The swing chart is, of course, one of my favourite tools for trading markets. If you simply adopted the method of only trading in the direction of the swings you would most likely remove a lot of errant trading against the trend.
The great feature of the swing chart is that if you elect to have the labels turned on, you can easily see at a glance the length or distance of a swing. Sometimes this can be a very good clue to the mood of the market.
Let’s take my market, the SPI for example.
On this swing chart, I have a 1 day swing showing the labels which advise the date, price and distance of the swing and the percentage of the last swing. Let’s look carefully at these figures.
We start with a swing low on September 18 at 6155 which runs up 325 points to end a sideways move. Then we see a retracement of 89 points. This should be immediately recognisable as the Fibonacci number 89, which means we would be on red alert if we were short term/intra day traders holding a long position.
For example, you may be in short on an intra day trade and a swing gap or a wedge appears to indicate upside movement may happen after 89 points down you would be inclined to close that position out for a profit.
The retracement leads to another rally of 341 or nearly a 100% repeat of the previous upward run, then a pullback of 143 points. Surely this number should be ingrained in all of us as 144 is the most important Fibonacci number of all. Once again we can expect to see higher prices once this retracement is confirmed as ended by breaking the prior top.
Now the market has a rally of 298 points, or 155 points greater than the retracement. 155 is a figure mentioned in my book ‘Trading with the Gods’, and again we have a known figure and this just helps us to complete a trade.
The market falls 227 points from the top; you should again recognise 228 as a number from my book. This angle is represented in the pyramids and again is a known number.
Its just fantastic to see these numbers at work in everyday market trading. But perhaps we may have overlooked one important point. The rallies have been getting smaller: 325, 341 then 298: now look at the retracement figures of 89, 143 and 227.
Put simply, the rallies are diminishing whilst the pullbacks are increasing. This should alert us that the market is running out of steam, especially when then next rally is only 159 before an inside bar....there is a very good chance a top is in place or at the very least the sellers are gaining momentum.
This example is on a futures market, but if you look you will find similar examples on stocks, commodities, currencies
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