Identifying Swings and Pivots in the Market
A beginner's guide to analysing market structure
Understanding swings and pivots is key to analysing market structure for profitable trading. Let's break it down into simple concepts.
What are Swings and Pivots?
A swing consists of a peak (high) and a trough (low). It represents the overall move in price over multiple candlesticks on the chart.
For example, an upward swing starts at a trough and goes up to form a peak. Then it reverses down to the next trough again. This full move from trough to peak to trough is defined as one price swing.
The points where a swing reverses from a peak to trough or vice versa are called pivots. They join together two consecutive swings.
Remember: Pivots = Points connecting two swings
Three Types of Pivots
Pivots can be of three types depending on how many candlesticks form the reversal pattern:
- First level pivot: Only one candlestick needed to form the pivot.
- Second level pivot: Two candlesticks on either side of the pivot candle.
- Third level pivot: Three candlesticks on either side of the pivot candle.
First Level Pivots
First level pivots are the most common type seen on price charts.
They form when the current candle makes a clear higher high or lower low compared to the previous candle and the candle after it. Only one candle is needed to form this reversal pattern.
For example:
- Candle A makes a swing low
- Candle B forms a lower low compared to Candle A
- Candle C then rallies higher from Candle B's low
So Candle B becomes the first level pivot low. It reverses the downtrend into an uptrend.
First level pivots indicate basic trend changes from up to down or vice versa. They are useful signposts for traders but have low reliability on their own. Using other indicators or patterns to confirm is advised.
Second Level Pivots
Second level pivots need two candles on either side to form the reversal pattern. This provides more confirmation than first level pivots.
For example:
- Candle A makes a swing high
- Candles B and C form lower highs compared to Candle A
- Candle D then breaks out above Candle C high
Here Candle C becomes the second level pivot high. The two preceding lower highs increase its significance.
Second level pivots catch trend pauses and reversals with more accuracy. But they still need confirmation through other signals like volume, indicators etc.
Third Level Pivots
Third level pivots have the highest reversal significance among the three pivot types.
Why? Because they need three candles on either side to form the actual pivot point. This filters out a lot of false signals.
For example:
- Price makes a swing low at Candle A
- Candles B, C and D form higher lows
- Candle E breaks down below Candle D's low
So Candle D ends up becoming a valid third level pivot low. The three preceding higher lows confirm its importance.
Third level pivots often mark major trend reversals or support/resistance zones with greater accuracy. They are extremely helpful for traders to catch major moves.
The more candlesticks that form the pivot, the more significant it becomes as a reversal signal.
Pro Tip - Higher level pivots have greater reversal power and importance
Identifying Pivot Highs and Lows
A pivot high forms when the middle candle in the pattern makes a clear higher high compared to previous and next candle.
A pivot low forms when the middle candle makes a clear lower low compared to previous and next candle.
These pivot points sometimes mark major trend reversals or pause points in established trends. Understanding them helps traders immensely.
Why Pivots Matter
Learning to spot swings and pivots helps traders to:
- Identify higher highs, lower lows and trend reversals
- Spot key support and resistance levels
- Analyse overall market structure across timeframes
- Improve trade entry and exit timing
So keep an eye out for these swing pivot patterns when analysing any chart or asset! They form an integral part of price action analysis.
I hope this detailed explanation helps you understand these basic concepts better. Let me know if you have any other questions!
I have explained these concepts in video given below from our youtube channel. Check it for more details.
Price action trading part 5 - https://youtu.be/JVTluG18r1k?si=OZBC-FWTfXHNjeED
This 5th video in Price action series explains about market structure - swings and pivot. This video explains concepts of first order pivot, second order pivot, third order pivot, pivot high and pivot low.
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