How to leverage swing highs in your trading strategy

What is a swing high in trading?

A swing high in trading occurs when an asset's price reaches a peak that surpasses the high points around it. Think of it as a mountain peak on your price chart – it's higher than the ‘hills’ around it. These peaks often act like invisible ceilings, or resistance levels.

Swing highs could be helpful in determining whether a price is about to start heading down or if it’s gearing up to push even higher. They useful for deciding on trade entry or exit points or where to set those all-important stop-loss orders. Furthermore, they are often used in conjunction with other technical indicators to confirm trading signals and improve overall market analysis.

Basic swing highs candlestick chart

What is a swing low in trading?

A swing low in trading is a trough that’s lower than those on either side of it on a price chart. If swing highs are mountain peaks, swing lows are valleys. These low points often behave like safety nets, or support levels.

Swing lows are frequently used with other technical indicators, including swing highs. They can be helpful when considering entering or exiting a trade or placing stop-loss orders on short positions.

Basic swing lows candlestick chart

How does swing trading work?

Swing trading aims to capitalise on short- to medium-term price movements in financial markets. Swing traders seek to profit from the natural 'swing' of price movements that occur within larger market trends. By leveraging both technical analysis and fundamental analysis, swing traders attempt to identify optimal entry and exit points for positions, balancing potential for gains with risk management.

Here's a more detailed look at how swing trading works:

• Identifying swings: traders look for significant price movements – both upward and downward. A notable price increase (swing high) that could signal a subsequent reversal and, in turn, a short-selling opportunity. While a substantial price decrease (swing low) that might indicate a possible rebound and, in turn, a buying opportunity. Swings don’t always follow the overall trend; a swing high could occur within a downward trend

• Time frame: this approach involves holding positions from a few days to several weeks, placing it between day trading and position trading

• Overnight exposure: unlike day traders, swing traders often hold positions overnight, exposing them to slippage due to after-hours news or events, and overnight funding fees

• Analysis techniques: technical analysis uses chart patterns, trend lines, and indicators to find potential entry and exit points. Fundamental analysis incorporates macroeconomic factors or company announcements to support trading decisions

• Diverse markets: this strategy applies to stocks, forex, commodities and more

• Backtesting: seasoned swing traders often backtest strategies using historical data to refine their approach

• Emotional discipline: swing trading requires patience to hold positions through market fluctuations

Swing high examples

Swing highs can happen in any market. Here are examples in stocks and forex:

• Stock market swing high

Imagine a technology stock that’s been in an uptrend for several weeks. The stock’s share price rises from $100 to $120 over three weeks, then experiences a short pullback to $115. It then resumes its upward movement, reaching $130 before pulling back again to $125. This $130-point represents a swing high.

Traders would identify this swing high by observing that it's higher than the previous peak ($120) and the subsequent pullback ($125). This swing high at $130 could indicate a potential resistance level. If the price approached $130 again, traders might expect the stock to face selling pressure (where there are more sellers than buyers). If, however, the price broke above the $130 level, this could signal that the uptrend was going to continue.

• Forex market swing high

Consider EUR/USD rises from 1.1000 to 1.1200 over a month, then pulls back to 1.1150. It then climbs to 1.1300 before declining to 1.1250. The 1.1300 level represents a swing high.

Traders would note this swing high as it's higher than both the previous peak (1.1200) and the following trough (1.1250). This 1.1300 level could become a key resistance point. Traders might use this as a ‘sell’ point, a breakout level, or to set stop-loss orders.

How to trade swing highs and swing lows?

When trading a swing high:

1. Identify the highest point that the market’s price reaches before it starts to reverse

2. Enter a short position as the price begins to fall, aiming to sell at the highest possible point

3. Place a stop-loss above the level of the swing high to manage your risk

4. Set a take-profit at a support level or just above a previous swing low

When trading a swing low:

1. Identify the lowest point that the market’s price reaches before it starts to reverse

2. Enter a long position as the price starts to rise, aiming to buy at the lowest possible point

3. Place a stop-loss below the level of the swing low to manage risk

4. Set a take-profit at a resistance level or just below a previous swing high

Buy and sell signals candlestick chart