Swing low is a term used in technical analysis that refers to the troughs reached by a security’s price or an indicator. A swing low is created when a low is lower than any other surrounding prices. Successively lower swing lows indicate that the underlying security is in a downtrend, while higher lows signal an uptrend. A swing low’s opposite counterpart is a swing high.
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.
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 unexpectantly 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. (To learn more, see: What is a Common Price Target When Identifying a Double Bottom?)