Dec 7, 2021
Written by:
Al Hill
Swing high and swing low; you might have heard the term being used many times, especially among day traders. If you have been confused by what this term means, then this article will explain what they are. By the end of the article you would be able to identify swing high and swing low points, and hopefully incorporate these strategies into your playbook.
Price seldom moves in one direction. Pull up any chart across any market and you will undoubtedly see the zig-zag fashion. As price tends to flip-flop as it trends higher or lower, you are seeing the swing highs and lows forming.
As a day trader, swing high and swing low can reveal important market information. When you understand how to use this information, you can easily play with different trading strategies. With swing high and swing low you can ride the trend or even trade the market that is stuck in a range.
Swing high and swing low are common to all charts and therefore, the concept can be applied to any market. What’s even better is the fact that swing high and low can be applied to any time frame. What this means for you is that, understanding how swing high and swing low works enables you to swing trade or day trade the markets.
Another aspect to bear in mind is the fractal nature of the swing high and swing low points. Whether you look at a 5-minute chart or a weekly chart time frame, swing highs and swing lows are easily identifiable.
Well, fractal is defined as a curve or a geometric figure, according to this entry on Wikipedia. Each part has the same statistical character. It is a pattern that repeats itself. A good example is that of a snowflake where the fractal pattern occurs as you zoom in.
Undoubtedly, there is a lot of math involved and there is a specialized field in the study of fractals. This research article gives a basic insight into fractal geometry. It would be worth a read as it talks about the basics of fractals so you have a better understanding.
Below is an example of a Sierpinksi Triangle from this website.
You can see from the above figure how the triangle pattern is repeated when you zoom in. In other words, the larger triangle is made up of multiple smaller triangles in the same fashion.
Now that we know what a fractal is, let’s move on to explaining what a swing high and swing low is.
So let’s start with the very basics.
The text book definition for a swing high and a swing low is as follows:
A swing low is when price makes a low and is immediately followed by two consecutive higher lows. Likewise, a swing high is when price makes a high and is followed by two consecutive lower highs.
The first chart below shows this definition in action on the price chart.
What you see in the chart is a 5-minute chart for APPL. The flags at the top and the bottom show the swing high and swing low.
The flags depict the point when price makes a swing high or a swing low. Following the high and the low, the next subsequent sessions form a two consecutive lower high or a higher low. The above is an example of a very microscopic look at the swing high and swing low.
For intraday traders, the above chart can reveal quite some information. For example, starting with the first flat on the left side, you can see that after the swing low is formed, price tends to move higher. This tells you that the market is trend higher.
What’s more! The second swing low marked by the flag shows that it is a higher low compared to the first flag.
Now if you look close enough, you will see that the swing highs identified by the fourth and sixth flag are formed almost at the same price level. Subsequently, price tends to make swing highs and lows, each of which is higher than the previous one.
This pattern tells you that price is in an uptrend. However, as you might figure out, this is only in hindsight. So how can we capture the uptrend as price tends to make higher highs and lower lows?
You simply look at the swing highs and the swing lows. Now let’s add a moving average to the chart above to get a better picture.
Now the trend is clear when you look at the 10-period moving average. This is nothing but using swing high and swing low in order to understand the trend. The advantage of using the swing high and swing low is that you are able to define the trend by just looking at these patterns.
But you might be wondering why a swing high and swing low is formed in the first place.
A swing high and swing low is formed due to what is known as support and resistance. The technical explanation for support and resistance is as follows.
A support forms for the price when you notice that there are more buyers than sellers at a certain price. The demand for the asset or the stock overwhelms the supply and thus pushes price higher.
A resistance forms for price when you notice more sellers than buyers at the price level. In this case, price fails to move higher and therefore declines.
In the next chart below, the support and resistance levels are shown, which also coincides with the swing high and low.
When price breaches previous swing low or high point and follows up with another swing high or a swing low, price continues the trend. To put this in perspective, when price breaks the resistance level and forms a swing low, it means that buyers are in control. Similarly, when price breaks the support level and forms a swing high, it means that sellers are in control.
Now that we know the basic principles behind swing high and low, let’s look at how you can use this to improve your trading.
There are many ways to use the swing high and swing low in your day to day trading strategies. For one, the swing high and low method can be applied to identifying the trends in the market. You can also make use of the swing high and low based on the larger time frame.
In other words, instead of using the basic definition of swing high and swing low, you can identify the turning points based on a larger time scale.
The chart below shows a one-hour chart time frame for APPL.
Here, instead of using the swing high and low based on a session or a candlestick basis, we simply identify the swing high and swing low points on a larger time frame.
In the above example, you can see that the swing highs and lows are formed over a series of candlesticks or sessions. Using this method will help you to identify the trends and trade in the direction of the trend.
For example, the first four swing highs on the above chart indicate that price action is in a downtrend. However, after the swing low is formed, you can see that subsequent swing lows tend to post higher lows.
Eventually, price action starts to move higher and you can see that the trend changes direction. This is evident from the third swing low that forms above the previous swing high point around the 187.00 price level.
Using the above information you can easily trade the downtrend or even the uptrend when the direction changes.
The swing high and swing low also alerts you to potential breaks of support and resistance levels. This enables you to ride the momentum in price action.
As mentioned earlier, you can trade the trends with ease using the swing high and swing low method. You can apply other trend trading strategies as well using this method. Let’s take a look at the below example on how we can use a simple oscillator along with the swing high and swing low method.
The chart below you see is for MSFT, 1 hour chart. We only add the Stochastics oscillator with the default period settings of 14, 3, 3.
In the above chart, the usual swing high and swing low points are plotted on the chart. You can see that after price forms a bottom, the swing highs are formed around the same price level.
Similarly, the lows in price action show that price forms a swing low near the same area. After this bottom formation, price action starts to move gradually higher. This is evident from the fact that the swing lows start to post higher lows.
Eventually, price breaks the resistance level of 100.00. Just prior to this price action, you can see another (third) swing low being formed. By this you already can see that price is in a clear uptrend. Buying on the break above the resistance level would give you a chance to ride the uptrend.
The first profit can be booked near the previous swing high of 102.58, while leaving the rest of the position open and by covering the risk.
The above method is just a simple way to trade the trend by merely using the concept of swing high and swing low and an oscillator. You can also use this method with other indicators such as Bollinger bands or making use of overbought or oversold levels.
The swing high and swing low method as demonstrated above shows you how to capture the small but very significant movements in price action. The swing high and low methods can help you to identify mainly the support and resistance levels.
Using this information which can be applied to any chart and time frame, traders can easily build or improve their trading strategies.
Tags: Intro to Chart Patterns
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How can traders identify potential entry and exit points in the market?
Traders can identify potential entry and exit points by observing swing high and swing low points on the chart. These represent points where the trend may reverse or continue. Identifying these levels can help time entries and exits with the trend.
What strategies can be used to detect significant reversals in market trends?
Swing high and swing low analysis can be used to identify significant reversals in market trends. By tracking the formation of higher highs, higher lows, lower highs, and lower lows, traders can pinpoint potential trend reversals. Monitoring support and resistance levels that coincide with swing points also provides insights into changing market dynamics.
Can technical analysis help in predicting the next market movement?
Technical analysis can help identify trends, support/resistance levels, and patterns that may indicate future market movements. However, it should be used alongside other analysis methods, as market movements are ultimately unpredictable.
What indicators are most effective for recognizing market turning points?
Swing high and swing low are effective indicators for recognizing market turning points. They identify the highs and lows in price action, signaling potential trend reversals. Traders can use this information to time entries and exits in their trading strategies.
How do market participants use price action to make trading decisions?
Market participants use price action to identify key support and resistance levels, trend direction, and potential reversal patterns to make informed trading decisions. Analyzing swing highs and lows provides insights into the overall market sentiment and can help traders time entries and exits.
What role do support and resistance levels play in swing trading?
Support and resistance levels are key in swing trading as they identify areas where price may reverse. Identifying and trading off these levels can help capture swings in price movements.
How important is it to understand market psychology when trading?
Understanding market psychology is crucial for trading success. Recognizing common behavioral biases and emotions that drive market movements can help traders make more informed decisions and improve risk management.
What are the common mistakes traders make when trying to identify market swings?
Common mistakes traders make when identifying market swings include: Failing to identify the broader trend direction Mistaking short-term corrections for trend reversals Focusing too much on individual swing points rather than the overall pattern Overreacting to minor price fluctuations and getting whipsawed Neglecting to use appropriate technical indicators to confirm swing signals
How can a trader differentiate between a true market swing and a false signal?
Traders can differentiate true market swings from false signals by identifying clear patterns in price action, such as higher highs and higher lows for uptrends or lower lows and lower highs for downtrends, rather than relying on isolated price movements.
What tools do traders typically use to analyze market momentum?
Traders typically use technical indicators like moving averages, MACD, and RSI to analyze market momentum. These indicators help identify trends, momentum, and potential reversals in the market.
What defines a significant market swing?
A significant market swing is defined by the formation of swing highs and swing lows, which represent the turning points in price action. Swing highs occur when price makes a higher high followed by two lower consecutive highs, while swing lows form when price makes a lower low followed by two higher consecutive lows.
How do swing traders time the market?
Swing traders identify swing highs and swing lows to time market trends. They enter trades when price breaks above swing highs or below swing lows, indicating a change in trend direction. This allows them to capitalize on short-to-medium-term market movements.
What patterns indicate a swing high formation?
A swing high is formed when price makes a higher high, followed by two consecutive lower highs. This pattern suggests a potential reversal or consolidation in the uptrend.
How do volume indicators influence swing trading?
Volume indicators can help identify swing trading opportunities by highlighting periods of increased buying or selling pressure. Higher volume during a price swing can signal a stronger trend movement. Lower volume during a swing can suggest a potential reversal.
What is the role of candlestick patterns in identifying swings?
Candlestick patterns can identify swing highs and lows. Bullish and bearish candlestick patterns like doji, engulfing, and hammers can signal potential reversals in swing highs and lows during uptrends and downtrends.
How does the Fibonacci retracement tool aid in swing trading?
The Fibonacci retracement tool identifies key support and resistance levels based on Fibonacci ratios, enabling swing traders to identify potential reversal points and manage risk more effectively.
What moving average signals are crucial for swing traders?
The crucial moving average signals for swing traders are the 50-day and 200-day moving averages. When the 50-day MA crosses above the 200-day MA, it indicates a bullish trend. When the 50-day MA crosses below the 200-day MA, it signals a bearish trend.
How do oscillators help in identifying market extremes?
Oscillators like RSI, Stochastics, and MACD can identify overbought and oversold market conditions, signaling potential price reversals or continued trend movements. They help traders spot market extremes and time entries and exits accordingly.
Can pivot points accurately forecast market reversals?
Pivot points can provide useful indicators of potential market reversals, but they should be used alongside other technical analysis tools. Pivot points alone do not guarantee accurate forecasting of market reversals.
What is the impact of economic events on market swings?
Economic events can significantly impact market swings. Positive economic news often leads to stock price increases, while negative news can trigger market declines. Unexpected economic data releases can cause volatility and rapid price movements in the markets.
How do trend lines help in swing trading analysis?
Trend lines identify the overall price direction and highlight levels of support and resistance. They help traders spot swing highs and lows, enabling them to time entries and exits in swing trading strategies.
What risk management techniques are essential for swing traders?
Some essential risk management techniques for swing traders include setting stop-loss orders, diversifying positions, using position sizing, and monitoring risk-to-reward ratios. Proper risk management is crucial for limiting potential losses in swing trading.
How does trader sentiment affect swing trading decisions?
Trader sentiment significantly impacts swing trading decisions. Bullish sentiment encourages entering long positions during swing highs, while bearish sentiment leads to shorting during swing lows. Monitoring sentiment helps identify potential trend reversals.
What time frames are best for swing trading analysis?
Swing traders typically analyze daily, weekly, and monthly time frames to identify potential support and resistance levels, trend direction, and swing highs/lows. The choice of time frame depends on the trader's style and investment horizon.
How do breakouts and breakdowns confirm swing points?
When price breaks above previous swing highs or below previous swing lows, it confirms the continuation of the uptrend or downtrend respectively. Breakouts and breakdowns validate the strength of swing points and indicate a potential trend change.
Can Bollinger Bands predict swing high and low points?
Bollinger Bands can help identify potential swing high and low points. When price touches or moves outside the bands, it may signal an impending swing high or low. However, Bollinger Bands should be used in conjunction with other technical indicators for better trading decisions.
How does relative strength index (RSI) signal potential swings?
The relative strength index (RSI) is a momentum oscillator that measures the speed and change of price movements. An RSI above 70 indicates overbought conditions, while an RSI below 30 indicates oversold conditions, which can signal potential swings in the market.
What chart formations precede a swing reversal?
Swing reversals are often preceded by chart patterns like double tops/bottoms, head and shoulders, and triangle formations. These patterns signal a potential change in trend direction.
How do traders use divergence to anticipate market swings?
Traders use divergence, where the price and an oscillator like the RSI move in opposite directions, to anticipate potential market reversals. When price makes a new high but the oscillator fails to make a new high, this bullish divergence can signal an impending price pullback. Bearish divergence, where price makes a new low but the oscillator fails to do so, can indicate an upcoming price bounce.
What is the significance of swing points in market cycles?
Swing points represent key turning points in market trends. Identifying swing highs and lows can help traders spot trend changes and time entries/exits more effectively. Swing points are fractal in nature, observable across multiple timeframes.
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