Relying on ‘higher highs’ and ‘lower lows’ to identify trends is a common approach for traders.
After all, it seems logical: higher highs suggest an uptrend, and lower lows signal a downtrend. But what happens when the market defies this logic?
Take this scenario: you’re trading a downtrend on EUR/USD.
Suddenly, a new swing high forms, suggesting a potential trend reversal. Expecting a shift to an uptrend, you adjust your strategy — only to watch the market plummet to fresh lows.
This isn’t just frustrating — it’s confusing.
The truth is, these false signals aren’t anomalies. They’re part of the market’s natural ebb and flow, often caused by liquidity grabs, stop hunts, or smart money manipulation
In this guide, we’ll break down the mechanics behind these unexpected moves, reveal the hidden logic driving them, and offer actionable strategies to avoid being caught off guard. If you’re tired of false swing lows and highs wrecking your trades, keep reading.
This insight could change your trend trading strategy for the better.
The image above shows the market breaking an old swing high before swiftly moving back in the direction of the trend.
Common trading books state a trend change is signified by the market breaking through old swing high or low, as it tells us people are willing to transact at new prices.
When traders see the market break a swing high or low, whether it by 100pips or 1pip, they assume a possible trend change is taking place. In the image, we can see how the market made a new high that was higher than the swing high found at the top of the previous drop.
This new high was supposed to signal the market might be changing from a downtrend to an up-trend, yet as you can see, once the high is made, price starts to drop until it has fallen through the swing low created by the move up.
It would be at this point where the traders get confused.
The new high was supposed to indicate further up-movement, but the traders have just watched as the market failed to continue moving higher, and instead fell and broke through the swing low.
The reason why so many false swing highs and swing lows appear in the market is because of what causes swing lows and highs to form in the first place.
Swing lows and swing highs form because of smart money traders either taking profits off their trades or placing trades to make the market reverse. Now, the key thing to understand is whenever you see a false swing high or low form, it will be because the bank traders have placed trades to make the market reverse, not because they’re taking profits off trades they already have placed.
When the banks place trades, they never have enough orders to get all of their trades placed at one price. This means they have to make the market move up or down to purposely get other traders to place buy or sell trades to generate enough orders for them to then use to get their remaining trades placed.
The really important thing to understand is these remaining trades will be placed at prices that are as close together as possible.
The reason why is because having all their trades placed at close prices makes it much easier for the banks to calculate how many opposing buy or sell orders they’ll need to take profits off their trades once the market actually reverses.
In the image above, we can see the banks had placed sell trades at the swing high marked with an X.
We know they placed sell trades here because this was the only time a large number of buy orders came into the market during this retracement.
What we didn’t know was the banks had been unable to get all of their sell trades placed during this retracement, there were some left they couldn’t get placed because there weren’t enough buy orders coming into the market.
This meant the banks had to make the market move back up after it had fallen from the high marked with an X to make traders place buy trades, and thus, put buy orders into the market which the banks will then be able to use to get the remainder of their sell trades placed.
To make the market move back up the bank traders take some profits off the sell trades they’ve already placed at the swing high. What this does is consume all of the sell orders coming into the market from other traders placing sell trades, which causes the market to start moving higher.
Eventually the profit-taking causes the market to return to the swing high where the banks placed their sell trades. The market then proceeds to spike through the high before falling again. This drop is caused by the bank traders placing more of their sell trades using the buy orders generated from people placing buy trades because they’ve seen the market move higher.
The spike means the market has now made a higher high.
At this point, most traders would be thinking the market might be changing from a downtrend to an up-trend. The only thing left we need to see to confirm this is a higher low.
A few hours after the spike, the market stops falling and begins to rise.
This move up is also caused by the bank traders taking profits off sell trades. The reason they’re doing this is that they still have some sell trades left to place. The only way these sell trades can be placed is if buy orders are coming into the market from people placing buy trades.
The move-up manages to breach the previous high by about 10 pips.
This means we now have a higher high and higher low in place. As far as the Dow Theory is concerned, the market has reversed and is now in an up-trend.
Then we start to see the market fall.
Again, this is normal right until the point where the market manages to break through the higher low that was made by the banks taking profits.
This is where the Dow Theory starts to break down.
The new high was supposed to signal the market had reversed, the higher low only sought to confirm this further.
When the market then goes and falls through the higher low, it means the market has now reversed again, as the new low is a sign of more downside movement. So the higher high and higher low didn’t actually signal a change of trend because the downtrend continued soon after they formed.
The reason the market fell through the higher low was because the second swing high was created by the banks placing the last of their sell trades into the market, not because people were willing to pay higher prices to purchase currency, which is what all the books on the Dow Theory say is the reason why a higher high signals further up-movement.
Here’s the image we’ve just looked at, only I’ve removed the tags showing the swing lows and highs and marked all of the points where the banks could have potentially placed sell trades using X’s.
You can clearly see how all the swing highs are found close together.
The distance from the lowest swing high where the banks could have placed their trades to the highest swing high is only 28 pips. This is an incredibly small range when you consider the banks are placing sell trades that probably run into the tens of millions of dollars.
This image just goes to show how the higher highs formed not because people are willing to pay higher prices for AUD/USD, but because the bank traders were getting sell trades placed into the market. Why they didn’t signal a change of trend was because the Dow Theory fails to take into account the method the banks use to get their trades placed.
The Bottom Line
Relying solely on ‘higher highs’ and ‘lower lows’ to identify trends can leave traders vulnerable to false signals and unexpected reversals. These moments of confusion aren’t random — they’re often deliberate moves driven by smart money tactics like liquidity grabs and stop hunts.
By understanding why these moves happen and how to spot them, you gain a crucial edge. Instead of being caught off guard, you can anticipate these fake signals and adjust your strategy accordingly. Successful trading isn’t about being right all the time — it’s about recognizing patterns, managing risk, and staying one step ahead of the market’s tricks.
Keep learning, stay adaptable, and remember: the market rewards those who think one step ahead.