A simplified explanation of peaks and troughs in trading:
What are peaks and troughs?
- Peaks: These are the highest points that the price of an asset reaches during a specific period, appearing on the chart as a peak or summit.
- Troughs: These are the lowest points that the price tests during a specific period, appearing as lows or troughs.
Why are they important?
Traders use peaks and troughs to understand market direction:
- If peaks are formed repeatedly and are increasing, it may indicate an upward trend.
- If peaks are formed repeatedly and are decreasing, it may indicate a downward trend.
- Troughs help identify support levels, which are prices at which a decline may stop and potentially reverse upward.
How to identify peaks and troughs?
1. Look for high points (peaks) where the price stops and starts to decline.
2. Then look for low points (troughs) where the price stops and begins to rise.
3. Notice the pattern of repetition, and if peaks and troughs increase or decrease, it may reflect a change in the overall trend.
Important note:
- When repeated peaks are higher than previous peaks, it is considered a positive indicator and an upward trend.
- When repeated troughs are higher than previous troughs, it also indicates strength in the upward trend.
- The opposite is true for downward trends.