How Identifying the Right “Swing” will Boost your Win Rate and Your Profit

making a profit Did you know that something as simple as knowing where the current Swing High and Swing Low is on a given chart has massive implications on your success as a trader? If you don’t understand how to identify Swings correctly, you’re bound to put your Stop and/or Target in the wrong place which will kill your profit; we want to help you avoid that. Here’s what this article will cover:

  1. What a Swing High and Swing Low is and how to identify them correctly
  2. Why defining the correct swing is directly connected to your win rate and profitability
  3. A short exercise (at the end) to help make sure you fully understand today’s  lesson

 

SWING HIGH, SWING LOW

A Swing High, Swing Low (SHSL) is a piece of price action where multiple candle sticks or bars are grouped together and 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 price action in a certain direction 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. The Swing High is, of course, the highest price of the given move and likewise, the Swing Low is the lowest price of the given move.

How Do We Identify the Correct Swing?

When the market makes two consecutive higher highs and higher lows or two consecutive lower lows and lower highs, we consider it a swing. Swings come in all different shapes and sizes, but you can identify them all 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 (and 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: up_swing And just the opposite, here’s a typical Bearish Swing. Again, both new highs and lows are moving down: down_swing   That was simple, but what about when price is moving up and down and making non-consecutive highs and lows? Just remember that if there is a lower low in the midst of an bullish swing, it continues to remain bullish until there are consecutive lower lows and lower highs. Take a look at this example: multiple_swings Bullish swings are colored blue and Bearish swings are colored red. Notice toward 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: real_highs_and_lows_chart Each time a move down makes two lower lows and lower highs, we know it’s a separate bearish swing and each time the currency starts moving up and makes two consecutive higher tops and bottoms, we know it’s a bullish swing. And those 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, but 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: fake_higher_high

Notice that the market surged up to make a new high, but 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, you can use that information to increase your win rate and your profit.

1st If you identify the correct swing, you automatically know where the technical stop placement is for a given trade:

Always 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 with 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: eurgbp_1 - Copy 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: eurgbp_2 - Copy 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: eurgbp_3 - Copy 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 to 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 extension 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 just inside the 161.8 extension level: eurgbp_4 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: eurgbp_5 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 we just looked at, using the entire bearish move leading up to the trade would have resulted in a stop out instead of a nice target, and when it comes to trading, every loss you can trade in for a win 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 immediately! This is a must-learn lesson for every trader and to make sure that you fully understand it, here’s a short exercise for you to complete.

Training Exercise:

1. Look at the EUR/USD Daily chart for the total year of 2014. It should look something like this: eurusd_daily_2014 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!  

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NathanTucci

Nathan Tucci has been with Winner's Edge since 2011 as a writer and trader. He specializes in strategy development and enhancement and loves to share what he learns from testing, research and real world experience.
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  • http://elreydelmargincall.blogspot.com/ Justo Salazar

    Hi, my homework

  • http://elreydelmargincall.blogspot.com/ Justo Salazar

    Hi this is my homework, it was an excellent article Nathan

  • Veronica

    Hi Nathan,

    Thanks for the article. Unfortunately print screen on my computer is not working. I hope to attend to this soon.

    I liked to opportunity to discipline myself to identify the swings and this was good practice.

  • Rohan De Villiers

    Hallo Nathan
    Thank you for a great article and great lesson, I`ll surely start using it and I liked the way you explained the stop/limit.
    Have a nice weekend!

  • Randi Raulund

    Here you go!

  • Randi Raulund

    Apparently a can´t paste my screen.shot. :-(

  • Tihomir Tsanov

    It’s nice and useful article for the right markets signs. Congratulations to the author.

  • Dave Hanna

    Here’s my analysis:

  • Chris

    Thanks Nathan for the excellent article!

    I will join in with my contribution for the mentioned excercise. The brown circles indicate what I consider to be the swing highs and swing lows. I consider the bottoms and tops that do not have a circle to be part of an ongoing swing high and swing low. If anyone has questions, please let me know.

    I am looking forward to see the charts of many more!!

  • Guest

    Thanks Nathan for the excellent article!

    I will join in with my contribution for the mentioned excercise. The brown circles indicate what I consider to be the swing highs and swing lows. I consider the bottoms and tops that do not have a circle to be part of an ongoing swing high and swing low. If anyone has questions, please let me know.

    I am looking forward to see the charts of many more!

  • Chris

    Hey Dave, thanks for the feedback! I’m sure that Nathan indeed is using the two bars to the left and 2 bars to the right like we do in the trading room to spot tops and bottoms but let’s wait for his confirmation. The EURNZD looks like a bearish swing to me too. Someitmes the momentum can be strong indeed.

  • Chris

    Thanks Ron for the feedback and post! Yes indeed – that upside was a corrective swing, then followed by an impulsive swing. No probs; it’s always good to double check with a question. Do you want to post a chart as well? Happy Trading!

  • Chris

    Hello Thumper, great job on your screenshot. Excellent work. It’s great to see the detail that you provided in the chart. Candle stick patterns help spot the turning moment and I can see that all of your swings make sense.

  • Chris

    Hello Josh, thank you too for taking the time to learn via this excercise! It is a great that you took out the time to complete this. You did an excellent job! All the swings shown in this screenshot make sense to me. Great work.

  • Chris

    Hi Jordan, great job with the screenshot. We appreciate the fact that you took the time to learn via this excercise. On top of that, you provided excellent work! In my opinion most of the squares you drew on the chart are important tops and bottoms, although not all of them I would consider vital. When looking for swings we want to focus on the key tops and bottoms. For instance, the 4th square from the right I would not consider a swing bottom because the move still continues lower before it faces a lower high.

    Thanks for the post and screenshot, great job!

  • hugh

    Bullish and Bearish swings on the EURUSD

  • Ron

    never mind.. I see that the larger, over all trend was down and that the set up to go short was on a pullback….

  • Ron

    Nathan, In the above discussion and example to go Short, even though the trend line has been momentarily broken, the Swing pattern wasn’t. There still were higher highs and higher lows… So why did you have a set up to go short?

  • THUMPER
  • Josh

    Ok.Here is my take.

  • Jordan

    Here you go:

  • Dave Hanna

    Nathan, I’m not sure your definition is complete. First, you need to define what constitutes a “high” and a “low”. (I’m assuming you are using the standard fractal definition – two bars to the left and two bars to the right that are lower/higher than the high or low. But, without clarifying, technically the extreme of each candle could be considered a “high” or a “low”.) Secondly, what happens when you have a continuous run of higher highs with no lows in between, or vice versa. For example, according to your definition, the period from June 4 to the present (June 18) on the EURNZD daily chart would not constitute a bearish swing, because there are no lower highs in it.