If we overlook the cases where two consecutive candles have the same high or low, all candles can be specified into four categories with reference to their previous candles respectively –

  • Up Bar – Higher High and Higher Low (Green)
  • Down Bar – Lower High and Lower Low (Red)
  • Inside Bar – Lower High and Higher Low (Violet)
  • Outside Bar – Higher High and Lower Low (Blue)

One can easily see green candles here are making Higher High and Higher Low than the previous day’s candle and so on. Let’s define normal Swing High and Swing Low discussed ago –

  • Swing High – Up bar that is followed by a Down bar.
  • Swing Low – Down bar that is followed by an Up bar.

But we have already explored the drawbacks of ZigZag Line of this system. Without further complicating, let’s define the peaks and troughs of this system.

Unlike, the previous system, we do not choose the highest peak or lowest trough among consecutive ones. After we find the peak and troughs, we just follow the rules of –

  • After finding a peak, skip all the peaks in the middle till you find another trough.
  • After finding a trough, skip all the troughs in the middle till you find another peak.

This is why it is called bounce. After a peak (or, trough) is found, we continue our bias towards upside ignoring other peaks (or, troughs) in middle but, we immediate reverse our bias when we encounter first trough (or, peak).

To check if nth candle can be considered as a peak in this system, one of these five conditions has to be fulfilled –

  • (n-1)th candle is an up bar and nth candle is a down bar.
  • (n-1)th candle is an outside bar and nth candle is a down bar.
  • (n-1)th candle is an inside bar and nth candle is a down bar.
  • (n-1)th candle is an up bar and nth candle is an inside bar and close of the nth candle must be less than the half of the value of (high+low) of (n-1)th candle.
  • nth candle is an outside bar and close of the nth candle must be less than the half of the value of (high+low) of nth candle.

Similarly, To check if nth candle can be considered as a trough in this system, one of these five conditions has to be fulfilled –

  • (n-1)th candle is an down bar and nth candle is a up bar.
  • (n-1)th candle is an outside bar and nth candle is a up bar.
  • (n-1)th candle is an inside bar and nth candle is a up bar.
  • (n-1)th candle is an down bar and nth candle is an inside bar and close of the nth candle must be greater than the half of the value of (high+low) of (n-1)th candle.
  • nth candle is an outside bar and close of the nth candle must be greater than the half of the value of (high+low) of nth candle.

Unlike the previous conditions where one candle has to fulfil all the conditions, where the candle has to fulfil just one condition to be considered. We are walking in the same direction of peak unless a candle comes that satisfies any condition given for a trough. Then direction reverses and we do not stop unless we get a condition given for a peak.

In this below image, one can see the peaks and troughs as they are marked with a red triangle and green triangles respectively. Also, the ZigZag line is drawn in the above-said method.

Source: https://in.tradingview.com/script/y07CPYwP-Bounce-Indicator-Black/

There is no significant difference between the Swing Chart from Bounce Indicator and normal Swing Chart from peaks and troughs. It is also completely ok to mix the system.

Our end goal is having something definitive to compare higher highs, higher lows, lower highs and lower lows efficiently with least possible noise.

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