Here is a simple intraday trading setup based on the Higher Swing Low (HSL) technique. The chart timeframe for this intraday strategy is 3 minutes.
Interestingly, you can use this setup to trade stocks, equity indices, commodities or even currencies. Further, you can use any instrument to trade it i.e. cash (equity shares), futures or options. Also, with this strategy you can trade in a bullish as well as a bearish market.
We will use the HSL(Higher Swing Low) technique to identify the trend and a candlestick pattern to confirm the trade setup. Hence this strategy is going to be a combination of both HSL technique and a candlestick pattern.
There are a couple of terms we need to know before we move to the rules of the strategy. Let’s take a look at them below.
Swing low - This is a point where the price makes a low, takes a pause and bounces up f. So, the low point from where the price bounced back is called the swing low.
Uptrend - This is when price makes higher lows. When price moves up from a low point to a high point, it won’t give one directional move. Instead, It will make swings as it moves upward. In simple terms, once the price forms a new high, the formation of the next high should be higher than the previous high. This is where we can say that the price is in an uptrend. We need to see a minimum of two swing lows to decide on the trend and look for a trade setup at the third swing low zone.
Let’s understand the step -by -step process as to how to analyze and trade using this strategy. This is a bullish or long -only setup.
Steps of the setup:
To understand this strategy better, let’s analyse the Nifty spot chart in the example below.
Step 1 : We have to start from a distinct low. Ofcourse, it is impossible for us to enter at the lows and exit at the highs. We need to see the price going upwards by creating two swing lows in the process. After we get two swing lows, we can say that the price is in an uptrend. We will look at a price chart on Upstox pro web platform to understand step 1 better.
Look at the points A & B on the price chart. Those points are two swing low points. If we look at the price movement from A to B, we can clearly see the price is making higher swing lows (B point is higher than the A point) . A point here is our distinct low(first low) and B point is our second low. Once the price moves up from point B, we can confirm that it's an uptrend.
Step 2 : We have now identified an uptrend. In order to confirm our analysis and take a position, we will have to hunt for a bullish candlestick pattern at the third swing low (C point)
In the above chart, you could see a piercing line candlestick pattern marked in a black box. The formation of the third candle, which is green in colour is the point where we can say that the existing uptrend will continue after a brief correction.
We can also look for a potential third swing low (C point) by using the trendline tool. We connect the points A & B using a trendline. This trendline will act as a support to the price. We can see how the third swing point (C point) took support at the trendline and formed a bullish candlestick pattern indicating that the price will halt here and start its journey upwards again.
This confirms our analysis. Only after getting a bullish candlestick pattern at the third swing low point, we will trade this setup. Now that the analysis and confirmation is done, let us see how we can trade the setup with a defined entry, exit and stop-loss.
Step 3 : Let's understand with the help of a chart as to what price we enter, where do we keep our stop-loss and when do we exit (target).
We can see the GREEN line (17474) that's where we got the confirmation after the piercing line candlestick pattern was formed. That is our entry point. We will enter around those levels at 17474. Since Nifty spot can’t be traded, we can look to trade Nifty futures or options. If you choose to trade options, you can buy an ATM (at the money) strike price call option. In our example, the market price is at 17474 and the nearest strike seems to be 17500 call option. Since it’s an intraday trade, you can choose weekly expiry rather than a monthly expiry contract.
Now, let’s consider stop-loss. You can see the RED line (17433) which is the trendline support. That's 41 points below the entry point of 17474. If the Nifty reverses from this point and hits 17433 (our stop loss), then we will take a small loss and exit our position.
Since it’s an intraday and a quick trade, the chart timeframe being 3 minutes, we will aim for a risk to reward of 1:1. In our example, the risk being 41 points, we will aim for a target of 41 points too from our entry price which comes to 17515 (17474+41)
You can see the PURPLE line (17515). Once our price hits 17515, we will exit our 17500 call option.
We hope this HSL(Higher Swing Low) strategy was simple and easy to understand. You can try spotting it on charts and see if you are able to identify such setups.
We’ll come up with an article on how to use the same strategy to identify a bearish setup, which is called Lower swing highs (LSH) technique.
Until then, happy trading!