Swings.. Levels..And the Characteristics of swings.
I’ve received a lot of queries from the readers related to identifying the behaviour of the swings. Like an idiot, I never talked about it in much detail till now and I took it granted that it doesn’t need any explanation, even when I know that everything starts with identifying the behaviour of the swings, starting from constructing HTF framework to taking a decision whether to fade the move or not. So, I would like to give an overview of the things I feel that I have missed explaining until now. If I miss anything here, feel free to post them in the comment section and I will include them in the future articles or add an update in the article itself. And those who already know the things that I am about to explain here, skim through them once rather than skipping it. Even you might also find some useful pointers.
First of all, what is a swing?
The move between a pivot high and the immediate pivot low, or a pivot low and the immediate pivot high is known as a swing. Yes. There must be a swing high and a swing low to call something like a swing.
Characteristics of the swing:-
A swing must have a swing high/low at the starting point and a swing low/high at the ending point.
You can see what are the swing highs and lows here.
Every swing will have a Signal Candle, LWP and a Trigger Candle at the starting point of the swing.
The first candle at the starting point of the swing that shows strength in the direction of the swing is known as the Signal Candle of the swing.
The high or low of the signal candle depending on the direction of the swing is known as Last Wholesale Price (LWP) of the swing.
The candle that breaks that LWP is known as the Trigger Candle of the swing.
Every swing can either be impulsive or corrective.
This is a very very important characteristic to look at when you are trying to analyze a swing. You don’t need to put extra effort to say whether the swing is impulsive or not, because, the swing that has strong candle closes in its direction is an impulsive swing.
But calling something as corrective when candles are printing at the hard right edge is not that easy. Unfortunately, identifying the corrective move is more important as we fade those all the time in trending markets. In other words, you don’t need to deal that much with impulsive swings at the hard right edge. So it makes sense to pay attention to learn the characteristics of the corrective swings.
The behaviour of the swing can be identified near the starting point itself most of the time. To keep it simple, I kept the checklist to just two points.
a) If any candle of the swing closes within the LWP of the swing and the other extreme of the signal candle after LWP is triggered, it ends as a corrective move.
b) If there is no candle that closes within the LWP, to call a swing as corrective, it should have the following,
i) Decelerating momentum,
ii) Two failed attempts to close in the direction of the swing. ie. if the swing is a rally, there must be
at least two candles that have broken the previous candle(s) high and closed below that high. If
the swing is a downswing, there must be at least two candles that have broken previous candle(s)
low and closed above it.
That’s it. Don’t complicate stuff more than this. If a swing doesn’t check either ‘a’ or ‘b’ mentioned above, it’s not corrective and fading it might not be a good idea.
Finally, while analyzing a swing you need to look for one more thing.
Is the price accepted or not accepted after breaking previous swing low or high?
This is not something new. Do you remember when I talked about candlestick analysis where I mentioned to compare the close of the recent candle with the previous candle(s) high or low? The same thing here.
Acceptance of price after breaking recent swing high makes the starting point of the swing (swing low) a great level. You can use that level to trail the stop or to scale out while managing trade in the opposite direction.
Acceptance of price after breaking the recent swing low makes the starting point of the swing (swing high) a great level. Like before, you can use that level to trail the stop or to scale out while managing trade in the opposite direction.
To sum it up, while analyzing a swing, you need to look for the following four things,
Where is the starting point (a must) and where is the ending point(if any)?
Where is the signal candle, LWP and the trigger candle?
Is the swing impulsive or corrective?
Acceptance or non-acceptance of price after breaking recent swing high or swing low.
I also received a lot of queries related to the identification of HTF levels, and the levels in TTF to use for scaling out. I tried to reply to most of those and then decided to write about it in an article as the same doubts keep on repeating in all the mails.
Forget about the timeframe for some time. Whatever the timeframe is, the process of identification of the levels is the same. Look at the following image and it is self-explanatory.
If you do this process in HTF, starting from the right, it gives you the structural framework to operate.
If you do this process in TTF, starting from the right, it gives you the levels to scale out the trades.
Now let’s look at some charts. These lines are drawn with respect to the market price at the right edge.
Make a note that none of those lines is broken once. I intentionally removed the timeframes as the process of identification of the levels is the same irrespective of the timeframe you pick.
This is how I do it.
Start from the right edge of the chart, ie. at the current market price.
Look for swing highs above the current market price and check whether you can draw a level there or not.
Look for swing lows below the current market price and check whether you can draw a level there or not.
This will give you only those levels that are strong and can be trusted.
If you do this in the higher timeframe, it will give you the levels where you can confidently fade the weak trends with a BOF or TST setup depending on the TTF context.
If you do this in the trading timeframe, it will give you the levels that can initiate pullbacks so that you can scale out your position without holding the trade during the pullback if the market shows that it is struggling to continue beyond the level.
Do this in the LTF, and you will get levels to time with trend PB trades.
Hope this article clarified a few more things about analyzing swings and drawing levels. I should have written about this at the start of the series itself, but I just waited to complete price acceptance and rejections so that you can understand it better.