So far in this mini-series on swing trading, we have discussed the fundamental metrics to look at in order to choose the right candidates for swing trading. We also understood the concept of swing breakouts on Renko charts, which are an important breakout participation technique for swing trading using Renko charts.

In today’s newsletter of ‘Trading the Swing’ series, we will see how to participate in swing trades on OHLC (Open, High, Low, and Close) a.k.a Candlestick charts. We participate in swing trades on these charts using Market structures. Let us first understand Market structures and then look at some of the examples on the charts.

Market Structures - The turning points

When I began my trading journey, like many others, I started by learning candlestick charts. I familiarized myself with popular patterns such as Doji, Engulfing, Head and Shoulders, and Piercing patterns. As I delved deeper into research, I came across a concept that significantly enhanced my understanding: Market Structures. This three-candle pattern, documented by Dr. Ron Lockhardt, was thoroughly explained in Michael Jardine’s book on Fibonacci Trading, which became a key resource for me.

Market Structures represent crucial price formations that occur at pivotal points in a trend, often as part of pullback trading strategies. To visualize them, think of a wave: in any upward or downward trend, prices don’t move in a straight line. Instead, they advance in a wave-like manner, following the larger trend but experiencing smaller pullbacks along the way. Market Structures appear at these critical pullback points, providing valuable insight into price behavior.

There are two primary types of Market Structures: Market Structure High (MSH) and Market Structure Low (MSL). MSH signals a bearish pattern, while MSL indicates a bullish one. In an uptrend, you’ll notice more MSL formations than MSH, reflecting the dominant bullish sentiment. Conversely, in a downtrend, MSH patterns will outnumber MSL.

The accompanying image illustrates MSL and MSH patterns. A notable variation of these patterns is the presence of an Island candle, where the middle candle does not overlap with the other two.

In an uptrend, prices form progressively higher MSLs, while in a downtrend, they produce lower MSHs. Recognizing these formations offers a straightforward way to identify the prevailing trend of a stock, making them an invaluable tool for traders.

Using MSH and MSL for swing trading

Let us try and build a trade system using MSH and MSL for swing trading on OHLC Daily Timeframe charts:

1. Shortlist Fundamentally Strong Stocks
   Start by identifying stocks with robust fundamentals.

2. Check Relative Performance
   Assess if the stock is outperforming the broader markets.

3. Confirm the Trend with 21-period EMA channel
   Add 21-period EMA channel to the chart. Price trading above EMA channel suggests a bullish trend

4. Enter upon MSL completion
   Place your trade when the price forms a MSL near the EMA channel

5. Set a Stop Loss
   Set the low of the MSL as your stop loss.

Observe the chart below of COCHINSHIP, ANANTRAJ, and POWERINDIA. The boxes marked show MSL pattern. The price was trading above the EMA channel, suggesting a bullish trend. The MSL could have been an opportunity to participate in a swing trade discussed above.

MSL and MSH are among the lesser-known price formations within the trading community, yet they play an indispensable role in my analysis. While this is just one of the patterns I rely on, every trader develops a mix of patterns—some for analysis and others for actual trading participation. Understanding these patterns, even if they aren’t directly used for trades, is essential for building a well-rounded analytical approach.

I explore OHLC charts in depth in my course, How to Trade Candlesticks, where I guide participants through their nuances and applications.

If you are new to trading and curious about OHLC charts, the TNT One membership could be a great starting point. It grants you access to all current and upcoming courses, providing valuable insights and practical strategies to enhance your trading journey.

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