An uptrend can be defined as two consecutive higher lows and higher highs. So, if we have spotted an already existing uptrend then we expect that after the higher low there will be a higher high. Failure to accomplish the expected higher high is an indication that the existing uptrend is weakening and a new downtrend might take its place.
The possibility of the new downtrend is amplified if there is a new lower low. In this case we have the definition of a downtrend which is two consecutive lower highs and lower lows (see chart below).
So, in this case we can spot a new trend in its very beginning and it can be done at all time frames (daily, 5 minutes, etc). Of course, as in trading the word ‘’certainty’’ is out of the question, the new trend will not always continue developing, although most of the times the above method will work fine. In case that it doesn’t work we will exit using the stop loss order.
To spot a new uptrend we must think reversely and after a downtrend we must define two consecutive higher lows and higher highs (see chart below).
Remember that a clear chart is a prerequisite. If we cannot define the new trend in a clear and comprehensive way then it is better to look for another chart.
The method is applied in every asset class, stocks, futures, forex, etc, as the same technical analysis can be applied to every liquid market.
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