Higher Highs and Higher Lows – SMC Structure Trading

Technical analysis often starts with analyzing market structure. A bullish market moves by creating higher highs and higher lows. Correct identification of higher highs (HHs) and higher lows (HLs) significantly impact market analysis.

This article explores understanding of bullish market structure, and identification of higher highs and higher lows.

Understanding Bullish Market Structure (HHs and HLs)

Bullish market is composed of higher highs and higher lows. Higher highs are the peak points of a price movement. Every peak of price movement is higher than the previous peak.  Higher low is the lowest point of a price retracement which is higher than the previous low. In bullish market analysis, these two elements are combined to understand buying pressure and market optimism (SMC Concepts given by Wyckoff and his students). Remember, Michael J. Huddleston, famously known as ICT, denies the effect of buying and selling pressure.

According to SMC market analysis, bullish market creates higher highs but not all of them is considered as a structural high. There is a concept of inducement involved. In order to identify a valid higher high, one must have to identify an inducement level. Market must sweep liquidity below the inducement level. This confirms the structural high of a bullish market.

Next is to wait for the price to break the structural high. In SMC terms, it is known as Break of Structure. This denotes bullish trend continuation. However, if market is weak and breaks the recent higher low, this is considered as Change of Character (CHOCH).  This represents shift of interest from bullish to bearish.

Identification of Higher High (HH)

In bullish market structure, price action forms higher high. It is important to note that not all swing highs within a price impulse are valid structural highs (higher highs). Price must sweep liquidity below the inducement level.

Inducement is a level of liquidity. This can be recent minor swing lows within a bullish price move. Institutions use these levels to trap early traders. Like in bullish trend, inducement occurs when price retraces to trap traders into premature positions. There is a notion that this trap confirms the higher high. In order to find a valid higher high, you should follow the following steps:

• When price breaks a previous higher high and creates a new peak of price, this is a time to mark minor swing lows in recent price leg. Recent pullback can be the inducement zone we are looking for. However, there are other levels like equal lows, order blocks or any visible low can be the inducement zones. These are the levels where liquidity is resting.
• When price form a swing high after break of structure, we often expect price retracement. In retracement, price retraces downward and sweeps the liquidity resting below the inducement level.
• The last swing high formed before the inducement sweep is now confirmed as the valid higher high. This level represents structural strength.
• When price breaks above the valid higher high, this confirms the bullish trend continuation.

Inducement sweep in each price leg confirms strength and validity of higher high and filters out false breakouts. This improves the reliability of market structure analysis.

Identification of Higher Low (HL)

In Bullish market structure, retracements are common part of uptrend. Price forms higher lows as part of bullish market structure. However, like higher high, not all higher swing low are higher lows. In order to confirm a higher low, the following points should be considered:

• After the inducement sweep, swing high becomes a valid higher high. It is advised to monitor the subsequent price movement. Price must forms swing low.
• After the formation of swing low, price must move upward and break above the previous higher high.
• The swing low is seen as a valid higher low. This level represents a structural point of support within the bullish trend.

Internal liquidity sweep is often considered as strong signal for bullish momentum.

Importance of HHs and HLs

Higher highs and higher lows are used to identify uptrend in the market. If trend is identified accurately, these patterns are used to identify opportunities during retracements and capitalize on the upward momentum.

Another aspect is digging out market sentiments from higher highs and higher lows. When buyers dominate, price creates higher highs. This happens when price breaks its structure to the upside. This reflects strong bullish momentum.

Traders often use the previous higher low as stop-loss level. This helps in managing risk during the trade taken when price reaches to its Order block zone. If price break below the last Higher low, it may suggest trend reversal.

Identification of Structural High and Low after CHOCH

Change of Character refers to shift in market structure. It indicates trend reversal. So, how would you identify higher highs and higher lows in a new emerging bullish trend. If your prior trend is bearish, CHOCH indicates trend reversal from bearish to bullish.

After a bullish change of character, it is crucial to confirm first higher high for new bullish trend. Following the CHOCH, the price often leaves liquidity at specific levels. These are the inducement levels where early traders are trapped.

Secondly, price forms a swing high above the previous bearish market structure. This swing high acts as a potential candidate for the first structural higher high. In the price leg there is an inducement to sweep. This inducement sweep confirms a valid structural higher high. This higher high is the foundation of the new bullish structure.

Lastly, as the trend progresses price is expected to rise and break the valid higher high. Each break of structure should be accompanied by an inducement sweep to confirms subsequent higher highs.

Final Note

In SMC structure trading it is crucial to identify confirmed higher highs and higher lows. Inducement sweeps and structural confirmations enhances structure analysis and trade accuracy. Remember, structure analysis in trading is combined with trading strategies. However, no strategy guarantees success because markets are influenced by unforeseen events. Always combine technical analysis with risk management to minimize potential losses.

Trading forex, stocks, and cryptocurrencies involves significant risk and may not be suitable for all investors. Market volatility can lead to substantial losses. Never risk more than you can afford to lose. It would be better to take professional advice before making trading and investment decision.

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