tactical trader

Whether you are trading intraday or longer term it is important to have an idea of who is in charge: the bulls or the bears. Typically favoured by fans of esoteric (or just plain weird) methods, swing charts and balance points are an excellent way for all traders to determine the current market trend and to identify potentially important levels of support and resistance.

Three day swing charts

Three day swing charts make it easy to observe:

• whether a market is trending up, down or sideways

• important levels of support and resistance

• emotional spikes following a prolonged up or down move

Construction of a three day swing chart is very simple and is best explained with an example. Take a look at the 30 minute chart of the June 2006 eMini S&P 500 futures below:

As you can see the highs and lows for the last three days have been highlighted – that’s all there is to it! The two important price levels are the highest high of the three days (1309.25) and the lowest low (1288.00). On the next day, May 17th, if the price moves above 1309.25 then you will have a bullish bias and if it moves below 1288.00 you will have a bearish bias either for the whole day or at least for the open.

Let’s see what happens next:

Here you can see that the price moved below the three day low of 1288.00 within the first couple of hours of trading giving you a bearish bias for the day. It is also interesting to note that when the three day low was breached the price fell sharply lower illustrating how the three day swing chart allows you to observe important price levels.

Three day balance points

The balance point for a 3 day swing chart is simply the price level half way (50%) between the highest high and lowest low over the last three days. In the earlier example we had a high of 1309.25 and a low of 1288.00 giving a balance point of:

((1309.25 – 1288.00) / 2) + 1288.00 =

(21.25 / 2) + 1288.00 1298.75 =

10.625 + 1288.00 =

1298.625 =

1298.75 (rounded up to the nearest 0.25 point)

As with the swing chart, the three day balance point gives you a bullish or bearish bias for the day depending on whether the market is trading above or below the point. You should always know where the market is in relation to the three day balance point as it is an important benchmark (a market can be in a strong up or down trend and still retrace to the 50% level without signalling a change in trend). You can also look at other points such as the 38.2% and 61.8% levels – two values that Fibonacci fans will be very familiar with…