The idea of the swing chart is to break the market down so you can see its direction. Here's the chart with the swing added
This is done as follows. Each bar in a bar chart can be classified as either Higher, Lower, Inside or Outside. A Higher bar has a higher High and Higher Low. A lower bar the reverse. An Inside bar has a higher low and a lower high, it does not exceed the boundaries set by the previous bar. An outside bar has both a Higher high and a Lower Low.
The swing is determined by identifying the High and low points of the swing. Each bar is looked at in turn. For this example I will describe an up swing but it is reverse for a down. For the swing to go up there needs to be two Higher bars in a row, if there is a Lower bar the count starts again. Inside bars are ignored and outside bars are skipped without changing the count, but the next bar needs to exceed the high of the outside bar to cause a change in direction
Now that weve determined the swing we can use this to determine the direction of the market. The market either goes up, down, or sideways. This tool is no good for determining a sideways trend but is very useful for up & down. The simplest definition of an Up trend is Higher High's and a Low trend is Lower Low's (Not exactly rocket science). Now that the Gann Swing clearly shows us the highs and lows we can tell the direction of the market by looking for when either the high or the low is exceeded. If we assess the direction as Up and a low is then broken by a lower low the direction is now down.
This helps to give some order to the market. Presumably if we buy when the trend is up and sell when the trend is down we should do OK. The only problem is when markets are sideways.
This is the first building block in the trading system, it helps give a reference to overall market direction, it also give support and resistance levels by identifying key Highs and Lows. My next blog will cover position sizing using this so that we will always know the maximum loss / risk
