What it means
Technical analysis studies price charts to judge where a market may go next. Within the constant movement of prices, a swing low stands out as a turning point where sellers ran out of steam and buyers stepped in.
It is the low of a short-term dip. A common way to define it is by counting bars on the chart.
A swing low is a bar whose low is lower than the lows of the bars immediately before and after it, and some traders require two or three bars on each side. The more bars required, the more significant the swing low, but the later it is confirmed.
Swing lows matter because prices often return to them. A previous low can act as support, an area where buying interest has appeared before and may appear again.
If the price falls below a recent swing low, it is often read as a sign that the uptrend is weakening. In practice traders use the level to manage risk.
A buyer may place a stop-loss order, an instruction to sell automatically if the price falls to a stated level, just below the last swing low. This limits the loss if the view is wrong, and makes it possible to size the trade based on the distance to that level.
Swing lows are not guarantees. Support can fail, and in thin markets a single large order can create a swing low that means little, so many traders look for confirmation from volume or other indicators before acting.
Traders often pair swing lows with swing highs to describe a trend. In an uptrend each new swing low is higher than the last, and each swing high is higher than the one before.
When a new swing low forms beneath the previous one, the pattern of higher lows has broken, and many traders treat that as a warning that the trend may be changing.
In practice
Real-world examples.
Example
A share price rises from $40 to $55, dips to $49 and then climbs again. The $49 point is a swing low, and an investor in the stock treats it as the level that must hold if the uptrend is to continue.
Example
A currency trader marks the last three swing lows on a daily chart and draws a line through them. When the price breaks below the line, she closes her position, taking the break as a sign of a change in trend.
Example
A portfolio manager at a small fund uses the latest weekly swing low on an index as a trigger to cut equity exposure. If the index closes below it, the fund moves 10% of assets into cash.
Formula
Calculation
Position size = Amount risked / (Entry price - Stop price)
Suppose a trader with a $50,000 account will risk 1% on one trade, so the amount risked is $50,000 x 0.01 = $500. She buys a share at $52.00 after a pullback, and the most recent swing low is $48.00. She places the stop at $47.50, just below it.
Risk per share = $52.00 - $47.50 = $4.50
Position size = $500 / $4.50 = 111.1, rounded down to 111 shares
Check: 111 x $4.50 = $499.50, which is within the $500 she planned to risk. The position costs 111 x $52.00 = $5,772.Case study
Seen in the real world.
Northgate Trading is an illustrative, fictional proprietary trading firm with a rule that every position must have a pre-agreed exit. One junior trader bought shares in a retailer at $30 without setting a stop, hoping the price would recover from a dip.
The risk manager showed her the chart. The last swing low was $28.50, and the shares had been bouncing off that level for three weeks, so a stop at $28.20 would have limited the loss to $1.80 per share.
In the illustrative follow-up the price fell through $28.50 and kept falling to $24. The firm adopted a rule that every entry would include a stop based on a swing low, and the trader sized future trades using the risk-per-share formula.
Watch out
Common mistakes.
- Treating a swing low as guaranteed support, when prices can and do break through it.
- Placing a stop exactly at the swing low, where many other orders cluster, instead of a little beyond it.
- Calling every small dip a swing low, rather than requiring a clear pattern of lower bars on both sides.
Questions
People also ask.
How is a swing low different from a swing high?
A swing low is a trough where price turns up, while a swing high is a peak where price turns down.
Why do traders use swing lows for stops?
Because a break below a swing low suggests the buying that supported the price has gone, so the trade idea is probably wrong.
Do swing lows work on any time frame?
Yes, they appear on intraday, daily and weekly charts, though longer time frames are generally considered more significant.
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