Identifying Trends through swing points - the 2-step approach.Using swing points i.e swing highs and swing lows, to identify trends is one of the most basic techniques of technical analysis. This is also the building block for identifying price patterns and part of having high probability setups.
Swing points are the maximum or minimum points on a trend or range. A swing high identifies the rising price extreme while a swing low denotes the minimum price extreme.
The concept is simple. A rising trend consists of a series of higher highs and higher lows. A falling trend consists of a series of lower highs and lower lows. The following two charts show a rising trend and falling trend using this concept. First, USDJPY chart showing an uptrend or rising trend. Next, EURGBP chart showing a downtrend using this concept.
In a rising trend or uptrend, when the higher highs and lows are interrupted, we know that a trend reversal has been signaled. For a falling trend or downtrend, when the lower highs and lows are interrupted, we know that a trend reversal is about to take place. But often, people find problems with really identifying a trend reversal.
For example, it is widely taught that to identify a trend reversal in an uptrend, price has to intersect the last swing low. I used to follow that approach until I ran into problems. The same goes for a downtrend where it is taught that price has to intersect the last swing high for a downtrend to confirm a trend reversal. Using this approach, one could believe that a trend has reversed on some cases while in actual fact the reversal has not been confirmed but just a half reversal.
Now, I use the two step approach to confirm trend reversal.
For uptrends: Step 1. Price should first of all make a lower high. Step 2. Then when price breaks the last swing low before the lower high, a trend reversal has been confirmed. Otherwise, price will get to a consolidation or trend continuation. This GBPJPY daily chart illustrates it.
For downtrends: Step 1: Look for price to make a higher low. Step 2: Then when price breaks the last swing high before the higher low, you have confirmed a trend reversal. Otherwise, price will go into a consolidation or a trend continuation.
Note: How significant a trend reversal is can be determined by the duration and magnitude of the rallies and corrections for uptrends, or selloffs and corrections for downtrends.
