If you have ever spent a day at the beach watching the tide come in and go out, you know the water level doesn’t go from high tide to low tide in an instant. The tide rises gradually, moving higher and higher up the sand and then gradually falls, moving lower and lower.
Financial markets move in much the same way. They do not rise from the yearly low one day up to the yearly high the next. Nor do they plummet from the yearly high on one day to the yearly low the next, though sometimes, during a panic, it can seem that way!
Markets move gradually over a series of swings. If a market is rising (a bull market), it will generally make a series of higher tops and higher bottoms before reaching its peak. On the way down, it will generally make a series of lower tops and lower bottoms.
These moves can be identified and measured using a ‘swing chart’.
A swing chart measures each move from a low up to a high and from a high down to the low, and allows us to see the trend in the market. Many traders talk about trend and use phrases like “follow the trend” and “the trend is your friend” but they are often unable to tell you what the trend of the market actually is.
Chart 1 below shows an example of a swing chart on the Australian Dollar (code: FXADUS in ProfitSource.)
click to enlarge
The chart shows a series of higher swing tops and higher swing bottoms, which we would call an uptrend. A swing chart allows us to quickly determine what the current trend of the market is, and which way we should be trading.
Chart 2 below displays the current swing chart as at Tuesday, 24 January, 2012.
click to enlarge
You can see that from December 2011, we have had a series of higher bottoms and for the most part, a series of higher tops. Not a strong uptrend, but an uptrend nonetheless.
This doesn’t mean we should all go rushing out and buy Australian Dollars (especially if you recall last week’s article about at the current ‘wedge formation’ on this market). It simply says that the trend is currently up and that the safer trades are long trades. For now, at least. Short trades should wait until we have a lower swing top and a lower swing bottom..
This article is just an introduction to the basics of swing charts, which are the main charts I use in ALL my market analysis. For a more detailed lesson on swing charts and swing trading, check out David Bowden’s Smarter Starter Pack or come along to a free seminar by clicking on this link. [insert link to TWS seminar here].
I will be watching the weekly swing chart very closely this year on the Euro Bund, which is an Interest Rate Product (code: FGBL-Spotv in ProfitSource and HUBB Investor software).
As American writer, Damon Runyan observed: “The battle does not always go to the strong, nor the race to the swift, but that’s the way to bet!”