Technical analysis is the study of past and present price action to project future market behavior. It’s a vastly popular discipline involving pricing charts and the application of indicators. Two elementary concepts of technical analysis are the swing high and swing low.
In this article, we’ll define these terms and talk a bit about trading swing highs and swing lows in the live market.
According to Investopedia, a trading range occurs “when a security trades between consistent high and low prices for a period of time.”
Ranges are the basis for many trend, reversal, and rotational trading methodologies. As price action evolves, trading ranges set up on all timeframes in all markets. So, how do we define a valid range? By identifying valid upper and lower extremes.
A swing high is the upper extreme of an established trading range. It appears as a peak or apex relative to previous and subsequent price action.
Swing highs define the upper bounds of a periodic range. They are the absolute top, meaning that within a selected sample set, price does not exceed the swing high.
A swing low is the lower extreme of an established trading range. It appears as a valley or trough relative to previous and subsequent price action.
Swing lows are the absolute bottom of a periodic trading range. Within the defined range, it’s the lowest price point — there are none lower.
The ultimate goal of technical analysis, in all of its forms, is to place evolving price action into context. That’s exactly what swing highs and lows do. They contextualize asset price movements by placing them into a quantifiable range.
Ranges come in all types, from very small to exceedingly large. Accordingly, trading swing highs and swing lows vary with respect to the size of a range.
A small, compressed, or “tight” trading range is a strong signal of market consolidation. It develops when the valid swing high and swing low are close together. It’s important to note that the term “close” is relative because this classification does vary per timeframe, tick count, or market.
Typically, tight markets either lack participation or are noncommittal. Given compression, reversion-to-the-mean strategies or breakout strategies can be effective.
In a reversion strategy, the trader sells from just beneath the swing high and buys from just above the swing low. Profit targets and stop losses are modest. Stops are placed above the swing high and below the swing low, and profit targets are located toward the center of the range.
In the case of a breakout strategy, trading swing highs and swing lows as “launch points” is ideal. For breakouts, buy orders are placed above the swing high, and sell orders are placed beneath the swing low. Profit targets are located outside of the range, while stop losses are beneath the swing high and above the swing low.
A large or extended trading range suggests a trending market. When faced with an extended range and trending market structure, traders may apply swing highs and lows in a number of ways.
One of the most popular is to buy pullbacks in a bullish trend or sell bounces in a bearish trend. To accomplish this, traders may use technical tools such as Fibonacci retracements and chart patterns to identify market entry points. These indicators rely on swing highs and lows confirming the presence of a chart pattern or traders calculating Fibonacci levels.
Setting stop losses and profit targets when trend trading swing highs and swing lows is a bit more nuanced than in breakout or reversion strategies:
Bullish: In a bullish trend, stop losses are placed below the swing high. Profit targets are located towards or above the swing high.
Bearish: In a bearish trend, stop losses are placed above the swing low. Profit targets are located towards or below the swing low.
Getting comfortable with swing highs and swing lows is a great way to begin learning technical analysis. And, why not use what you’ve learned to trade premier futures products like E-mini stock index futures?
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