Mastering Precision: Unleashing Swing Highs and Lows through EMA50 for Accurate Trading Signals
“Just as the full moon commands the tides, big players in the stock market hold the power to sway the market, dictating the rise and fall of fortunes.”
I embarked on understanding the stock market’s big players and their high-low swings for my blog. It was like catching a bouncing ball in a hurricane, but now I can confidently navigate their rollercoaster-like stock movements!
The main technique that every trader should learn in technical analysis is to track the “Big Money”, in other words, Institutional Traders, because they are the makers of the market and they never fail to make profits from any type of market conditions. Following the footsteps of these traders, one can identify the changes in trend earlier than rest of the traders and make a good lump of profit from the stocks. So, the question arises: How to track these big traders? Well, there are multiple techniques and every traders have their own say on this. But the technique I am going to share here is the technique of Swing High and Swing Low using EMA.
Swing highs and swing lows are important indicators of price movements in the stock market. Swing highs and lows are formed when Big Money enters in market.
When Big Money enters the market, swing highs are formed as the price reaches a peak and starts to decline. This can indicate selling pressure from institutional traders exiting their positions. These swing highs also correspond to potential overbought areas, where the buying demand may have reached excessive levels. As a result, the price becomes vulnerable to a reversal or a pullback.
Conversely, swing lows are formed when the price reaches a trough and starts to rise, indicating the presence of buying pressure. Big Money players may enter the market at these swing lows, taking advantage of lower prices to accumulate positions. These swing lows can also correspond to potential oversold areas, where selling pressure has become exhausted, and the price may be due for a rebound.
When swing lows are formed, indicating that big players have entered the market and bought at those levels, it can be advantageous to wait for a price pullback before considering a buying opportunity.
Waiting for a price pullback at swing lows allows traders to potentially enter the market at a more favorable price. The pullback signifies a temporary retracement or consolidation in price after the initial buying pressure. By waiting for the pullback, traders aim to enter the market at a lower price, maximizing their potential for profit.
The question that remains is how to effectively identify and track swing highs and swing lows in order to monitor the activity of significant market participants or big players. Various methods can be employed to identify swing highs and swing lows in the market. In this discussion, we will focus on utilizing the Exponential Moving Average (EMA) with a period of 50 to locate these key turning points.
Moving averages are widely used in technical analysis, with two common types being the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
The SMA calculates the average price of a stock over a specific period of time by summing the prices and dividing by the number of periods. In contrast, the EMA places greater importance on recent prices and uses a weighted calculation. The EMA is derived by:
EMA = (Closing Price * Multiplier) + (Previous EMA * (1 — Multiplier))
The choice between SMA and EMA lies in their responsiveness to price changes. While the SMA provides a straightforward average, it responds slowly to recent price movements. On the other hand, the EMA reacts more quickly to changes in price trends due to its emphasis on recent data.
In the context of identifying swing highs and lows, using the EMA50 can be advantageous. The EMA50 considers the most recent 50 periods and captures price changes more swiftly than the SMA50. This faster response enables traders to make timely decisions based on potential trend reversals or price fluctuations.
By employing the EMA50 to track swing highs and lows, traders gain a more precise and timely understanding of market dynamics. The EMA50’s responsiveness aids in identifying potential turning points and assists in making informed trading decisions.
Now, Coming to the main agenda of this article, how to identify Swing highs and swing lows. Identifying Swing High and Swing Low is a lot more easier than you think. For that, we need two price points lets say, x1 and x2, in the price chart as shown in the candle chart below:
Fig1. “Housing Development Finance Corporation (HDFC) — Captured on May 25th at 3:00 PM”
We are using the chart provided by Trading View. The EMA50 line is shown by the blue line in the chart. The two price candles must have the closing price above the EMA50 line and the low of the two candles must be below the EMA50 line. These are the only criteria required to identify swing high and low between these two prices. Now as we identify the two prices that have closing prices above the EMA50 line, swing high can be identified as the highest price point between these two prices at x1 and x2. Similarly, swing low is the lowest price point between those two price points. Pretty simple isn’t it? More examples are given below:
Fig2. “Reliance Industries(RIL)- Captured on May 31st at 1:55 PM”
Now you got the swing high and the swing low, one question might be in your mind right now, Why EMA50 in particular?
When the price has enough power, volatility & momentum, only then the price can cross the EMA50 line. To have the power and momentum to change the course of the trend is an indication that the big money is on the move, whatever that be, i.e. uptrend or downtrend. Because traders like us never have that sort of power to change the course of the trend and price to that extent. Therefore, EMA50 is a tool that will be useful to know when and where the institutional traders are getting involved in the market. Remember, we are tracking the “Big Money” .
However, despite its effectiveness, the technique of identifying swing highs and swing lows is not without limitations. Understanding these limitations is vital for traders to make informed trading decisions.
Limitation 1: Small Ranges and Market Noise:
While identifying swing highs and lows with this technique is the presence of small range swings. These are minor fluctuations that occur within small price range and may mislead traders into considering them as significant turning points. Failing to filter out these small range swings can result in false signals and consequently impact trading decisions. So, Traders need to avoid these small swings. The chart presented below illustrates an instance of a small swing, which serves as an exemplary demonstration of the limitations encountered in swing high and swing low identification.
Fig:- Avoiding small swing ranges in Kotak on may 2 at 11:00 AM
Limitation 2: Trending Environments:
Another limitation arises when attempting to identify swing highs and lows in trending environments. To address the second limitation, we will dedicate a separate blog to thoroughly explore this challenge and provide professional strategies for overcoming it.
There you go, now you know how to identify Swing High and Swing Low between two price points using EMA50. Swing Highs and Swing Lows are the tip of the iceberg. There is a lot more to explore in the trading world, I have just scratched the surface. There is a lot more you can do using this concept, mastering this concept can take you from a rookie trader to a profitable trader.
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