I often get asked how I draw my swing charts.
This surprises me as swing charts aren’t new. They’re old. Very old. Traders and analysts have been using swing charts to help smooth prices for over 100+ years, from Charles Dow to Ralph Elliott to W.D Gann etc.
Swing charts aren’t a secret in trading.
However, having said that, I still get plenty of questions on how I create swings.
A typical inquiry usually comes like this;
I can’t find anywhere in your books where you explain how you define swing points. In your books you mention overlaying swing charts to help identify turning points. So I’ve searched everywhere and what I’ve found is a multitude of definitions of what constitutes a swing point. Where the definitions include variables that can be adjusted, whether it’s a number of bars or percentage change used to define a swing point, to mention a couple.
You say swing charts are objective. You say swing charts have no parameters to vary. You say that you, or not anyone, can vary or adjust a swing chart. You say or imply swing charts represent the market and not opinion. You say they’re objective.
Yet in my search there appears to be an infinite number of definitions with a multitude of parameters to vary?
I guess my question is how do you define the swing points in your swing charts?
I trade off daily bars.
In a nut shell I allow the market to create my swing charts.
To define a swing point, whether it’s a swing high or low, at its simplest I let a daily bar break to create a swing point on a swing chart.
If daily bars are moving up, making higher highs and higher lows, I look for a break of a previous bar’s low. If this occurs a swing high is created on the previous bar’s high.
If daily bars are moving down, making lower highs and lower lows, I look for a break of a previous bar’s high. If this occurs a swing low is created on the previous bar’s low.
However issues arise when either inside or outside bars appear. Unless you have intra-day data a trader will not know whether an inside or outside bar’s high or low is created first? This represents a dilemma.
I have hard rules on how to deal with them that I share with traders who own my models.
How I deal with them isn’t particularly revealing however it’s how I do it and I only share them with traders who support my models.
I don’t use any variables or parameters that can be adjusted. I just have hard rules that I follow. My swing charts are 100% objective and are created by the market’s daily price action.
Traders who don’t have my models will need to determine how they’ll treat inside and outside bars themselves. It’s not an impossible task to achieve, but one that will require concentration.
Swing Charts with Variables
One note of caution if you use swing charts that contain variables.
If you do you’ll need to be aware that by doing so you are adding an extra layer of complexity to your strategy. An extra layer of complexity that will add additional equity curves to your strategy’s Universe of Alternative Equity Curves (page 156, The Universal Tactics of Successful Trend Trading) along with their additional expectancies and risk-of-ruin calculations.
There is no problem in using variables in your swing charts as long as your Universe of Alternative Equity Curves do not contain any risk-of-ruin calculations above 0%.