Swing Charting
What do Point & Figure charts, Kagi charts, Renko charts, Filtered Waves, and ZigZag have in common? They are all related to swing charting in some way.
What Is Swing Charting?
The basic idea behind swing charting is that when a new price swing breaks through the previous swing’s level in the same direction, more information is added to the chart. The filter is the foundation of this kind of charting. Once prices have moved by the distance specified by this filter, a new line is drawn next to the previous one. In a nutshell, it is a chart that shows up and down price movement of a minimum size, regardless of the time it takes.
A breakout system functions similarly to a swing chart. A buy signal is when a new high is established after a certain number of days, and a sell signal is when a new low is made after a certain number of days. Gann, Merrill, Livermore, Donchian, Hochheimer, Wilder, and Keltner have all written on this for years, and they all employed swing charting in one way or another.
Many swing-based systems use volatility as the basis for determining the parameters for the swing filter. In this manner, the number of days required to compute the swing filter reduces as the present volatility rises.
Swing Charting Techniques
Donchian’s Four-Week Rule was one of the more straightforward swing strategies; if the price is above the highs of the last four complete weeks, buy; if it is below the lows of the last four full weeks, sell (go short). That’s all. You know what? Dunn and Hargitt Financial Services ranked it as the finest of the then-current popular systems in 1970. Numerous swing charting methods are available.
Some people consider three successive new highs to be an uptrend, and they will stay that way until three new lows occur in a row. The list goes on and on, but the idea remains the same.
In his 1977 book Filtered Waves, Arthur Merrill introduced the concept of filtered waves. He only used a proportion of price fluctuation as his swing filter. This technique removes actual price from the decision and can work on almost any time series. For all you engineers, it is just an amplitude filter; it helps remove undesirable information.
A simple example is to display price data identifying only moves of 5% or greater.
Hewlett-Packard Co. (HPQ) Swing example chart from StockCharts.com
It filters out all the small price variations, showing only 5% or greater moves.
A warning, though, is that until prices are reversed by the filter amount (5% in the accompanying chart), the final leg of ZigZag will fluctuate in accordance with the most recent price movements. The turning point, or the moment when prices have attained at least the threshold amount since they reversed, is the crucial element. A turning point indicates that prices have already shifted in the other direction by at least the specified amount. (Please read this paragraph again until you understand it.)
Below is the same price data but with a 10% filter being used. Notice how it removed some of the smaller waves.
Hewlett-Packard Co. (HPQ) Swing example chart from StockCharts.com
Below is a chart using the exact same data, but with a filter of 15%. That is, only moves of 15% or greater are shown by ZigZag. Notice that the small up-move in the last few days of the previous charts is gone. This is because prices have not moved upward by 15% since the down leg started.
Because it helps you stay on the trend, limit losses, and adhere to clear guidelines, swing charting is a useful tool for trading and financial decision-making.
you may be interested in this blog here:
