Swing
charts are a fantastic method of determining the trend of a market.
Gann developed swing charting as a way to reduce the noise or the
volatility that can be seen on daily bar charts. It enabled him to
make definitive choices with his trading which were based on a
mechanical set of rules.
But
to read a swing chart we need to understand how one is constructed
first.
In the following diagram we can see a number of daily bars. Each daily bar displays 4 important facts. They are the Open, Close, High and Low of the trading day. These 4 points are recorded and charted each day.
In the following diagram we can see a number of daily bars. Each daily bar displays 4 important facts. They are the Open, Close, High and Low of the trading day. These 4 points are recorded and charted each day.
Gann
realised that the market would have major trends within minor trends
and not always did these trends align to the same direction. So Gann
decided that by combining the bars together he could follow a single
trend a remove the minor moves.
In
the example below we have 4 trading days. On each day the market made
a higher top and a higher bottom point on bar. These up bars are
essentially indicating to us that the market is moving to higher
prices each day. If we combine the bars together we get a simple line
from the lowest point to the highest point. Our swing chart
construction starts to take shape with a single up bar.
This
up trend of bars is easy enough to read but the 5th
market day provides us with a down bar. A down bar has a lower top
and a lower bottom to that of the previous day.
Now
we need to have this down bar reflected in our swing chart. To do
this we draw a horizontal line across one position to the right and
put in a line down to the lowest price of the down day.
If
the 6th
market day was another down bar we would simply extend the low of the
swing chart bar further down. This would continue until an up day was
made in the market.
In
this example of real data from the S&P500 the 6th
day was actually an up bar. The trend returned and continued to the
up side. Our swing chart needs to reflect this new daily data and
does so by putting in another swing. This time to the upside.
This
method of recording daily data continues until we have a number of
swings in our chart.
We
now have a much clearer picture with of the trends and counter trend
moves. More importantly Gann realised that while the market made
higher tops and bottoms on his swing chart, the major trend was still
running up as well. He could traded the major trend by following the
swings until the market made a lower swing top and bottom. He would
be able to stay with the main up trend and not be deceived into
closing his trade early and missing out on profit taking.
A
couple of variations to the above can occur. We often see that the
market will make an inside bar or an outside bar.
An
inside bar appears on the chart as follows
The
first 2 bars create a single up bar on our swing chart, the inside
day does not have a higher top or lower bottom to the previous day so
our swing bar remains the same. An inside day has no effect on the
formation of the swing chart at this point.
On
the following day to that of the inside day we will most likely see
and up bar or a down bar. An up bar will simply continue the swing
chart up on the same line, and a down bar with a lower low to that of the
inside day will see a down swing formed in the chart.
