them?  Simply because it makes it easy to recognise the bars, and then the peaks and troughs.  It is not necessary.

 

Now, for peaks and troughs –

 

A peak is formed when we have an up bar followed by a down bar.

A trough is formed when we have a down bar followed by an up bar.

 

Click the following picture of peaks and troughs to enlarge:

 

Peaks and Troughs

 

 

Simple eh?  But vital.  While 90% of traders are following the latest indicator or fancy mathematical formula, you must realise that most of these are based on our price bars, and price bars form the peaks and troughs you have just seen.  So truly we are going straight to the heart of our data to get the real story!  No lagging indicators here, and that’s ok by me.

 

 

.

. If you enjoyed this, subscribe and get the latest updates for free:

Enter Your Email Address:

.

(Check Your Junk Mail, Just In Case)

Popular Posts

June 11, 2009  Tags:   Posted in: Free Trading Course Lesson Backlog

Leave a Reply