Swing Highs And Swing LowsBy
Part of Art of Chart Reading
The terms swing high and swing low often show up in all kinds of technical analysis discussions. They are simply the local extremes that are visible to us in a particular timeframe. It is not difficult at all to recognize them visually. They are essential concepts when we are reading the charts.
Defining The Extremes
Following is a chart of 1 Hour British Pound US Dollar.
Visually, it is quite obvious where many of the swing highs (marked by red down arrow) and swing lows (blue up arrow) are. However, if we do not have clearly stated rules to follow, it is difficult to label some of the swing points marked above. Without exact definition, it will be difficult to conduct proper research and historical testing on the concept.
Ever since people started to computerize charts, they worked rigorously on how swing extremes can be defined.
The standard approach to define swing extremes is to compare that against certain number of bars near the extreme.
1. A swing high should be higher than the high of the nearest N bars to both the left and the right side.
2. A swing low should be lower than the low of the nearest N bars to both the left and the right side.
Common choices for N are 3, 4, 5, 8, 20, etc.
This approach to define swing highs and swing lows works most of the time. The exceptional cases are the situations where the market is swinging very quickly. In those situations, as using number of bars to identify swing points is equivalent to counting the amount of time (or number of transactions if you use volume or tick bars), you would miss many important swing points from your chart.
In the example above, if we use the definition of 4 bars minimum for the swings, swing low (#2) will be missed. But visually we know it is an important swing point.
So how do we resolve this issue?
There are several methods that compensate the shortcomings with the standard method.
The conservative approach is to look for the missing swing point when you have 2 consecutive swing highs (or swing lows). For example, after the swing high (#3) is detected and that there is no swing low identified since last swing high (#1) because there is no swing low with N equals 3 or more bars, we can go back to look for the swing low (#2) in between.
Another approach is based on the fact that if a swing extreme is exceeded there ought to be a swing extreme in the opposite direction. So, instead of waiting for swing high (#5) to occur first, once the price level defined by swing high (#3) is exceeded, we know there must be a swing low (#4) somewhere after swing high (#3). This method compensates the standard and conservative approach in identifying swing points earlier in some cases.
Chart Readers Way
Do we human really need to be so precise in defining every single swing points?
The answer is no. If you try to do this the computer way you will always be slower than the computers. The computers are designed to uncover information by mass scale scanning on data. If you try to focus so much on finding the swings like the computers, it will stress you out quickly.
Human works on insights. We should not duplicate the computers’ method in finding swing points. In general, by using charts on one instrument with different timeframes, we can easily figure out the important swing points.
To keep things simple, follow these rules.
1. If it is clearly a swing point to you in your main timeframe, then it is.
2. If it looks like a swing point to you but you are not sure, and that it is clearly a swing point in the immediate lower timeframe, then it is a swing point in your timeframe too.
3. If it is not clear in your timeframe where the closest 3 swing points are, look at the next higher timeframe for clues.
The Importance of Swing Extremes
The most important thing with swing points or swing extremes is that they are proven turning points where price stopped going in one direction and reversed. It gives you confirmed information that a particular price acted as support (where price stopped going lower) or resistance (where price stopped going higher). This information is visually available to all the participants in the market. It is like a public message broadcasted to all participants. Hence the swing points will affect the market participants when price is moving near these them.
As chart readers, we care about how price moves from swing point to swing point. The way a market swings will give us clues whether it has certain bias to move in a particular direction. These structured swings are known as chart patterns.