Swing Trading and Market Timing Knowledgebase

By: John Crane, swing trading guru

Confirming a Reaction Swing

A Reaction swing will always begin and end with a pivot. This means a Reaction swing in a downward trending futures market will begin with a low pivot point and end with a high pivot point. The opposite is true for a Reaction swing in an upward trending futures market. A Reaction swing requires a minimum of three price bars, including the price bar with the lowestclosing price and the price bar with the highest closing price, and at least one price bar in between. The swing pattern can contain more than three price bars, but requires a minimum of three.

In Figure # 2.3, the low pivot point is preceded by two price bars with higher closing prices, marked at –1 and –2, followed by a price bar with a higher close, marked as +1. This pattern sets up a possible low pivot, but it is not confirmed until there is a closing price above the closing price of +1. In this example, the confirmation occurred two bars later when the price bar marked +3 closed above the close of +1.

reaction swing chart
Figure # 2.3 – A low pivot is confirmed when there is a closing price above the LP (Low Pivot) +1.

A Reaction swing begins and ends with the lowest and highest closing prices—always use the closing price. For example, when a futures market is trending lower, it will always make a low closing price before it begins a corrective rally. This is the beginning of a possible Reaction swing. When this corrective rally comes to an end and then resumes the main downward trend, its pivot point is the price bar with the highest closing price – and marks the end of the Reaction swing.

Figure # 2.4 –Reaction swing begins and ends with closing prices.

Sincebeginning of the Reaction swing started with a low pivot point, the end of the Reaction swing is confirmed with a high pivot before the resumption of the downward trend. See Figure #2.4. The opposite occurs during an upward trending futures market.

Therefore, all you need to know are the dates of the highest closing price and the lowest closing price of the Reaction swing in order to move on to the next step - projecting future turning points or reaction points in the futures market called swing trade dates.

A sell signal is confirmed when a price bar trades below the LP pivot low, this is called the Breakout bar. (The opposite configuration would form a bullish Reaction swing and buy signal.)

In traditional technical analysis, these chart patterns are called flags or pennants. Usually a trader will look at these patterns as a means to estimate the distance the futures market should move if and when it breaks out of the pattern. Although this method predicts a good target area, it is limited as it only offers a one-dimensional approach - that of Price alone.

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**THE RISK OF LOSS IN TRADING CAN BE SUBSTANTIAL. YOU SHOULD, THEREFORE, CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER OR OVER-COMPENSATED FOR THE IMPACT IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT.NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES.