6 Tips for Trading with Swing Highs and Lows

In swing trading, identifying precise swing highs and lows is pivotal.

For instance, analyzing the S&P 500, traders noted a swing low at 2700 followed by a rise to 2800, marking a potential entry. By applying a 14-day RSI, they observed an oversold signal below 30 at the swing low, which suggested buying.

Subsequently, as the market approached the swing high with an RSI nearing 70, signaling overbought conditions, it indicated an optimal selling point.

6 Tips for Trading with Swing Highs and Lows

Choosing the Right Time Frame

When trading swing highs and lows, a trader must also decide on what time frame to use to match their trading style. Day traders gravitate toward 1-minute to 15-minute charts to catch quick and significant movements. In contrast, swing traders may opt for 1-hour to daily timeframes that allow them to perform greater analysis and keep trades for longer periods. In addition, the choice also depends on market volatility and trading volume. Thus, a shorter timeframe is suitable during a major market announcement when prices react rapidly to newly available information. Moreover, with historical data of such, the most common patterns may surface. Instead of reacting to each new piece of information, a trader can anticipate such a move.

The best way to ascertain a good time frame is to backtest to determine which will give you the best risk/reward. Let’s say you want to stick to a simple moving average strategy. You can then apply it for 15 minutes and compare its performance against the same strategy but used on a 1-hour timeframe. This process is very intuitive, and one will never be stuck on either of the timeframes. Always remember this quote by the legendary Jesse Livermore: “It was never my thinking that made the big money. It was my sitting.” I take it to mean be patient and wait for the perfect setup.

A trader can also utilize technical indicators such as the RSI or MACD to help them choose what time frame to utilize. Thus, if the RSI is overbought on a 4-hour time frame and the same is not practically possible on the daily chart, then the trade will likely retrace a little bit as it may likely be a little overextended. In this case, the 4-hour timeframe is more profitable to use.

Recognizing Trend Reversals

Finding the pivot points at which the markets switch from one trend to the other is the key to success for swing highs and lows. The Double Top and Double Bottom patterns are a reliable method for that, as they often signal the end of the movement and the shift in the other direction. When an uptrend is observed within a daily chart in the double top pattern, a sell-off is implied. In this case, the position is confirmed by the support, which lies at the bottom of the two peaks.

Volume levels also present a critical role in the effective definition of trend reversal. The indicator implies that an uptrend turning into the downtrend should be followed with an increased pace of volume that indicates a high pressure from the selling side. Finally, the MACD provides equally critical information. In this case, a crossover signal indicates that a bullish reversal is going to happen in case the indicator crosses the signal line at the bottom. A bearish reversal is signaled an opposite way. Moreover, it is reasonable to track the indicators for all time frames as that increases their reliability.

Legendary investor Warren Buffet once suggested his traders: “Be fearful when others are greedy, and greedy when others are fearful” . This quote is aligned well with the requirement to be ahead of the trend and be the one who identifies them first. The approach implies that most of the reversals will require to trade against the herd and the overall sentiment of the market.

It is critical to mention the power of Fibonacci retracement levels. If the patterns are observed, the price in many cases retraces before the continuation of the movement. If the price fails to break the 61.8% lines, a reversal is highly probable.

Importance of Volume in Swing Points

Volume plays a vital role in confirming swing highs and swing lows in the trading world. High volume is a strong indication of the momentum being put behind the stock price while analyzing the swing points. For instance, in the case of a swing low, if the volume is high, or much higher than it was in the previous sessions, it denotes strong accumulation of the stock and the possibility of it bouncing back in the upward direction.

Volume indicators such as the Volume Oscillator and On-Balance Volume provide a measure to quantify this momentum. They measure how the volume is flowing concerning stock prices. For instance, if the OBV is rising while the prices are rising, it is logical to assume that the trend value is in the upward direction; likewise, falling OBV denoting a down trend will give early signals since OBV precedes the falling of prices.

Moreover, the beginning of a significant trend is always marked by increased volume of trading among the masses. A very good example could be the 2008 recession. Major indices arrived at significant market bottoms, and the average trading volume of the S & P 500 or Dow Jones was more than double the average trading volume of the past thirty days. To quote the legendary Trader Paul Tudor Jones, “Prices move first and fundamentals come second.” This quote emphasizes how volume should precede prices as leading indicators.

When prices are backed by a good volume, there is a high probability of them being true to the market and not merely being noise. To trade and determine appropriate swing high or swing low times, one must identify the volume data of the data days leading up to the swing point. The swing high or the swing low is much more reliable when the volume trend is increasing on the approach to the swing high or the swing low.

Using Moving Averages for Confirmation

Moving averages are crucial for confirming swing highs and lows, as they are dynamic support and resistance levels for the market. Many traders use the 50- and the 200-day moving averages to determine major trends and possible reversal points. Typically, when swing low crosses above a moving average, ascending momentum is indicated so that it can be a buy signal.

Generally, the efficiency of this trading system can be assessed by referencing crossover events. For instance, the 200-day simple moving average presents a resistance level when prices climb above a perceived swing low . On average, more than 70% of cases indicate a continuous uptrend over the next three months according to backtesting data. This pattern was also observed during one of the recovery stages in the early 2009 market. The S&P 500 established the swing low in March by climbing above its 50-day moving average . It was accompanied by continued upward movement, implying that this strategy works well in determining the reversal of trends.

Speaking of experts in the field of technical analysis, John Murphy showed that the dual moving average crossover system worked better than a single average moving crossover. In this regard, for more accurate signals, one should monitor two moving averages with different time periods. As a result, it becomes possible to trace both short-term moves and longer moves. A good buy signal can be deemed as a crossing of the shorter moving average above the longer moving average during a swing low, and the signal’s strength will be even higher if it is accompanied by increased trading volumes .

In turn, the indicator’s signal can be confirmed by verifying the existing trend within other indicators such as RSI or the Relative Strength Index. A simple example can be on the chart when the RSI is acquiring a bullish divergence in conjunction with a positive moving average crossover signal.

Trading Ranges Effectively

Range trading can be extremely lucrative if pursued with precision and a thorough understanding of market parameters. Swing highs and lows within a range dictate its limits, where the swing highs will next serve as resistance and the swing lows as support.

The starting point is defining the range itself. A trader has to examine where prices have consistently bounced off an adjacent low, or where they have been rejected as excessive. For example, if the EUR/USD currency pair has been falling between 1.1200 and 1.1400 for several weeks, these two adjacent points are the critical levels in this example of a swing trade.

It is vital to fortify these critical levels and to use historical data for the purposes of a backtest. If a certain price level has toppled the market more than five times in six months, this is a safe bet and ascertained as a swing high or low.

To further capitalize on this range, it is advisable to make use of the Stochastic or the RSI oscillator, both of which can identify the perfect moment to enter or retreat. The RSI retreat from an overbought territory at the swing’s high is a good indication that it is time to sell, and conversely for the purchase at the range’s bottom.

A neat trick is to input a buy limit at a swing low and a sell limit near the high. Both of these limit orders will accrue financial gains throughout the total swing of the price.

One of the main figureheads of the practice in question, Ed Seykota , had this advice to offer: “The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance” . This is the reason why stop-loss orders, once set a bit beyond the swing, are vital in range trading.

Advanced Swing Trading Techniques

Swing trading is combining the accuracy of technical analysis and insights from market psychology. Advanced traders wield a mix of powerful tools and strategies to hone in on their trading activity at swing highs and lows. Using multiple time frame analysis is crucial for nailing accurate entries and exits. A trader might, for instance, use a weekly chart to recognize the overall trend and switch to a daily or hourly chart for precise swing points. This way, trades stay in line with short-term and long-term trends in the market.

An excellent strategy includes the Ichimoku Cloud, an indicator that supplies the trader with support and resistance, trend direction, momentum, and entry points. When prices break out of the cloud in the direction of the overall trend, the trader can catch swings just as they start to take off and gain momentum. Using Fibonacci retracement tools during trends can also help recognize potential reversal points. When a price moves significantly, pulling back to a Fibonacci level, such as 38.2%, 50%, or 61.8%, often creates strong support or resistance. This provides an indication of where swing highs or lows might occur.

For instance, in 2019, Apple Inc. was trading bullishly. After a massive surge, the stock finally started to slightly take back, touching around the 61.8% Fibonacci level in a perfect buying opportunity since the price was about to head up again . Bruce Kovner, a world-renowned trader, once said, “I have the personal rule of never staying with losses, particularly when I can’t understand what’s happening in the market.” This signifies just how crucial it is to have an exit strategy.

Using stop-loss orders, advanced traders frequently place the orders below the swing lows or above the swing highs. Moreover, implementing volatility indicators, such as Bollinger Bands, can be helpful. Placing the bands around a 20-day moving average with two standard deviations will mean the volatility on the bands corresponds to the swing points. If one sees a swing low touching the lower Bollinger Band, it might suggest a possible buy if taken in conjunction with other indicators .

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