Profit from Swing Points


One aspect that often gets neglected when carrying out technical analysis is location. New traders often get caught up in what candlestick pattern is forming and completely lose sight of the overall context and what the wider price action is telling them.

A large part of price movement is driven by people interacting with the market, their emotions are built into their decision making and therefore we need to add this dimension to our analysis and learn how to capitalise on it.

Swing points in the market make strong areas to look out for future potential trades, simply because they attract so much attention. At Traders Edge focus on the really obvious key swings like the one highlighted in the chart below.

You will notice at these swing points that price had been either selling off or rallying for some time and it would have taken a lot of momentum to cause these moves. You can also see that quite an obvious ‘V’ shape formed when price reversed. It’s these areas we are most interested in.

It’s quite common that when price revisits these areas we see supply or demand step back in again. We also know that people initiate positions on the break of these swings points. Upon price breaking a swing high other traders will often enter short positions on the anticipation of a breakout, this is exactly the area where we can capitalise on that movement.

We can see in the chart below the blue arrow marks the high of a significant swing point, not entirely obvious as we have zoomed in but price had been rallying for some time, supply stepped in and created a significant swing point.

As this is the daily time frame you can see quite some time later price revisited this area at the yellow arrow. The important thing to note here is that price slightly probed above the high of the previous swing point. Undoubtedly many traders will have initiated buy orders on the anticipation of a break out, professional traders and institutions will have recognised this and been able to use that liquidity to sell into. The resulting move is clear with a false break and then a strong move to the downside. This momentum is increased as any long traders will be forced to exit positions with sell orders.

If you scroll back through your charts and look for significant swing points, see how many of them had false breaks, it’s surprisingly common. A hole strategy can be derived from this pattern alone if you study it enough and learn how to apply it. Revisit your charts and let us know how you get on!