Learning to Swing Trade - Exploration

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Friends,
Gann methods are not restricted to only swing charts more importantly it is more in focus with price ranges, time periods, trading plan, stoploss, risk management, price forecasting, angles movement, squrares, anniversary days etc.
It needs a lot of awareness which definitely requires too much sweat and handwork of years.
Sankoorikal

Hi, sankoorikal,
Thank you. I am limiting myself to use only Swing Charts, Stop Loss, Risk Management and may be price forecasting.

The method I am going to use is that

to develop Modified Swing Charts with the use of Gann Charts (so my concern is only to understand basics of Gann Charts),

Point & Figure charts to take a broader view.

Finally integration of P&F charts with Modified Swing Charts to give final trading signals.

 

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Gann Swing Chart

Let me remind you that we donot actually need a Gann Swing Chart. But understanding a Gann Swing Chart will help us to proceed further.

A Gann Swing Chart is a line superimposed on a bar chart highlighting the swing highs and swing lows. As prices go up, one draws a line connecting the daily highs of the share price. Inside days (ie lower high, higher low) are ingnored. Down days are ingnored until, as per Gann, three consecutive down days occur. At that point, the line swings to the buttom of the third bar, and is connected to each lower low made by the bar chart. Again inside days are ignored, as are up days until there are three consecutive days up.

The result looks like an irregular wave pattern.

Attached chart is to display how a Gann Swing Chart looks like.

 

[darkstar]

A LEGEND - WD GANN

An extract from his interview



Just what he made out of his theory.



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COMPARISON OF DOW THEORY TO GANN

There are several elements to Dow Theory. But, important one is, from the price action, when a bull market turns into a bear market and vice versa.

We know that a bull market has higher highs and higher lows. It best compares to an irregular staircase. After the market has made a swing low (shown as A on the chart) and its resumes its uptrend, it is a warning sign when the next upward swing fails to make a new highs. See point B on the chart one. The price action suggests that the enthusiasm of buyers is eroding. When the subsequent downward swing breaches a previous swing low, the erosion of support from buyers is confirmed. This is a sell signal. See Point C on Chart one.

In Dow Theory these swings would be substantial swings lasting many weeks if not months.

But Dow Theory did not regard it as a sell signal if, after making new highs, the subsequent downward swing breached a previous swing low. (See Chart Two).

There would need to be a lower high, before the swing low was breached, as in the first chart. It is in this respect that Gann swing charts differ from Dow Theory. In Gann Swing Charting theory, a sell signal is generated whenever a prior swing low is breached (whether or not the last swing high was lower than the one before that). The swings in Dow theory last many weeks or months, whereas in Gann swing charting, a valid swing low may be created by a retracement lasting just 3 days.

daily i read your article its really very good their language, simplicity really nice

 

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Even though the message conveyed by Point & Figure Charts is a first step to take the view of the market in general and stock in particular, I feel swing charts alone are sufficient to trade index futures and options.

It is entirely possible to time the markets and to trade index futures and options by using swing charts alone. If we don't like point & figure, so be it. The Swing Chart is a winner all by itself.

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MODIFIED SWING CHARTS.

The modifications which are going to be made to Gann's swing chart is an attempt to make the swing charts as effective as possible from a trader's perspective and to enhance the timing of the market.

Here modification does not mean that we need draw an entirely new swing chart. What it meant is that interpretation and trading can be done from an ordinary bar chart.

It is the highs and lows recorded by the bar chart which are important. Please remember that 'close price' has no relevance in this respect.

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Let us examine important terms we are going to use in due course.

UP DAY - A day with a higher high and a higher low than the previous day.

DOWN DAY - A day with a lower high and a lower low.

INSIDE DAY - A day with lower high, higher low. These days are generally ingnored.

OUTSIDE DAY - A day with Higher High, lower high. These days represent significant price action, hence receive variable treatment.

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FAULTS WITH GANN SWING CHARTS

I am not sure whether I am competent to pin point faults with Gann. Unless I say the faults, I cannot modify them for my use.

The main focus of a Gann swing chart and Modified Swing charts is the identification of relevant countertrend rallies/dips. These form a reference point both for trading and for determining the trend.

Gann regarded a oneday rally in a downtrend as irrelevant, however substantial the rally may be. What his method seeks to do is to focus on those corrections in a short term trend which portray an important level where supply exceeded demand, or vice versa. So, the problem is how to identify the important, and exclude the unimportant.

In a downtrend, the standard Gann Swing chart turns up and registers a countertrend rally, a swing high, only when there are 3 consecutive days of higher highs. Here, I find the first fault with Gann Swing Chart. Much worse is that the countertrend rally is over and the main downtrend has resumed only when there are a further 3 consecutive days down. Undoubtedly, Gann Chart gives us a very good idea of direction, but the stipulation that the main downtrend has resumed only if there are 3 consecutive days down is counter productive for traders.

Hence, modified Swing Charts has a great and tricky responsbility to determine in real time exactly when that turning point has happended.

 

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EARLY BIRD CATCHES THE WARM

Like Gann, let us look for a 3+ day movement to identify a countertrend swing, but trade with the trend on the first day after the counter trend swing appears to end. In other words, use a 3 day swing chart to set up the trade and 1 day swing chart to activate the trade.

In a netshell, after the market has a 3+ day rally in a bear market or a 3+ day decline in a bull market, the first day that the market reverts to trend means a swing high in a bearish market or a swing low in a bullish market has been established. Things getting complicated? It is simplicity itself but merely complicated to describe.

Let me try to explain the concept with the help of a chart.

A big slanting upwards arrow indicates that the stock in a bull phase. We are looking for a dip and take positions on first sign of reversal in line with the main trend.

See the small arrow pointing upwards. It is the 3rd day making lower high and lower low. Hence expect reversal on the next day. The next day is a greenish Bar and has pierced the high of 3rd day bar. Hence take long positions on the same day just above the high of 3rd day high.

For now, let us not see what happended to the price thereafter or targets or stoplosses which we would cover as the learning continues and Swing Trading unfolds. Let us restrict ourselves to the point of entry based on the theory "Early bird Catches the Warm".

 

[tvrssvk]

continue dude....doing a great job

 

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Hope friends have understood that I have already modified Gann Swing Chart once with "Early Bird catches the warm" in my earlier post. Thus, our first modified Swing Chart is in place.

Second modification is that what if the third day is an outside day.(Outside day is defined in my above posts). Just treat it as if it is continuation of the same trend. Please remember that many Swing Chartists follow this rule.

Third modification is that "is it compulsory for three consecutive days". Just modify our requirement to that three days need not be consecutive. That is to say we are looking for complex swings.

Let us understand these theoretically. We will try to examine them as the case we come across.

From next post onwards, we will look for Swing Signals. The above modifications will be discussed as the case deserves.

 

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Friends,
Let us test our understanding of the concepts on the historical charts of Unitech.
Unitech has made a swing high. Now, heading for a dip. Let us count three down days. 1, 2, 3 downdays marked on the chart. On the fourth day, we should buy above 3rd downday high. OK initiate BUY. Keep the STOP LOSS just below the low of 3rd downday.
Watch the EOD of the 4th day. Buy order is not initiated. Also, we can find that the Low of 3rd downday is breached. Hence, the Low of third downday is compromised and a new low is made on 4th downday. Our Buy order above 3rd downday HIGH is continued since the fourth day high is also at the same levels.
That is to say buy above 4th day high and keep stop loss below 4th day low.
Let us wait and see how the price moves upwards.
What would be our action in the next chart as I am going to unfold the chart.

 

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Unitech has breached the high of the fourth day and our buy order got executed on fifth day.
Now keep the stop loss just below the low of 4th day.
Price climbed up till ninth day. On 10 th day it was a Low day. Sell just below the low of ninth day and book profits.
Donot forget to move your stop losses as the price moves higher.

 

[LOVETHEROVER4]

thanku sir

I am also interested in same subject u r doing a great job sir will u put light on suzlon that is started going up today it is closed above 50% retracement.
A reversaL has taken place or just a rally?