Swing points, and zones instead of lines

Support and resistance are the prices where the market has previously changed its mind. The reason they matter is the same reason candle patterns matter: at those prices, a group of traders took a position, got hurt, and would like to get out. This lesson gives you a mechanical rule for finding those prices and a reason to draw them as zones rather than lines.

A mechanical definition of a swing point

A swing high is a candle whose high is higher than the highs of the N candles on each side of it. A swing low is a candle whose low is lower than the lows of the N candles on each side.

N is your choice and should be stated. This course uses N = 3 for "minor" swings and N = 10 for "major" swings on whatever timeframe you are reading. The point of a number is that two people will find the same swings; "it looks like a top" is not a definition.

Candle 4's high (41.90) exceeds the highs of candles 1-3 and 5-7. With N = 3 it is a swing high. Its low is not a swing low; candle 1 and 7 have lower lows within the window.

             |
           +---+  <- swing high at 41.90 (N=3)
         | |   |
       +---+   | |
     | |   |   +---+
   +---+   |     |   |
   |   |   |     +---+ |
   +---+   |       |   +---+
     |     |           |   |
                       +---+
   1   2   3   4   5   6   7

Why swing points are levels

At candle 4, some traders bought at 41.90 or close to it. They were buying the top of a move that immediately failed. Every one of them who did not stop out is holding a loss, and the price at which their loss becomes zero is 41.90. When price returns to that area, many of them sell to get out flat. That selling is resistance.

At the same time, traders who shorted at 41.90 are in profit and saw their idea work. Some of them will short again at the same price. More resistance.

The same logic inverted makes every swing low a support.

The strength of the level scales with:

• The timeframe of the swing (a weekly swing high has more trapped money than a 5-minute one).
• The size of the reversal away from it (a sharp rejection trapped more people more painfully than a slow roll-over).
• The volume traded near it (more participants means more trapped ones).

Key idea: A swing high is the price where the most recent group of buyers were proven wrong. It is resistance because they, and the sellers who beat them, both have a reason to sell there again.

Why a zone and not a line

Look at the swing high again. The candle's high was 41.90, but its close was somewhere below that, and the trapped buyers were filled anywhere from perhaps 41.50 to 41.90. Nobody bought at exactly one price. The sellers who beat them entered across a similar range. The level is therefore a band of prices, and drawing a single line at 41.90 invites two mistakes:

1. Treating a touch of 41.85 as "the level held" and a touch of 41.95 as "the level broke". Neither is true; both are inside the zone.
2. Placing a stop at 41.95, which is precisely where a wick will reach before price reverses.

A zone is drawn from the extreme (the wick) to the nearest body edge, plus a little. On the example, the zone might run from 41.60 (roughly where candle 4's body meets its upper wick) to 41.90 (the high). On higher timeframes it is often wider, because the wicks are longer.

  41.90 ------------------------------------  <- wick high
        ////////////////////////////////////  <- zone
  41.60 ------------------------------------  <- body edge

A practical rule for zone width: about 10-20% of the average range on that timeframe, or the wick-to-body distance of the swing candle, whichever is larger. If your zone is wider than half an average range, you have drawn a region, not a level, and it is not tradeable.

The most recent swing wins

A chart has hundreds of swing points, and you cannot mark them all. Priority goes to:

1. The most recent major swing high and low (N = 10). These are the boundaries of the current structure.
2. The most recent minor swings (N = 3) inside them.
3. Older major swings that have not yet been traded through.

Once price has closed through a level and moved on, the old level is either flipped (Lesson 4) or dead. Do not keep every line from the past year on the chart. Module 6 covers over-marking as a specific pitfall.

Swing points across timeframes

Because higher-timeframe candles are aggregates (Module 1), a daily swing high is also a swing high on every lower timeframe, but a 15-minute swing high is usually invisible on the daily. When you mark levels, start on the higher timeframe and work down. A level that appears on the weekly, daily and 1-hour charts is one level with three sources of evidence; a level that only appears on the 5-minute is a 5-minute level and should be treated as such.

Try it: On a daily chart, apply N = 10 and find the last three major swing highs and three major swing lows by counting candles, not by eye. Draw each as a zone from the wick extreme to the body edge. Then apply N = 3 and mark the minor swings between them. Look at the chart with only these on it and note how much cleaner it is than the version in your head.

Recap

• Swing high: a high above the N highs on each side; swing low is the mirror. State your N (3 minor, 10 major).
• The level exists because buyers at a swing high were proven wrong and will sell there to get out flat; sellers who beat them will sell there again.
• Draw zones from the wick extreme to the body edge, roughly 10-20% of the average range wide.
• Prioritize the most recent major swings, then minor swings inside them, then old levels not yet traded through.
• Mark from the higher timeframe down; a level on multiple timeframes is one level with more evidence.