by Rick Ratchford
If you are using price charts in order to analyze the markets and make trading decisions, then it is imperative that you become a master at reading this portal to market action. There is a wealth of information that can be gleaned by simple 2-D (price and time information) price charts that many fail to retrieve.
For years I have drawn and micro-analyzed thousands upon thousands of price charts to help me forecast market price action with precision. There are countless numbers of market forecasts that I have published on public online forums and newsgroups that support my qualification in helping traders work towards mastering their chart reading skills.
In some of the articles I've written over the years, as well as many of the lessons provided to my membership clientele (http://www.profitmaxtrading.com), I've covered the basics that all chart readers need to understand about price charts in order to get the true pulse of the market. Everything starts at the basic level that I call the 'swing'.
Understanding price 'swings' are extremely important in order to properly read a price chart. Trends, which we have all been taught is what we should be trading with, is best identified by the current grouping of 'swings'.
W. D. Gann shared a great amount of information in his various books and course dealing with 'swings'. He describes the basic identification of swings that has not changed to this day. My understanding of swings was derived by Gann's teachings.
There are two types of swings. 1) is the swing top and 2) is the swing bottom.
When identifying whether a price bar is a swing, you always want to compare that price bar with the one immediately preceding it. If the price bar in question has a high that is "equal to or higher" than the previous price bar and is eventually followed by a price bar making a lower low (while our price bar high in question is still the high), it is considered a 'swing top'. A swing bottom is just the opposite, where you have a low that is "equal to or lower" than the prior price bar low and eventually followed by a higher high.
When you have a series of swing tops and bottoms, you can determine the trend. For example, if you compare swing bottoms to previous swing bottoms and swing tops to previous swing tops, higher swing bottoms and tops identify a BULL TREND. Lower swing tops and bottoms identify a BEAR TREND.
In addition to the above simple rule for identifying a bull or bear trend, there are always minor exceptions that you should consider. For example, where you have a bull trend due to higher swing tops and bottoms, a swing bottom may go lower than a previous swing bottom and still the trend is considered a bull trend. But it may only go lower than one prior swing bottom, not two. Otherwise, the trend is considered 'changing'.
Same for bear trends, where you have lower swing tops and bottoms. A swing top may form higher than a previous swing top, but only one and still be considered a bear trend.
In either case, whether bull or bear trend, if this exception happens more than one time, you then must consider that the trend may be changing or entering a consolidation/accumulation phase, often called a SIDEWAYS market.
Swing bottoms and tops make using trend lines easier to use in analysis. You will often note future swings will react off of trendlines that are drawn using previous swing bottoms or tops. The importance and value of identifying swings because more and more evident when you become skilled at using trend lines for chart analysis. And for the really skilled chart analyst, swings and trend lines will often expose the unseen barriers to price action as well as expose the geometric relationships that exist between swing tops and bottoms and previous price ranges.
There is always a starting point for learning any skill or craft. When it comes to learning to master the price chart, the starting point begins with the identification of 'swings'.