Introduction to swing charts

With the strong trends exhibited by stocks, swing trading has become increasingly popular with traders. In fact, the swing chart is the most common technique used to identify trends.

In this article, we will see how to draw swing charts and more importantly how to use them to profit.

Key takeaways

  • Swing trading is a style of trading that attempts to capture gains in a security over a period of a few days to several weeks based on changes in momentum.
  • Technical analysts can use charting techniques to identify potential entry and exit points for a swing trade.
  • Swing charts can be constructed by identifying short-term highs and lows that have occurred to identify trends.

Why use Swing Charting?

Swing charts are extremely useful tools for technical analysis, and here are a few reasons why this technique is so popular:

  • Oscillating charts show nothing but trends, greatly simplifying the localization process. Remember, trends are the primary means of making a profit in any market.
  • Oscillating charts feature less market “noise”, which can help you more accurately apply other forms of technical analysis that are not time sensitive.
  • There are several variations of this technique, such as Kagi charts and Gann-based swing charts, which offer a more complex way to locate trends. These techniques also offer the option of making many empirical changes to further improve trend-finding capabilities.

Building a swing chart

Oscillating charts, in their most basic form, are made up of price bars, which represent the behavior of prices over a given time.

Here’s a simple bar chart that we’ll reference throughout this article:

Investopedia / Julie Bang

Most technical traders have probably seen a bar chart, as it is the most common type of chart. The vertical lines represent the price range, the left parity represents the opening price, and the right parity represents the closing price for a given period of time.

There are many different ways to build a swing chart using highs and lows. In this article, we will focus on the popular and effective Gann swing charting method. These are the four basic inflection points in this type of chart:

  • Up day: Higher high and higher low (green).
  • Day of descent: lowest maximum and lowest minimum (Red).
  • Inner day: lowest and lowest maximum (black).
  • Outside of the day: Major high and minor low (blue).

Here’s the same bar chart as the one above, ranking each bar as one of the four inflection points:

Investopedia / Julie Bang

We have now identified the beginnings and ends of various trends using the four different inflection points. To construct the oscillation chart, we must eliminate time as a factor and instead focus solely on price action. To do this, we must find two points:

  • Day up followed by day down
  • Low day that is followed by a high day

Investopedia / Julie Bang

These two points indicate when a trend begins or ends and, as such, the time to enter or exit a swing trade. Now that we have marked these points, we can build the actual swing chart. To do this, we first eliminate the time factor by moving the points together at equal intervals while maintaining order. After this, simply connect all the dots to complete the table. The final product should look like this:

Investopedia / Julie Bang

Note that the time factor has completely disappeared and it is much easier to see price trends.

Using swing charts

Oscillating charts can be used in a number of ways:

  • To easily see the general trend of a market or stocks.Trends can be discerned simply by looking for progressively higher highs and lows (which form a ladder pattern) or by drawing trend lines.
  • To easily position the “stop-loss” and “take profit” points: Previous highs can be used as profit-taking points, and previous “step” lows along a trend can be used as moving stop-loss points.
  • Apply technical analysis techniques that are not urgent.: For example, Fibonacci levels can be calculated or Elliott waves can be applied. These can often help you predict where prices are going, or they can help you set more effective profit-taking and stop-loss levels.
  • To create price channels: These can be developed by connecting consecutive highs and lows. This can help predict prices, locate moving take-profit and stop-loss points, or help you liquidate or add a position in a timely manner. Placing lines connecting highs to highs and another line connecting lows to lows creates a channel through which the price moves.

The bottom line

Oscillating charts offer an easier way to see trends by eliminating market noise and the time factor. They can be used in conjunction with various forms of technical analysis to obtain more accurate predictions and take profit and stop loss points. There is an old market adage: “The trend is your friend.” Swing charts can help you find it.

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Mark Holland

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