DEFINITION of Swing High
Swing high is a term used in technical analysis that refers to the peak reached by an indicator or a security’s price. A swing high forms when the high of a price is greater than a given number of highs positioned around it. A series of consecutively higher swing highs indicates that the given security is in an uptrend. A swing high can occur in a rangebound or trending market. The opposite of a swing high is a swing low.
Example of a Swing High
BREAKING DOWN Swing High
Swing highs can be used by traders to identify possible areas of support and resistance, which can then be used to determine optimal positions for stop-loss orders. If an indicator fails to create a new swing high while the price of the security does reach a new high, there is a divergence between price and indicator, which could be a signal that the trend about to reverse. A swing high may be part of a broader chart pattern, such as a double top or head and shoulders formation. (To learn more, see: What Does it Mean to Use Technical Divergence?)
Trading Using Swing Highs
Traders can use the following two strategies when using swing highs:
Trending Strategy: Swing highs in an overall downtrend form at the end of retracements. Traders could take a short position once a swing high is in place and momentum reverses back to the downside. Indicators and Japanese candlestick patterns could be used in conjunction with the swing high to increase the chance of a successful trade.
For example, a trader could require that the relative strength index (RSI), was overbought (above 70) when price made the swing high and that the three black crows candlestick pattern has subsequently appeared to confirm a return to the overall downtrend. A stop loss-order could be placed above the swing high to minimize losses if the trade does not move in its intended direction.
Range Bound Strategy: During periods of consolidation, traders could initiate a long position at a swing low and use a corresponding swing high to set suitable profit targets. For instance, a risk-averse trader might set a profit target halfway between the two swing points. Aggressive traders may set a profit target at the swing high.
The Fibonacci retracement tool can also be applied to the chart to show probable resistance areas between the swing high and swing low. For example, in the chart of the Standard and Poor’s 500 index (S&P500) below, traders who went long near the swing low could set a profit target at either the 38.2, 50%, 61.8% or 100% Fibonacci level. (For further reading, see: What is Fibonacci Retracement, and Where do the Ratios that are Used Come From?)