Did you know, that the ability to identify where the current Swing High, Swing Low is on a given chart has a massive implication of your success as a trader? By identifying Swings correctly, you'll be able to Stop and/or Target in the correct place to boost your profit. Here’s what this article will cover:
- What a Swing High, Swing Low is and how to identify them correctly.
- Why defining the correct swing is directly connected to your win rate and profitability.
- A short exercise (at the end) to help ensure you fully understand today’s lesson.
SWING HIGH, SWING LOW
A Swing High, Swing Low (SHSL) is a piece of price action where multiple candlesticks, or bars, are grouped together. They are considered to be part of one move in a certain direction. The Swing High, Swing Low movement is commonly referred to as a leg, a ‘move,’ or simply a swing. We call this a “swing” because it’s one piece of the price action in a certain direction. It is always followed by a swing in the opposite direction OR a sideways move.
If it’s followed by movement in the same direction, it would be a continuous part of the same swing. Price “swings” back and forth in the market, which is where the name is derived from. The Swing High is, of course, the highest price of the given move. Likewise, the Swing Low is the lowest price of the given move. Here is a strategy you can read about and it's called risk to reward ratio.
Identifying Swings, correctly.
When the market makes two consecutive higher highs and higher lows, or two consecutive lower lows and lower highs, it is considered a swing. Swings come in all different shapes and sizes. You can identify them all of them by using the simple rule about consecutive higher highs and higher lows, or vice-versa. Like most things in trading, the easiest way to get a handle on this is to view examples. Remember, we’ll have an exercise at the end to make sure you understand this properly. Here, you can see a typical Bullish Swing. Notice that we have two consecutive higher highs and higher lows:
And just the opposite, here’s a typical Bearish Swing. Again, both new highs and lows are moving down:
That was simple, but what about when the price is moving up and down and making non-consecutive highs and lows? Just remember, if there is a lower low in the midst of a bullish swing, it continues to remain bullish until there are consecutive lower lows and lower highs. Take a look at this example:
Bullish swings are blue and Bearish swings are red. Notice towards the end of the swing, there is a surge down where a lower low is created. But there is not a consecutive lower low after that, so it remains a Bullish Swing. Let’s take one last look at some real charts to highlight the swings.
Each time a move down makes two lower lows and lower highs, we know it’s a separate bearish swing. Each time the currency starts moving up and makes two consecutive higher tops and bottoms, we know it’s a bullish swing. They continue to count as one swing until a separate swing forms in the opposite direction. Many times the market will make a new high in the midst of a downtrend. This is just a fake and does not mean anything to us unless there is a higher low after the new high, and then another new higher high.
Here's an example of how that looks in the market:
Notice the market surged up to make a new high. It was followed by a new low in the midst of a downtrend. So, we ignore that high and include it as part of the bearish swing.
Using the Correct Swing to Increase Profit:
Now that you know how to identify the correct swing on a given time frame, use this information to become one of the most successful traders in Forex.
1st: If you identify the correct swing, you automatically know where the technical stop placement is for a given trade: Always stay 7-20 pips below the low of the bullish swing for a buy and above the high of the bearish swing for a high.
2nd: Knowing the correct swing means you can draw a Fibonacci extension to identify high probability target areas. See, without understanding how to identify the right swing, you won't be able to place your stop OR your target in the right place. In order to demonstrate the true importance of this, let's look at an example of our Double Trend Trap trading method. The DTT Method is a great strategy based on trend continuation.
Identifying the correct swing with this strategy has huge implications. The DTT strategy looks for counter-trend moves, then draws a trend line on the counter-trend structure and waits for the break back into the direction of the trend. Here's an example:
Here, the EUR/GBP has built a small counter-trend structure and is now breaking to the downside. This means that we are ready to short the market. But we need to know where we’re going to take profit and where we’re going to put our stop loss. Using the information we’ve learned in this article, we can quickly identify the most recent swing:
Now we know that the stop should be placed above the high of the recent swing so we'll identify the top and put our stop a few pips above that:
That’s the easy part. The big question is “Where do we put our target?” Well, Fibonacci Extensions make GREAT targets, but ONLY if you are identifying the correct swing. That’s what makes this article so important. Without identifying the correct swing, you’ll place the target too far away and kill your win rate. Because we know the correct Swing, we can draw a Fib and put our Target a few pips inside the 161.8 extensions so that we have a good size target AND a high probability of winning this trade. I simply draw the Fib from the swing low to the swing high and then place my target inside the 161.8 extension level:
Now, we wait and see. I'll remove the Fib now that we have the SL and TP placed and we will see how this trade develops:
As you can see, the market surged right down to our extension level and stopped. Though not all trades will work out perfectly like this example trade, this is a fairly common occurrence. In cases like this, picking the right Swing is of HUGE importance. Many traders might simply grab the entire Bearish move on the chart as the recent swing (I have seen this a lot) to draw their Fibonacci Extension. The problem is that, by doing so, they have dramatically reduced the chance that the trade will now hit their target. In the EUR/GBP example, using the entire bearish move leading up to the trade would have resulted in a stop out instead of a nice target.
When it comes to trading, with every loss, you can trade in for a win that is of huge significance. Just increasing your win rate by a tiny amount (assuming all else remains equal) can completely reverse your results as a trader. I hope this article illustrates the connection between identifying Market Swings correctly and the ability to win a high percentage of your trades. If you use this article as a resource and take advantage of this lesson, you will see a boost in your win rate fast. This is a must-learn lesson for every trader. To ensure you fully understand it, here’s a short exercise for you to complete. Also read about Trader's Tech and Installing MT4 EAs with Indicators.
1. Look at the EUR/USD Daily chart for the total year of 2014. It should look something like this:
2. Identify each swing (both Bullish and Bearish) that’s occurred on the chart so far.
3. Take a screenshot of the identified swings and submit it in the comments below this article.
4. We’ll get back to you to confirm you did it right or to critique your work. 🙂 Thanks for taking the time to read this article and we look forward to seeing your completed exercises!
Thank you for reading!
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