Understanding Market Structure through Swing
In this article, I am going to discuss Market Structure through Swing. Please read our previous article, where we discussed Market Structure in Trading. At the end of this article, you will understand the following pointers.
- What is the swing?
- Types of swing Why Swing points are important?
- Chart reading through the swing
- 4 Important facts that affect the swing
Before entry, you must know where buyers in a downtrend and sellers in an uptrend enter. Let me explain if you know that, this is the end of the swing downswing then you can buy with small risk and exit when you know that this is the end of the upswing. For finding sellers in an uptrend or buyers in a downtrend we have to analyze swing structure, by weighing the relation between supply and demand
Hence by observing market swing, we are able to glimpse into the structure of the market and get clues about
- The current direction of the market(trend)
- Strength of trend (buying and selling pressure)
- Support and resistance
- When will the trend change?
- when to buy/sell/exit
Why Swing points are important?
These points are not random, they are created by the market. They represent momentary changes and demand and supply forces. The bulls could not move the market above the swing high. This means that at that point in time, no one was willing to offer a price higher than the swing high. Traders saw no value above the swing high. In the future, his point may act as resistance.
It is similar to learning to read a new alphabet-once you understand the characters, you can read the words, and once you know the words you can read the story. The first letter to master tells you what market activity causes the formation of a short-term high or low. If you learn this basic point, the meaning of all market structures will begin to fall into place.
It focuses the relation between current candle high and low with previous candle high and low
Swing high and swing low
Criteria for drawing swing high and swing low: SWING HIGH or SWING LOW CONSIST OF MINIMUM 5 BAR. The middle bar must be higher high and higher low than the two-proceeding bar and the two-following bar
There are two types of swing
- High and low
- Swing high and swing low
Let me explain to you
Swing low (SL)
The market tried to move down. Then, it stopped and the bullish trend resumed. The market broke all resistance (swing high) and made a new trend high. In other words, the market failed terribly in its attempt to move down. The lowest point it pushed to is called swing low
Swing low and low point
Every major market has some pullback that is shallow and some last for one swing. The point where pullback goes deeper and lasts for more than one swing, forming a LOW. Eventually, this deeper pullback terminated and the trend resumed. A low becomes a swing low once the price breaks out above the last extreme price high for the resumption of the bullish trend. Let me explain to you
LET’S DO SOME EXAMPLE
All the concepts discussed above are applicable for a swing high and high
HOW TO KNOW WHEN LOW BECOMES SWING LOW
When the price cleared the above swing high level. To clear a price level, the market must form a candle that is completely above the price level. This means if a candle low is higher than a price level, the market has cleared above the price level.
We will cover this in more detail in the price action topic
Chart reading through the swing
Charts have actual value in determining the position (location) and probable trend of stocks, by weighing the relation of supply and demand swing. To study charts, look for the motives behind the action which the chart displays.
Whenever you read a chart, consider what you see there as an expression of the forces that dominate the price and when the force lift from prices. Study your chart from the viewpoint of the behavior of the stock, the motives of those who are dominant in it, and the successes and failures of the buyers and sellers as they struggle to dominate each other
Important facts that affect the swing are:
- price movement
- The relationships between price movement and volume
- The time required for all the swing movements
Price movement and swing
Price movement (price changes from swing to swing)
Observing the sequence of a price swing, we are able to glimpse into the structure of the market and get clues about
- support and resistance
- Lines of supply and support(trend)
- Changes in impulse and reaction movement (net gain or loss)
- Comparative strength and weakness(momentum)
- Development of accumulation or distribution
Swing and Support Resistance
This swing points are not random, they are created by the market. They represent momentary changes and demand and supply forces. The bulls could not move the market above the swing high. This means that at that point in time, no one was willing to offer a price higher than the swing high. Traders saw no value above the swing high.
Hence, subsequently, when the price moves close to or near above a swing high, we must remember that traders saw no value in buying above that point previously. Assuming that most traders have not changed their opinions, the price is unlikely to move above the swing high. Effectively the swing high mark a price area that resists the market from moving up this is what we call a resistance area. Reverse for support area
Changes in impulse and reaction movement (net gain or loss)
By comparing impulse swing with retrace swing we can we can measure the strength of a trend
- Increased IMPULSE swing is a sign of potential trend strength as the gain is positive. Shortening of impulse swing is a sign of potential trend weakness.
- The increased reaction is a sign of the potential weakness of a trend. The decreased reaction is a sign of the potential strength of a trend
For more details, please read the following Thrust Pullback article
Comparative strength and weakness
- Compare the momentum of the current price swing with the momentum of the previous price swing in the same direction.
- Compare the momentum of the current price swing with the momentum of the previous price swing in the opposite direction.
- Is the current price accelerating or decelerating? What does that mean?
For more details, please read the following Advanced Price Action Analysis article
Development of accumulation or distribution
- The trader will buy aggressively in the vicinity of previously established market support points, as he is convinced that a rally will generate sufficiently.
- When the trader notes diminishing demand in the rallies from each support point, he recognizes that his opportunity for successful speculation on the ‘Bull’ side is also diminishing
- Ultimately, a worthwhile opportunity on the long side is gone, and the professional switches his position. Becoming a short seller at rally tops increases the supply of stock and this increase intensifies the progressing imbalance favoring the sellers over the buyers. Again, the transition to a trend condition is accomplished with the line of least resistance now being a bearish one
TREND and swing
Let’s combine all the above factors. Conventional technical analysis says the market moves in the up-down wave, what we call market swing. In a healthy bull trend, the upswing generally exceeds the downswing in length, the reverse is true for the bear market. When a trend fails to make a new high (failed rally), it possibly indicates a trend change (sideways or reversal).
Volume traded in each swing
Volume (when to buy/sell/exit) of trading on alternative buying and selling waves
- Increasing or decreasing the pressure of supply and demand
- Buying and selling climax
- Activity or intensity of trading (the ability of bull and bear to attract following on advances and decline. rallies and reaction
- Characteristics of supply and demand whether urgent, timid, or aggressive
For more details, please read the following Volume Price Action Analysis article
Volume and price of each swing
Volume and price movement provide the greatest aid in:
- Determining the direction of coming moves.
- Deciding when to buy or sell.
- Knowing when a stock is on the consolidation
- Knowing when a move is ending.
For more details, please read the following Volume Spread Analysis article
In the next article, I am going to discuss Supply and Demand Trading in detail. Here, in this article, I try to explain Market Structure through Swing. I hope you enjoy this Market Structure through the Swing article. Please join my Telegram Channel and YouTube Channel as well as my Facebook Group to learn more and clear your doubts.
About the Author: Pranaya Rout
Pranaya Rout has published more than 3,000 articles in his 11-year career. Pranaya Rout has very good experience with Microsoft Technologies, Including C#, VB, ASP.NET MVC, ASP.NET Web API, EF, EF Core, ADO.NET, LINQ, SQL Server, MYSQL, Oracle, ASP.NET Core, Cloud Computing, Microservices, Design Patterns and still learning new technologies.