What Is a Swing Low?
Swing low is a term used in technical analysis that refers to the troughs reached by a security’s price or an indicator during a given period of time, usually less than 20 trading periods. A swing low is created when a low is lower than any other surrounding prices in a given period of time. A swing low’s opposite counterpart is a swing high. Swing lows and swing highs are used a number of different ways to identify trading strategies, trend directions and volatility ranges.
- Marking the trough in fluctuation prices, swing lows are a visually obvious low point in a given collection of trading periods.
- The relative low point in the last 20 or so trading periods will likely be identified as the swing low.
- Swing lows are subjective to the time frame of the observer.
Understanding a Swing Low
A swing low represents a relative low point in price action within a given time frame. On a daily chart, a swing low would likely be the lowest price in the most recent month. A swing low is often associated with swing trading strategies.
Swing traders work on a variety of different time frames, and the swing low price would be the lowest price in the given time frame these traders watch. For some it might be the lowest price in a week, or for others trading on hourly charts, it might be the lowest price in the last few hours. For still others it might be the lowest price in the last hour or less. Because prices fluctuate on all time frames, a swing low is a subjective observation based on the time frame most important to the observer. A typical swing low, regardless of time frame should be rather obvious to even a casual observer as shown in the following example.
In this example, swing highs are marked by the points numbered 1 and 2. The swing low in this illustration is the point marked by the letter B. Letter A is shown for comparison purposes. If a trader were interested in every high and low point in a three-to-four-day period, both of these points would be considered a swing low. For most chart viewers, only point B would be considered the swing low of interest here.
Swing lows can be defined as part of an algorithm, in which case they become more useful. Swing lows and swing highs can be used to determine trends. A series of swing lows and swing highs that are all rising indicates an upward (bullish) trend is continuing. If one of the lows or highs breaks the pattern and posts lower, this becomes a signal that traders or technical analysts will pay attention to and watch for possible trend change. Successively lower swing lows indicate that the underlying security is in a downtrend, while higher lows signal a potential change to an uptrend.
Swing lows are useful for an investor who holds a long position in a security because they can be used to determine strategic locations for a stop-loss order. According to the Dow Theory, if price breaks below a previous low, this movement can be interpreted as the beginning of a downtrend. In the case of an indicator, if it fails to make a new swing low while the price of the security continues to decline, a positive divergence occurs, which could indicate that the downtrend is losing momentum. Consecutive swing lows may also form a trend reversal pattern, such as a double or triple bottom.
Swing Low Trading Strategies
Trend Retracement: Traders can use a swing low to enter a position at a more favorable price in a stock that is trending. To help determine if a swing low is nearing completion, traders can use technical indicators, such as the stochastic oscillator, a moving average or trendline. Ideally, a swing low finds support from multiple indicators.
Traders should wait for momentum to return to the upside before opening a trade. For example, momentum might be confirmed by the stochastic oscillator crossing back above 20, or simply, by two consecutive up days. A stop-loss order should be placed below the swing low to close the trade if price unexpectedly reverses. If the stock continues to rise, the stop can be trailed higher under each successive swing low.
Trend Reversal: Multiple swings lows after a prolonged downtrend could indicate a market bottom is in place. For this setup to be valid, the low point of each swing low should be roughly equal. Often the most recent swing low on the chart is slightly below the previous swing low as the smart money clears out stop-loss orders before moving the market higher.
A trend reversal is confirmed when price closes above the previous swing low’s reactionary high. Traders can set an initial profit target by subtracting the lowest point of the consecutive swing lows from the confirmation point. For instance, if the lowest point is $50 and the confirmation point is $75, the difference of $25 ($75 - $50) is used as the first profit target.