Most f us learned to climb stairs not long after we learned how to walk. Before long, and with practice, it became second nature. Observing and properly reacting to the charting formations known as bull and bear stairs can become just as simple.
Once you understand the basics, using stairs is a way to make consistent, relatively low-risk profits. Soon you can be executing trades based on this pattern as intuitively as you physically climb and descend stair steps--with hardly any deliberate thought at all.
Before we get to the execution, however, we need to look at exactly what goes into this simple bar chart formation on a daily chart.
Currency futures markets make excellent candidates for this strategy. We will look at the euro, Australian dollar, Canadian dollar and British pound.
Currency trading is often presented as a specialized practice, requiring specialized knowledge of global finance and macroeconomics to trade successfully. While a fundamental background doesn't hurt when you're trading any market, price movement is price movement. In that sense, bull and bear stairs, which are predominant in the Nasdaq 100, the Dow Jones Industrial Average, the Russell indexes and the S&P 500, are just as useful in forex.
Indeed, stair patterns are common on daily charts, and if you've been trading for any time at all, you are probably quite familiar with them. A bull stair is marked by successive trading days in which each day's low is higher than the preceding day's low and each day's high is higher, though not always, than the preceding day's high. The price seems to climb a set of stairs along steadily rising lows.
Stairs can be elusive. If you do not know what you're looking for, a profitable stair can be buried in plain sight among all the other days on a daily chart. However, once you know what to look for, stairs will stick out with neon signs signaling potential profit. When you know how stairs work, you will have one more moneymaking play in your trader's playbook.
"How hard is this?" (right) shows a four-day schematic of a bull stair and a bear stair. Look familiar? Taking the bull stair as an example, the lows rise steadily. The highs rise steadily. Each day's low is roughly the same increment above the preceding day's low. Each day's high is roughly the same increment above the preceding day's high.
If you know that the price in a bull stair will move below each preceding day's high before resuming the uptrend, you could buy below that level and hold on until you reach the appropriate profit target. You repeat this, day in and day out, as long as the stairs continue.
Trading is a competition. Markets are constantly exploring potential breaking points in the competition. So, when price is rising, there is only a degree of probability that it will continue to rise. The rally must be tested each day. Knowing this, each morning, dominant buyers hesitate. These buyers want to test and, at the same time, exhaust selling pressure before bidding aggressively. The price pulls back from the previous day's high. Frightened longs see the weakness and sell. They want out. Bold sellers smell a bearish day and short the market. The price continues to break.
The move often stops just above, or sometimes alongside, the previous day's low. The bulls are ready now. The price has been tested. Bidding becomes aggressive. The price rallies to a new high. Some of the bulls may have sold or shorted on the way down to set up a better entry price on the day. These bullish traders set up the frightened longs and bold shorts. Traders are competitors.
If you do not understand how, or why, stairs work, you can easily become one of these frightened longs or shorts. Getting whipsawed on a bull stair can be unnerving and expensive. The experience can have a long-lasting negative impact on your …