Are you finding it tricky to identify lower highs and lower lows in a downtrending market? Don’t worry you’re not alone. As someone who has spent years navigating the markets, I understand how confusing it can be. In this guide, I’ll break down how to spot these key patterns in a bearish trend using simple terms.
Before we dive in, it’s helpful to understand some basic trading concepts. If you’re new to Smart Money Concepts (SMC), I recommend getting familiar with market structure, which is the overall direction of the market whether it’s trending up, down, or sideways. Understanding the Break of Structure (BOS) is also essential; this occurs when the price moves beyond a previous high or low, indicating a potential change in trend. Another important concept is the Change of Character (CHOCH), which is a shift in market behavior signaling a possible reversal in trend. Lastly, inducement refers to a move designed to tempt traders into the market, often leading to a liquidity sweep. Grasping these ideas will make it easier to follow along.
Identifying Lower Lows in a Bearish Trend
In a downtrend, prices generally make lower lows. However, not every dip is a valid structural low. To identify a true lower low, start by spotting the inducement. Look for a level where the market tempts traders to enter, usually just before a significant move. After the inducement, the price will form a swing low—a noticeable bottom point before retracing upward. Then, watch for a liquidity sweep. The price retraces up to sweep the inducement level, taking out any stop-loss orders placed by traders. The last swing low formed before the inducement sweep is your valid lower low.
When the price breaks below this lower low, it’s considered a valid break of structure. Each time the market breaks downward, look for an inducement sweep to confirm the new lower low. This pattern helps you identify genuine shifts in market structure, allowing you to make more informed trading decisions.
Identifying Lower Highs in a Bearish Trend
Similarly, the market makes lower highs in a downtrend, but not all highs are significant. To confirm a valid lower high, first, once you’ve identified a valid lower low, watch for the price to form a swing high. If the price moves down from this swing high and breaks the previous low, it reinforces the bearish trend. The last swing high before the break of structure is your valid lower high.
Repeat this process after each break of structure to confirm subsequent lower highs. This approach keeps you aligned with the market’s downward momentum and helps you avoid false signals that could lead to losses.
Identifying the Structural High After a Bearish CHOCH
A Change of Character (CHOCH) occurs when the market shifts from bullish to bearish. To find the structural high after this shift, identify the final peak the market made during the bullish trend before the CHOCH. This last higher high becomes significant because the bearish trend starts from this point. Recognizing this high allows you to see where the new downtrend began.
Continue to look for inducement sweeps and breaks of structure to the downside to confirm new lower highs. By tracking these movements, you can better anticipate future price actions and adjust your trading strategy accordingly.
Identifying the Structural Low After a Bearish CHOCH
When the market changes from an uptrend to a downtrend, you’ll also want to find the new structural low. Start by identifying the inducement look for levels where traders might be lured into the market. Wait for the price to form a swing low, which is a new low point before retracing. After the swing low, the price sweeps the inducement level. The last swing low before the sweep is your valid structural low.
As the bearish trend continues, expect the price to break previous lows. After each break of structure, look for another inducement sweep to confirm the next lower high. This method keeps you in sync with the market’s movements, helping you make smarter trading choices.
Conclusion
Identifying lower highs and lower lows in a bearish trend doesn’t have to be complicated. By understanding inducements, swing highs and lows, and breaks of structure, you can read the market more effectively. Practice these steps, and over time, you’ll gain confidence in spotting these patterns and making informed trading decisions.
Frequently Asked Questions (FAQs)
An inducement is a price level designed to tempt traders into entering the market. It’s often used by larger market players to trigger orders at specific levels, leading to a liquidity sweep where stop-loss orders are hit before the market moves in the intended direction.
Not every low is considered a valid structural low because some lows don’t represent a significant shift in market structure. A valid lower low is confirmed when specific patterns, like inducement sweeps and breaks of structure, occur. This validation helps traders avoid false signals.
A Break of Structure in a bearish trend happens when the price breaks below a previous significant low. This action confirms that sellers are in control and that the downward momentum is likely to continue. It’s a key signal for traders to stay aligned with the bearish trend.
A Change of Character indicates a shift in market behavior, such as moving from an uptrend to a downtrend. Recognizing a CHOCH is crucial because it signals that the previous trend may be ending, and a new trend is starting. This awareness helps traders adjust their strategies accordingly.
Yes, the principles of identifying lower highs, lower lows, inducements, and breaks of structure can be applied across various markets and time frames. Whether you’re trading forex, stocks, or commodities, and whether you’re looking at daily charts or 5-minute intervals, these concepts remain valuable. However, the reliability of signals may vary with different time frames, so it’s essential to consider the context.
