Trading on a 'swing'
Swing-trading tries to identify changes in trends. The method was developed in the early 1900s by William D Gann. His original rules for identifying trend reversal points were simple and mechanical.
He connected successive highs, if the trend was up, and successive lows, if it was down. A violation in the trend-line could initiate a swing. When three successive sessions of higher highs and higher lows occurred in a downtrend, or three successive sessions of lower highs and lower lows in an uptrend, Gann’s rules indicated a new trend, or a big correction in the existing trend.
He used several subsidiary rules to determine if it was a correction, or a reversal. The basics have been modified many times. But most swing traders still use versions of the original swing charts, connecting successive higher highs or lows and look for trend-line violations to generate buy/sell signals.
Some “swingers” use point and figure (P&F) charting, a method designed to pick up only significant price changes. On P&F charts, only price points are marked, with an “x” for uptrends and an “o” for downtrends in vertical columns. For example, if the chartist decides a 0.5 per cent move is significant, he will draw one “x” if the price moves up 0.5 per cent, and two xs stacked on top of each other, if the price moves 1 per cent.
He will also set a filter for important reversal points (usually thrice the basic price unit) and shift columns when such reversals occur. Moves of less than the basic unit are ignored.
P&Fs offer a clear picture of price support-resistance levels, highs and lows, etc. But apart from ignoring time, they also eliminate volumes, closing rates and other data. There is also a subjective element since the chartist sets what he considers important price intervals and reversal points.
Between August 27 and 31, a three-session pattern of successive lower lows and lower highs occurred with a bottom at 5,348 (August 31). Subsequently, we’ve seen a pattern of three sessions of successive higher highs and higher lows (with one indeterminate session).
Many swing traders will interpret this as a correction (August 27-31), followed by a strengthening of the original uptrend. Most P&F chartists will also read it as a buy signal with the price breaking into a new range. If the breakout is valid, the market should go to a new high of around 5,700-5,750.
There are caveats. One is that volumes haven’t really risen with the breakout. The other is that the intermediate uptrend has moved from a low of 4,786 on May 25 — that’s 16.77 per cent and 14 weeks. Swing traders and P&F chartists both underplay the importance of volume and the latter ignore time altogether. But the time element suggests that this is the kick of the intermediate uptrend and the volume action suggests it won’t be that strong.
The author is a technical and equity analyst