Identifying a Swing Pattern
Now that we’ve gone through and identified what the formations are in the last chapter, let’s go through an example.
Just like in math class, you first have to learn how to do long division by hand before you can use a calculator. So, first, we’ll go through the process of identifying a potential formation by hand before using The Swing Toolkit.
If you are already familiar with trading Swing Patterns, then the following process will be very familiar to you.
Steps to Manually Analyze a Swing Pattern
Next, you measure the XAB retracement. In this case, point B comes in near the 61.8%, as you can see below. Thus, this could be a one of two patterns (based on our Swing Patterns learned in the last chapter). No other formations could be valid, since this XAB retracement is either too small or too large for them to be valid (for example, another pattern may require a 78.6% retracement and this is only 61.8%).
Next, we determine XA and BC projected zones. If this is a valid pattern, then we expect point D (our potential support area) to fall within 2.24 to 3.618 of the BC projection (blue box) and 1.618 of the XA projection (maroon line). These levels are referring to the formations from Chapter 2. Thus, we have the potential area illustrated below:
However, the XA projection line (maroon level) does not fall within the BC projection area (the blue box between 224% and 361.8%). These two zones must intersect for the formation to be valid. Thus, this is an invalid formation!
Next, we determine XA and BC projected zones. To test for a pattern, we do the same thing as above, but use the Fibonacci ratios that the formation requires. In this case, we expect point D (our potential support area) to fall within 1.272 to 2.618 of the BC projection (blue box) and 0.786 of the XA retracement (maroon line) (referring to the formation from Chapter 2). Thus, the formations gives us the potential support area illustrated by the maroon line and blue box.
We have a match! The XA leg retraces to a price (maroon line) that falls within the BC projection zone (the blue box). Thus, we know to look for a potential support around that area.
Phew! That was a lot of work. Now that you know how to do it by hand, it’s time to use your “calculator” (the Pattern drawing tool) and find the formations quick!
Now, The Swing Toolkit way!
As expected, there is only one valid formation, the same formation we found above. It also identifies the same potential support area we found above (indicated by the dotted green line within the box). All from drawing a single line!
Using the Swing Pattern tool, you simply draw a line from point C to point X and the rest is done for you!
As you can see below, if we play the chart forward, the market came within a few ticks of our level and took off like a rocket!
Of course, not all trades work out this well, but the accuracy of these patterns definitely make it my primary tool in my trading toolbox! As always, it’s important to have a method of triggering (entry) and proper money management (targets and stop placement). (Always use a stop!) These are topics we will cover in a later chapter.
Final Thoughts
Preferred Platforms
