No doubt by now you’ve heard us use the term "swing" as it relates to trading. Typically, we will mention that a stock or index printed a swing low, or we might suggest exiting a short-term trade on the next swing high. Since different traders utilize different definitions of a term, let’s discuss exactly what we mean when we use the terms swing high or swing low.
In technical terms, a swing low usually refers to the trough in a given time frame. Whether you are looking at a minute, hour, day, or weekly chart, a swing low occurs at the visually obvious low point on the chart. A swing low is a valuable tool in the trader’s toolbox because it provides a spot on the chart to place a stop where there otherwise may not be any logical place. The opposite, of course, is a swing high. Swing highs are valuable for spotting entries on short positions and for providing potential exit points on long positions.
The purpose of looking for a swing low is to be able to spot a potential trend change. The goal is to enter a trade as close to the top or bottom as possible, so that your reward-to-risk ratio is as favorable as it can be. Let's take a look at an obvious example of each on a chart.
In real time, we never quite know when a swing high or low will occur, but we can see when one is potentially setting up. Let’s see how a swing low looks when it is the most obvious… in hindsight. There is more than one swing low and high on this chart, and your eye will quickly spot them, but first, look at the two we highlighted. They mark the absolute top and bottom of the time frame in question. In a perfect world, we'd have gone short the Nasdaq on the swing high via an inverse ETF like SQQQ, or via QQQ puts, and held them until the swing low at the bottom, where we flip to long and ride it higher. In the real world, the twists and turns of the market in realtime are never so obvious, but since we know a trend change is eventually going to occur, we know a swing is going to occur also.
A swing is never enough of a reason to invest on its own. It is only useful when you already expect a reversal, and are waiting for some initial evidence that it is taking place. For that reason, we tend to ignore swings that occur in the middle of nowhere. We instead rely on prior support or resistance levels to look where a reversal might occur, and then look for a swing to time our entry or exit. Now that we saw what a swing low looks like on a chart, let's see what they might look like in realtime with a couple of examples of how they might be useful.
First, let's look at how we trade a swing low. See on the chart below where the price dropped hard to a former reversal level and then paused. This is the time to begin looking for evidence of a bounce via a swing. What we're looking for is a candle that makes a HIGHER low and a HIGHER high. It is the first candle that breaks the pattern of falling candles that make lower lows and lower highs.
Looking at the chart above, we can see the red line marks a spot on the chart where a reversal COULD occur. It's too soon to tell if one WILL occur, but we can see the telltale signs that one MIGHT occur. We see an obvious level of support where a reversal occurred in the past, and now we see the daily candles bunching up and failing to make lower lows for a few days. After a series of lower lows and lower highs, we want to see a candle break that routine and instead print a higher low and a higher high. Let's look at how that might look on the chart below.
We mark with an arrow the spot where the next daily candle exceeds the prior high. This is where a swing low completes. The pattern of lower lows has finally been broken, and it did so right on support. So, how to trade it? Let's see when we might enter, and where our stop would be by looking at the same setup with different notes.
When trading a swing low (it's the same process in reverse for a swing high), we wait for the candle to exceed the previous day's high to trigger our entry. Generally, we will wait until it becomes clear the candle will close at this level—i.e. near the end of the day for a daily candle. You can see that there were a couple of times in the days prior where it briefly looked like a swing low would occur, only to end up closing lower by the end of the day. When we've determined that the entry is triggered, the correction low becomes the stop, as we marked on the chart.
Again, a swing doesn't carry enough weight to justify a trade on its own. It is simply a tool to help guide an entry that other technical indicators support. In this case, the swing low marked the bottom of the move and provided a logical stop just beneath support. If we zoom out, we can see that the swing low we examined successfully marked the trend change, and a long rally followed.
Although not all swings mark reversals, all reversals experience a swing. Knowing what they look like helps us guide our entries so that we are potentially in the trade at the very early stages of its reversal.
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