CHART PATTERNS
Swing Lo
Swing Trading With Swing Charts
by Teresa Lo
Here's how you can use swing charts as an indispensable tool for
all your trading.
Of late, swing trading has caught the attention
of many market participants. This migration of traders from "day" to"swing"
trading has most likely been caused by the severe contraction of price
movement in most stocks and stock indexes over the past few years. For
example, Amazon (Figure 1) is a typical high-profile Internet stock. On
January 29, 1999, Amazon's 20-day average true range (ATR) was $10.30.
As of October 31, 2003, the value was $1.93. Roughly, this means it now
takes more than a week for Amazon to cover the amount of movement that
it used to cover in a single day back during the market frenzy, rendering
intraday trading quite a bit less profitable than it used to be.
While there seems to be no lack of information offered on the subject
of swing trading, the meaning of the term swing is often unclear. Let me
provide some insight into how to use swing charts as an indispensable tool
not only for swing trades but also for any type of trading.
BAR-BASED SWING REVERSAL
Prior to the widespread use of computers, two traders laid the groundwork
for defining swing based on the actual price action observed in the markets.
One name that will forever be associated with swing charts is W.D. Gann.
In the same era, technician William Dunnigan conducted research into the
nature of trends and reversals, but did not construct swing charts per
se. In recent years, the late Robert Krausz (author, trader, and STOCKS
& COMMODITIES contributor) implemented what is thought to be an alteration
that Gann made to the method.
What these traders did was make specific rules about what constitutes
an important price reversal. In doing so, they also defined a swing. For
Gann and Krausz, if two consecutive bars made lower lows, a downswing would
be triggered, while an upswing would be triggered if two consecutive bars
made higher highs. Dunnigan imposed more conditions, but what they all
have in common is that swing reversals were deemed to have occurred by
the appearance of specific price bar combinations; therefore, the same
formula could be used across all time frames and markets. The point is
driven home by the title of Dunnigan's last book, One-Way Formula For
Trading In Stocks And Commodities, written shortly before his death
in 1957.
FIGURE 1: THE REASON SWING TRADING IS GAINING POPULARITY. It
takes more than a week for this stock to cover the amount of movement it
used to cover in a single day.
...Continued in the February issue of Technical Analysis of STOCKS
& COMMODITIES
Excerpted from an article originally published in the February 2004
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2004, Technical Analysis, Inc.
Return to February 2004 Contents
