Basics of Swings

Swing means fluctuations. Swing traders use technical analysis to look for stocks with short-term price momentum.  ‘Swing Low’ and ‘Swing high’ are one of the most widely used terms among traders. It is used to identify trend directions and trend reversals.

A swing low is the low of the candle in a candlestick chart or bar chart or hollow candle chart that has a higher low on either side. A swing high is the one that has a lower high on either side.

  • In case of Swing High, the high of the neighbour candles are lower than the high of the main candle itself.
  • In case of Swing Low, the low of the neighbour candles are higher than the low of the main candle itself.

If someone is aiming to find swing high and swing low in the lower timeframe of a highly volatile stock, there may be too many swing highs and lows creating noise due to the volatility. Even in larger time frames, the noise is significant.

To reduce this noise, we define a 2nd higher low or 2nd lower high and confirm that candle as a Perfect Swing Low or Perfect Swing High.

Here is an example of perfect Swing Highs (red arrows) in the chart of Bajaj Finserv –

But there is a cost if you wait for proper formation of perfect Swing Highs in some scrip. The scrip already moves a significant amount missing us a good amount of profit. Also it dramatically affects the risk: reward system. Our stop loss (risk) becomes far and our take profit (reward) becomes near. So, it is quite reasonable if we approach the swing low and swing high as it is from its classic definition rather than aiming the perfection.

In this below chart of United Spirits, the marked candle in the first box can be called as a Swing low but the marked candle in the second box cannot be called as a Swing low.

The low of that marked candle in the second box has ended higher than the lows of one of the neighbour candles (in this case, both neighbour candle has lower low)! But if we follow the classic definition of the swing low, you can easily spot a swing low in the second box.

Here, The neighbour candles have higher lows making the marked candle a classic swing low!

To clear the confusion, we shall call the Swing highs having one lower high on both sides as a Classic Swing High and the Swing highs having two levels of lower highs on both side as a Perfect Swing High (Few people call it Gann Swings). And, vice versa.

Trailing Stop Loss

Majority of Traders and Investors use swing highs as a trailing stop loss.

When you’re in a long position and you want to lock in your profits by updating your stop loss in an upper level to trail the price. One of the way to do this is to set the stop loss to the last swing low. When a stock moves in a trend, it always retraces before moving up higher.

After prices rally from a retracement, you can move your stop to the newest swing low when prices move up to a new high in the trend. You can repeat this process until you are either stopped out or reach your target.

A stock is considered to be in an uptrend when it makes consistent higher highs with higher lows. Once this is broken; the stock is said to have broken the uptrend! Now, if a swing low is broken, then the definition of an uptrend (higher highs with higher lows) has been broken and you should not be in a long position anyway.

In the above chart of United Spirits, the red arrow marks the entry as we spot a volume invitation in the stock and the trailing stop losses have been plotted with a number of past classic swing lows.

The opposite case is also true! The same strategy is used to trail the stop loss in a short position by setting the stop above the recent swing high. In the same way, when a retracement is made (a new low is created in this case) we need to move our stop loss more down for better profitability. Once the swing high is broken, it is a higher high and hence the stock is no more in downtrend!

Here is an example of TVS Motors’ short trade (the short has been triggered with the break of the support line) along with positions of swing highs which are trailing stop losses –