Swing highs, lows and the trend

Page 2 labelled each day. This page uses those labels to find the market's turning points, and from them to say which way the trend runs.

Swing highs and swing lows

A swing high is the top of a rally that has finished. A swing low is the bottom of a dip that has finished. Neither is obvious in the moment: a price can look like it has topped out, then push higher the next day.

So the method waits for proof. A dip needs its full count of days (three by default, as page 2 described). Then, once price turns back with the trend, the lowest point of the dip is a provisional swing low. It becomes the swing low only once price has held above it for three more days (by default). Until then the dip might still continue, and the low might still move lower.

A swing high is the mirror image: the top of a rally, which becomes the swing high once price has held below it for the same number of days.

The trend: a staircase

An uptrend is a staircase going up. Each swing low sits above the one before, and, for the most part, each swing high does too. A downtrend is a staircase going down: lower highs, and mostly lower lows.

The method keeps one trend at a time for each stock, either up or down, and every signal is labelled with it (currentTrend in the signals guide).

When the trend changes

The rule for a change of trend is Gann's:

• An uptrend ends when price falls below the last swing low.
• A downtrend ends when price rises above the last swing high.

Only the high and the low count. The close is irrelevant, so an intraday break is enough. The break has to clear the level by a small margin, a fraction of a percent, so that one stray tick doesn't count.

This is simpler than the textbook Dow theory test, which also wants a lower high before it calls an uptrend over. Gann's version acts on the break alone. A swing low may be only a few days old, but it marks a level where buyers recently stepped in, and a price that falls through it has shown that they've gone.

When the trend only pauses

Most dips don't change the trend. A pullback that stops above the last swing low is a pause, and the trend carries on. That's the situation the continuation signals are built for: the dip is where they find their entry.

A break of a provisional low means something different. If price falls through it before it has held for three days, the dip is simply continuing, and a lower low becomes the new provisional one. The trend hasn't changed. It's only the dip that's longer than it first looked.

False starts

The method acts early. It takes the first day of a turn after a countertrend count, rather than waiting for proof. Early entries come with an early stop, close to the turning point.

Sometimes the turn isn't finished: the next day price carries on in the direction of the dip, and the entry's stop is reached. That's called a false start. The dip is still under way, the signal appears again with a new level as the low moves lower, and the method waits for the swing low to prove itself.

False starts are the price of acting early. They come from having a close stop, and page 5 explains why that's worth having.

Where this leads

With bars, swings and a trend, the four signals follow. Page 4 describes each one: where its entry is, and where it's proved wrong.

Next: The four signals.