TRADING BASICS

Learn Swing Trading Stock Market Stages Trading Stock Trends Moving Averages Candlestick Charts Stock Chart Volume Support & Resistance Relative Strength

THE STRATEGY

Trading Strategy Traders Action Zone Trading Pullbacks Entries and Exits Elliott Wave Tutorial Market Timing Strategy Learn Chart Patterns Money Management

TOP ARTICLES

How To Read Charts How to Scan For Stocks Adx Indicator Candlestick Patterns How to Trade Gaps Multiple Time Frames How to Short Stocks Fibonacci Retracements

LEARN SWING TRADING

Get a jumpstart on trading stocks!
On this website, you will learn swing trading techniques and strategies that will put you on the path to success. New to trading stocks? This website was created specifically for you! But, learning how to swing trade stocks can be challenging without the knowledge necessary to succeed. The majority of traders fail and lose all their money in the first year! They fail for these reasons:

They do not have knowledge. They do not have a plan. They do not have discipline. But this will not happen to you if you go through and read all of the information on this website. You need to have a plan and then develop the discipline to follow it. In the end, you will win where others have failed.

What is Swing Trading?

Swing trading is a style of trading stocks that attempts to capture short term moves in the stock market. A swing trader typically holds a stock for 2 to 5 days. This is a perfect time frame for those that have a job and cannot "day trade". This time frame is also unique in that you can potentially capture explosive moves in a stock in a very short period of time. As a swing trader... You do not care about the fundamentals of a company. You do not care what kind of products they sell. You do not even care what the name of the company is. You make trading decisions based on the laws of supply and demand - nothing else. Here are the two things that you are interested in... 1. 2. Is there money flowing into this stock or is there money flowing out of this stock? How can I get into this stock with the least possible risk to my trading capital? Thats it! You have be able to answer those two questions in order to be a profitable swing trader. Ok,

STOCK MARKET STAGES

Stage Analysis on a Stock Chart
To trade stocks successfully, you must first understand the four stock market stages that individual stocks and the overall market go through. These cycles tell you if you should be long, short or in cash. Once you are able to identify what stage it is in, you can then trade accordingly to those characteristics. You will either be focusing on long positions, short positions, or you will stay safely in cash - just by glancing at a chart! Here are the four stages that stocks go through. This happens in all time frames whether it is a monthly chart, weekly chart, daily chart, or an intraday chart.

Stage One
Stage 1 is the stage right after a prolonged downtrend. This stock has been going down but now it is starting to trade sideways forming a base. The sellers who once had the upper hand are now beginning to lose their power because of the buyers starting to get more aggressive. The stock just drifts sideways without a clear trend. Everyone hates this stock!

Stage Two
Finally stocks break out into Stage 2 and begins the uptrend. Oh, the glory of stage 2!! Sometimes I have dreams of stocks in Stage 2! This is where the majority of the money is made in the stock market. But here is the funny thing: No one believes the rally! Thats right, everyone still hates the stock. The fundamentals are bad, the outlook is negative, etc. But professional traders know better. They are accumulating shares and getting ready to dump it off to those getting in late. This sets up stage 3.

Stage Three
Finally, after the glorious advance of stage 2, the stock begins to trade sideways again and starts to "churn". Novice traders are just now getting in! This stage is very similar to stage 1. Buyers and sellers move into equilibrium again and the stock just drifts along. It is now ready to begin the next stage.

Stage Four
This is the dreaded downtrend for those that are long this stock. But, you know what the funny thing is? You guessed it. Nobody believes the downtrend! The fundamentals are probably still very good and everyone still loves this stock. They think the downtrend is just a correction. Wrong! They hold and hold and hold, hoping it will reverse back up again. They probably bought at the end of Stage 2 or during Stage 3. Sorry, you lose. Checkmate! Stock market stages occur in all time frames on every chart you look at. This could be a five minute chart of Microsoft or a weekly chart of the Dow. Generally, you want to stay in cash when a stock (or the market itself) is chopping around in a stage one. In stage two you will want to be aggressively focusing on long positions. In stage three you want to be in cash. In stage four you want to be aggressively focusing on short positions.

TRADING STOCK TRENDS

Why You Should Trade Trending Stocks
To consistently make money in the stock market, you only want trade stock trends! But what are the characteristics that make up a trend? Remember when we talked about stock market stages? Well Stage 2 is an uptrend that is characterized by a series of higher highs (HH) and higher lows (HL). Stage 4 is a downtrend that is characterized by a series of lower highs (LH) and lower lows (LL).

This creates a series of peaks and troughs on the chart that you can trade quite successfully. Below is the the beautiful anatomy of stock trends:

Stocks Trends Vs. Trading Ranges

It is estimated that stocks only trend about 30% of the time. The rest of the time they move sideways in trading ranges. This is what a trading range looks like:

Yeah, trading ranges can get that sloppy! There is absolutely no reason to trade stocks that are chopping around like that when you can trade stocks that are in the trending phases. Trying to trade stocks in trading ranges (stage 1 and stage 3) is a great way to chew up your trading capital. Stick with trends! If you look at any stock on a chart that is in a strong uptrend, you will find that the pullbacks are short lived. This gives you a excellent opportunity to buy the stock before it resumes the uptrend. Same thing with stocks in downtrends. The rallies are short lived which gives you an excellent opportunity to short them.

TRADING MOVING AVERAGES

How to Use Moving Averages
Moving averages help us to first define the trend and second, to recognize changes in the trend. Thats it. There is nothing else that they are good for.

The Two Moving Averages

I use two moving averages: the 10 period simple moving average (SMA) and the 30 period exponential moving average (EMA). I like to use a slower one and a faster one. Why? Because when the faster one (10) crosses over the slower one (30), it will often signal a trend change.

On the left side of the chart the 10 SMA is above the 30 EMA and the trend is up. The 10 SMA crosses down below the 30 EMA in late February and the trend is down. Then, the 10 SMA crosses back up through the 30 EMA in April and the trend is up again - and it stays up for several months thereafter. Here are the rules: Focus on long positions only when the 10 SMA is above the 30 EMA. Focus on short positions only when the 10 SMA is below the 30 EMA. It doesn't get any simpler than that and it will ALWAYS keep you on the right side of the trend! Note that moving averages only work well when a stock is trending - not when they are in a trading range. When a stock (or the market itself) becomes "sloppy" then you can ignore moving averages they won't work! Here are the important things to remember (for long positions - reverse for short positions.): 1. 2. 3. The 10 SMA must be above the 30 EMA. The must be plenty of space in between the moving averages. Both moving averages must be sloping upward.

The 200 Period Moving Average

The 200 SMA is used to separate bull territory from bear territory. Studies have shown that by focusing on long positions above this line and short positions below this line can give you a slight edge. You should add this moving averages to all of your charts in all time frames. Yes. weekly charts, daily charts, and intraday (5 min, 60 min) charts.

Support and Resistance?

Stocks will reverse (up or down) at price levels that are in close proximity to popular moving averages but they do not reverse at the line itself. So, suppose you are looking at a chart and you see the stock pulling back to, let's say, the 200 period moving average. Look at the price levels on the chart that proved to be significant support or resistance areas in the past. Those are the areas where the stock will likely reverse.

READING CANDLESTICK CHARTS

How to interpret candlestick patterns
On a piece of paper, write down the following statement with a big black marker: There is nothing on a chart that matters more than price. Everything else is secondary. Take that piece of paper and tape it to the top of your monitor! I think too often swing traders get caught up in so many other forms of technical analysis that they miss the most important thing on a chart. You do not need anything else on a chart but candles to be a successful swing trader! There is nothing that can improve your trading more than learning the art of reading candlestick charts.

Buyers And Sellers

There are only two groups of people in the stock market. There are buyers and sellers. We want to find out which group is in control of the price action now. We use candles to figure that out.

The picture above shows how candlesticks are constructed. The highs and lows of the time period are called the "wicks" and the open and close form the "body". The candle itself is the "range". When stocks close at the bottom of the range we conclude that the sellers are in control. When stocks close at the top of the range we conclude that buyers are in control. Note: In the stock market, for every buyer there has to be a seller and for every seller there has to be a buyer. If a stock closes at the top of the range, this means that buyers were more aggressive and were willing to get in at any price. The sellers were only willing to sell at higher prices. This causes the stock to move up. If a stock closes at the bottom of the range, this means that sellers were more aggressive and were willing to get out at any price. The buyers were only willing to buy at lower prices. This causes the stock to move down. Where a stock closes in relation to the range tells us who is winning the war between buyers and sellers. This is the most important thing to know when reading candlestick charts. We can classify candles in two categories: wide range candles (WRC) and narrow range candles (NRC). Wide range candles state that there is high volatility (interest in the stock) and narrow range candles state that there is low volatility (little interest in the stock). Note that stocks tend to move in the direction of wide range candles. The arrows on the chart below show how stocks move in relation to the range and closing prices:

Wide Range Candles

If we know that stocks tend to move in the direction of wide range candles, we can look to the left of any chart to gauge the interest of either the buyers or sellers and trade in the direction of the trend and the candles.

The importance of this cannot be overstated! You want to know if there is interest in the stock and if it is being accumulated or distributed by institutional traders.

Narrow Range Candles

Narrow range candles imply low volatility. This is a period of time when there is very little interest in the stock. Looking at the chart above you can see that these narrow range candles often lead to reversals (up or down) because: Low volatility leads to high volatility and high volatility leads to low volatility. So, knowing this, doesn't it make sense to enter a stock in periods of low volatility and exit a stock in periods of high volatility? Yes.

Hammers, Doji's and Shooting Stars?

The number one rule when reading candlestick charts is this: You want to buy stocks when nobody wants it and sell stocks when everybody wants it! This is the only way to consistently make money swing trading! I know what youre thinking. You thought this page was going to be about hammers, dojis, and shooting stars. Sorry to disappoint you, but knowing all of the different types of candlestick patterns is really not at all necessary once you understand why a candle represents the struggle between buyers and sellers. Consider this:

In this picture we see a classic candlestick pattern called a hammer. What happened to cause this? The stock opened, then at some point the sellers took control of the stock and pushed it lower. Many traders were shorting this stock thinking it was headed lower. But by the end of the day, the buyers took control, forced those short sellers to cover their positions, and the stock had enough strength to close the stock at the top of the range. When we are reading candlestick charts, why would we need to know the name of the pattern? What we do need to know is why the candle looks the way that it does rather than spending our time memorizing candlestick patterns!

STOCK CHART VOLUME

How to interpret volume on a chart
Stock chart volume is probably the most misunderstood of all technical indicators used by swing traders. There is only a couple of times when it is actually even useful and if you get right down to it, you really could trade any stock without even looking at it. If a stock is trading on low volume, then there is not much interest in the stock. But, on the other hand, if a stock is trading on high volume, then there is a lot of interest in the stock. Volume simply tells us the emotional excitement (or lack thereof) in a stock.

Liquidity
Stock chart volume also shows us the amount of liquidity in a stock. Liquidity just simply refers to how easily it is to get in and out of a stock. If a stock is trading on low volume, then there aren't many traders involved in the stock and it would be more difficult to find a trader to buy from or sell to. In this case, we would say that it is illiquid.

If a stock is trading on high volume, then there are many traders involved in the stock and it would be easier to find a trader to buy from or sell to. In this case, we would say that it is liquid. Lets look at a couple of common volume patterns on a stock chart:

A surge in volume can often signify the end of a trend. Here, on the left side of the chart, this stock begins to fall. Volume increases dramatically (first green arrow) as more and more traders get nervous about the rapid decline of this stock. Eventually everyone piles in and the selling pressure ends. A reversal takes place. Then, in the middle of the chart, volume begins to taper off (red circle) as traders begin to lose interest in this stock. There are no more buyers to push the stock higher. A reversal takes place. Then, on the right side of the chart, volume begins to increase again (second green arrow) and another reversal takes place. This chart is a good example of how the trend of a stock can reverse on high volume or low volume. Mistakenly, some traders think that stocks that stocks that are up on high volume means that there were more buyers than sellers, or stocks that are down on high volume means that there are more sellers than buyers. Wrong! Regardless if it is a high volume day or a low volume day there is still a buyer for every seller. You cant buy something unless someone is selling it to you and you cant sell something unless someone is buying it from you!

Volume and Price

So if all volume represents is interest in a stock, when is it useful? The only time volume is useful is when you combine it with price. For example: Expansion of range and high volume - If a stock is drifting along sideways in a narrow range and all of sudden it breaks to the upside with an increase in range and volume, then we can conclude that there is increased interest in the stock and it will probably continue higher. Narrow range and high volume - If a stock has very high volume for today but the range is narrow then this is called churning. In this case, significant accumulation or distribution is taking place. Ever heard the saying, "volume precedes price"? Many times you will see volume pick up right before a significant move in a stock. You can see that interest is building. On a stock chart, look for volume to be higher than the previous day. This is a sign that there may be a significant move to come.

Take a look at this example...

This stock rallied for three days in a row on relatively low volume. Then, on the fourth day, volume increased dramatically. This increase in volume began the move to the downside. Interpreting volume on a stock chart can be confusing! Just remember that the price action is the most important factor on a chart. All else is secondary.

SUPPORT AND RESISTANCE

Find support and resistance on a chart
Support and resistance identify areas of supply and demand. Supply is an area on a chart where sellers are likely going to overwhelm buyers causing the stock to go down. On a chart, we call this resistance. Demand is an area on a chart where buyers are likely going to overwhelm sellers causing the stock to go up. On a chart, we call this support. Knowing this, it only makes sense to buy at support and sell at resistance! Supply is an area on a chart where sellers are likely going to overwhelm buyers causing the stock to go down. On a chart, we call this resistance. Demand is an area on a chart where buyers are likely going to overwhelm sellers causing the stock to go up. On a chart, we call this support. Knowing this, it only makes sense to buy at support and sell at resistance! Stocks run into resistance (supply) because those traders that bought too late and saw the price go down now want to get out at break even so they sell. Stocks find support (demand) because those traders that missed the move up now have a second chance to get in so they buy. The picture below shows support and resistance and the laws of supply and demand.

Support can become resistance and resistance can become support if prices break through these areas. Here is an example:

In the picture above you can see that once prices fell through support (1) it became resistance (2) and once prices broke through resistance (3) it became support (4). There are varying degrees of support and resistance. On the long side, when a stock falls down to a prior low it is more significant than when a stock falls down to a prior high. On the short side, when a stock rises up to a prior high it is more significant that when a stocks rises up to a prior low. In other words, the more times a support or resistance area is "hit", the more significant it is. In the first picture above, the support and resistance areas are very significant, whereas in the second picture these areas are only somewhat significant. YOUR JOB AS A SWING TRADER IS TO IDENTIFY THE NOVICE TRADERS BECAUSE THOSE TRADERS ARE THE ONES YOU WILL PROFIT FROM.

FINDING RELATIVE STRENGTH

Find Out if a Stock is Strong or Weak
Relative strength refers to how strong a stock is relative to something else. This could be either how strong it is compared to the overall market or the industry group that it is in. If it is stronger, than then we say that it has relative strength. If it is weaker, than we say that it has relative weakness.

Relative Strength
To improve your odds of a successful trade, you want only want to trade stocks on the long side that are stronger than the market itself. One way to do this is to compare it to the S&P500. You can plot it on a chart:

Looking at the chart above we have the stock compared to the S&P500 (black line). In early May, you can see that the S&P 500 began to rally, as did the stock itself, but the stock was weaker than the S&P500. This stock had relative weakness. It eventually sold off. Now look at the chart below. In March, the S&P500 began to sell off but this stock went straight up. This stock had relative strength compared to the market and would have been a great trade (isnt hindsight a wonderful thing?!).

You can also compare stocks to the specific industry groups that they are in. On the long side, you want to be trading the strongest stocks that are showing relative strength compared their industry group. On the short side, you want to be selling stocks that are showing relative weakness compared their industry group. You can also compare different industry groups to each other! For example, on the long side, you can see on a chart which industries are leading the market. Then you can select those stocks in those industries. Ok, by now I think you get the point. You just want to find out how strong or weak a stock is BEFORE you trade it! But wait, is there an easy way to find all of this out? Yes!

Finding Relative Strength or Weakness

Wait until the stock market sells off hard for a few days. Now go through the stocks on your watch list. Which ones are up for the day that the market has sold off? Those stocks have relative strength and those are the ones that you should trading. Why? Because these stocks will be the ones that will move first when the market recovers and will make the most significant gains. Also, look at charts for the various industry groups. Which ones are up on big down days in the market? Those industry groups have relative strength and those are the ones you want to be in. This is completely the opposite on the short side. On big up days in the market look for the industry groups and stocks that are down for the day. These are weakest and the ones that you should be focused on for shorting. Do not underestimate the simplicity of this technique! If you mainly trade on the long side of the market, use the down days in the market to go through your watch list. Find the stocks that are up for the day, showing relative strength. Then wait for the right time to enter the stock. I promise you that doing this one little thing will greatly improve your trading!

SWING TRADING STRATEGY

The Complete Swing Trading Strategy
Now lets put everything together into a swing trading strategy. This trading plan is for discretionary traders. Your success will depend on how well you use your discretion! After you understand the concepts, then modify this trading strategy into a strategy of your own.

Feel free to change things around a little. Maybe you want to add some other kind of technical indicator. Or, maybe you would like to incorporate some fundamentals into the mix. Whatever you decide, make it your own. You will be far more successful with a trading strategy that YOU design, rather than just blindly following someone elses plan! Ok, lets get started with our trading strategy. We will begin by preparing for the week ahead.

Preparing For The Trading Week

On Sunday mornings, I get up early, grab a cup of coffee and head to the computer to get ready for the trading week ahead. I am wanting to know what types of trades I will be focusing on for the upcoming week (long or short). This part is easy. Using our market timing strategy, we look at the moving averages to determine if we will be biased to the long or short side of the market. Staying in cash and out of the market IS a strategy. You do not have to trade! Once we find out what type of trading we will be doing, it's a good idea to get a feel for what will likely affect the market for the week ahead. These are some of the things I look at:

Economic Calendar Industry Groups Charts I look at the economic calendar to see what types of reports are coming out that could influence the market. I also look at charts for all the major industry groups to see which ones are strong, which are weak, and which ones have potential to make major moves. Have a notebook handy next to your computer to jot down ideas about the upcoming week. When you are trading you will forget about your weekend research! Having you notes next to you will come in handy.

Scanning For Stocks

Now well run our scans to find some potential trades. Remember that we are looking for stocks that have pulled back into the Swing Traders Action Zone. Specifically, we are looking for stocks that:

are in Stage 2 or Stage 4 are in strong trends have relative strength or weakness are at a support or resistance level Sift through your scan results and find the ones that show these specific characteristics. Add these to your watch list.

Trading Strategy
Using this trading strategy, we will wait for Williams %R to give us a signal to go long or short. Once that happens, then run through your watch list to find potential trades. It may be that the scan that you ran on Sunday will not offer any good setups, so run your scan again to look for trades using the same criteria as outlined above. Now you are looking for a specific entry into a stock using candlestick patterns. WAIT! Before you get into a trade, make sure you check the news to make sure that they are not coming out with their earnings reports or releasing any other type of financial information.

Once you are in a trade, forget about the market, forget about the news, and forget about opinions! Trade the chart. Use your exit strategy to either take profits or losses. If you have managed your money correctly, then you should have small losses and by trailing stops your profits will cover these and more! The success of this trading strategy relies on your discretion to find good stocks to trade and how well you manage your money. While I cannot guarantee that you will have success with this trading strategy, I will guarantee that some of these concepts will improve your success as a swing trader.

SWING TRADERS ACTION ZONE

The Trading Strategy
The Traders Action Zone (TAZ) is a buy and sell zone on a chart that swing traders can use to identify possible reversals in a stock. This is just simply "area" that we look at to see if a stock that is in a strong uptrend, after pulling back to this area, will likely reverse. First of all, lets take a look at all of the different types of traders involved in the stock market when looking at a daily chart. Then, we will look at where they buy stocks. We'll focus on the long side only.

Position Trader
This type of trader is looking to hold stocks for long periods of time. They buy stocks that are first breaking out of basing patterns into a stage two uptrend. This is likely where you will see institutions buying stocks. This buying pressure is what starts the uptrend. They are hoping that the next two groups of buyers will push the stock higher.

Momentum Trader
This type of trader buys stocks that are, well, showing momentum! They buy stocks right after a major move in a stock and hold for a short period of time. They are hopping on a board a fast moving stock looking to capture short term gains quickly.

Swing Trader
This is where you come in! You are trading the swings within the trend. Here is a chart that may help you to better see how everything unfolds

Now you can see where you fit into the big picture of this animal we call the stock market! Ok, I forgot to mention the day traders that make up each of the individual candles but I think you get the point.

Traders Action Zone

On the chart above you can also see the traders action zone which is the area in between the 10 sma and 30 ema. This is where you, as a swing trader look for reversals back to the upside when going long and reversals to the downside when shorting stocks. I've drawn arrows on the chart to show where you get buy (green) signals and short (red) signals to enter a stock. Pretty cool, huh? It doesnt matter whether you use smas or emas. There is little difference between the two so dont get caught up in the variations. We are just using these moving averages to create a zone that we will find our entries for long and short positions. Well cover the entries (and exits) on a separate section of this site.

What is so special about this zone?

I have found that for swing trading, a lot of reversals happen in this area. So in order to create a focus in your trading strategy, it is helpful to narrow down your potential stock setups to one area on a chart. This zone provides a plethora of setups on a daily basis. We are not really concerned with the moving averages themselves. When a stock pulls back into this zone, look to the left to identify support and resistance, trend lines, candlestick patterns, etc. You are looking for multiple signals all pointing in the same direction.

Will this strategy make me a profitable trader?

You may be surprised by my answer. The answer is no. There isn't ANY trading strategy that will make you a consistently profitable trader. Sorry to disappoint you. The only thing that will enable you to consistently pull money out of the markets is YOU. YOU must have discipline. YOU must be able to take losses. YOU must be able to take your profits. YOU must eliminate fear. Put simply, you must be able to control the emotional and psychological problems that prevent success. That will be your biggest challenge in learning how to trade stocks with any strategy.

TRADING PULLBACKS
Buy Weakness and Sell Strength
Buying weakness and selling strength is the art of buying pullbacks. Stocks that are in up trends will pull back offering a low risk buying opportunity and stocks that are in downtrends will rally offering a low risk shorting opportunity. As a swing trader, you have to WAIT for these opportunities to happen because Doesnt it make more sense to buy a stock after a wave of selling has occurred rather than getting caught in a sell-off? Doesnt it make more sense to short a stock after a wave of buying has occurred rather than getting caught in a rally? Absolutely! If you are buying a stock then you want as many sellers out of the stock before you get in. On the other hand, if you are shorting a stock, then you want as many buyers in the stock before you get in. This gives you a low risk entry that you can manage effectively.

Buying Pullbacks And Shorting Rallies

Where do you buy a pullback and where do you short a rally? You buy them and short them in the Traders Action Zone (TAZ). Here is and example on the long side:

See how you are buying stocks in strong uptrends after a wave of selling has occurred? Ok, now here is an example on the short side:

Now you can see how you are shorting stocks after a wave of buying has occurred. When going long, wait for the decline into the TAZ and when going short, wait for the rally into the TAZ. Are all of them created equal? Nope. You have just a standard pullback like in the example above and then you have

The First Pullback

These are exactly what the name implies. It is the first one after a change in trend. How do you identify a change in trend - when the 10 sma crosses the 30 ema. After that happens, you look for an entry when the stock gets into the TAZ. Here is an example:

This is the most reliable type of entry into a stock and this is the likely area where institutional money is going to come into the stock. If you only trade one pattern, this should be it! You can get into a stock at the beginning of a trend, at a point of low risk, and you can take partial profits and ride the trend to completion! What more could you ask for? Oh yeah, speaking of getting in on the beginning of a trend. This next setup fits neatly into an Elliott Wave Pattern...

First Pullback After A Breakout

There is one other type of pullback worth mentioning and that is the first pullback after a breakout. If you are looking at a stock that is trading sideways or forming a basing pattern, and it suddenly breaks out of the pattern, you can look to buy the first pullback after the breakout. This also gives you a low risk entry into a stock that will likely continue the current trend. Most traders are going to buy breakouts. The word breakouts sounds so exciting doesnt it? The problem with buying breakouts is that it is hardly every low risk. Think about it. If you are buying stocks when everybody else is, then who is left to buy the stock after you get in? Forget buying breakouts. Step away from the crowd. Wait for the breakout buyers to get scared and sell. This sets up the pullback that you can get into with low risk, high odds, and a profitable reward.

SWING TRADING ENTRY STRATEGY

How to Get a Good Entry on a Stock
Your swing trading entry strategy is the most important part of the trade. This is the one time when all of your trading capital is at risk. Once the stock goes in your favor you can then relax, manage your stops, and await a graceful exit. This is the basic price pattern that is used to enter stocks. Once you become familiar with it, you can try out more advanced strategies based on the specific pattern that you are trading. More on that in the Chart Patterns section.

With your entry strategy, the first thing that you want be able to do is identify swing points. Whats a swing point you ask? This is a pattern that consists of three candles. For entries on long positions, you look for a swing point low. For entries on short positions you look for a swing point high.

Swing Points
For a swing point low, the first candle makes a low, the second candle makes a lower low, and the third candle makes a higher low. This third candle tells us that the sellers have gotten weak and the stock will likely reverse. For a swing point high, the first candle makes a high, the second candle makes a higher high, and the third candle makes a lower high. This third candle tells us that the buyers have gotten weak and the stock will likely reverse. Here are pictures of the candles to help you better understand swing points:

For our long entry strategy, we are trying to find stocks that have pulled back into the Traders Action Zone that have made a swing point low. Like this:

You can see on the chart above that this stock is in a nice uptrend with the 10ma above the 30ema. The stock has pulled back into the TAZ and made a nice swing point low (highlighted). See how the pattern consists of a low, lower low, then a higher low? Great! Our entry strategy would be to enter this stock on the day of the third candle. Now lets look at a stock on the short side. We are looking for a stock in a nice downtrend with the 10ma below the 30ma. Then we wait for a rally into the TAZ that forms a swing point high. Like this:

See how the pattern consists of a high, higher high, then a lower high? We would look for an entry on the third candle.

Consecutive Price Patterns

Ok, now check this out. Look back up at the first chart where the stock pulls back into the TAZ. You will notice that the pullback consists of three consecutive down days with lower highs and lower lows. That is what you want to look for in a pullback. You can buy the stock the first time it trades above the previous candles high. This will complete the swing point low. On the second chart, you will see that the stock has three consecutive up days with higher highs and higher lows. The fourth candles still makes a higher high and a higher low. The fifth candle finally makes a lower high and a lower low - completing the swing point. Pullbacks do not have to consist of exactly 3 consecutive up days (for short trades) or down days (for long trades.) Sometimes you will run your scans and find stocks that have more than that. One final note: When you are looking for swing points to develop, you always want to look to the left of the chart to see if the stock is at a support or resistance area on the chart. That will improve the reliability of this entry strategy. Ok, now that we know how to get into a trade, how do we get out? We need an exit strategy.

SWING TRADING EXIT STRATEGY

How To Take Profits And Control Your Losses
Your exit strategy consists of two parts: Where will you get out of the trade if the stock does not go in your favor? Where will you take profits if the stock does go in your favor? These are the two questions that make up your exit strategy. You have to be able to answer these questions before you can place the trade!

Your Stop Loss Order

First, lets put to rest the debate about where or not you should use a physical stop or use a mental stop. A physical stop loss is an order to sell (or buy if you are short) that you place with your broker. A mental stop is YOU clicking the sell (buy) button to get out of the trade. From a technical perspective, it does not matter which type you use. Before you get into a trade you will have a plan that will determine when to get out of the trade if it does not go in your favor. You are a disciplined trader that always follows your plan (right?). What difference would it make whether or not you have an actual order placed with your broker or if you are going to pull the trigger yourself? There is no difference. In either case, you will get out of the stock when your plan (exit strategy) tells you to! Personally, I always use physical stop loss orders placed with my broker. This is because I do not want to sit at my computer and look at a monitor all day long! I think I would rather go to a funeral than stare at candles forming on a chart! Ok, maybe thats a slight exaggeration, but you get the point! Where is your stop going to be? First of all you need a stop that makes sense and you need it to be out of the "noise" of the current activity in the stock.

Look at the average range of the stock over the past 10 days. If the average range of the stock is, say, $1.10, then your stop needs to be at least that far away from your entry price. It doesnt make

any sense to have your stop .25 cents away from your entry price when the range is $1.10. You will surely get stopped out prematurely! For long positions, your stop should go under a support area and a swing point low. Like this:

You can see in the chart above, that the stock comes down into the TAZ and then forms a bullish hammer with the low at a previous resistance area. We know that resistance can become support so it makes sense to put our stop under the low of the hammer. Ok, that takes care of the first part of our exit strategy, now lets look at second part taking profits!

Taking Profits
Use trailing stops! This is an easy and unemotional way of exiting a trade. If this trade is going to be a typical swing trade with a holding time of 2-5 days, then you can trail your stops 10 or 15 cents under the previous days low or the current days low - whichever is lower. Here is an example:

There is a day by day example of a trailing stop loss order on this page. If this is a first pullback scenario, then you may want to hold this for a longer time frame. Having some big winners every now and then will fatten up your trading account! In this case you can trail your stops under the swing lows (or highs for shorts) until stopped out. Like this:

In either case, you should always determine where your stop is going to be and how you are going to take profits before you get into the trade. Have a solid plan in place (write it down). This will take all of the emotion out of the trade. Then you can relax and trade the map that you have created. This will make your exit strategy easy to follow and it will put you on the path to success.

TRAILING STOP LOSS ORDERS

How to Trail Your Stops: A Day By Day Example For Swing Traders
How do you trail your stops and protect your profits? On this page, I'll show you a day by day example of how to use trailing stop loss orders. The first thing that you need to know is that your stop loss order needs to be placed after the market has closed. Now you need to memorize the following sentence... "My trailing stop loss order needs to go under the current days low or the previous days low whichever is lower." "My trailing stop loss order needs to go under the current days low or the previous days low whichever is lower." The following is an example of how to trail your stops on a day-by-day basis...

Trailing Stop Loss Order: Day One

The green highlighted candle is the current day and the day that you bought this stock. After the market closes, you tell yourself that, "My trailing stop loss order needs to go under the current days low or the previous days low, whichever is lower. Since the previous day is lower then your stop loss order needs to under that day. This is the red line on the chart above (just under $44.50). Now, let's go on to day two...

Trailing Stop Loss Order: Day Two

The green highlighted candle is now the current day. After the market closes, you tell yourself that, "My trailing stop loss order needs to go under the current days low or the previous days low, whichever is lower." Since the previous day is lower then your stop loss order needs to go under that day (the day of entry). Now look back up at the chart above. You will see that your stop loss order has moved up. You always move your stop loss order up with a long position - never down. Now, let's go on to the third day...

Trailing Stop Loss Order: Day Three

Once again, the green highlighted candle is now the current day and the market has closed. You stop loss order will go under the previous days low (red line) because it is lower. Note that at this point your stop loss order is going to be close to your entry price. Just move your stop loss order to break even. Now, you have a "free trade" and you can relax!

Trailing Stop Loss Order: Day Four

Now, your stop loss order has moved up significantly and you have a decent profit in this stock. If you get stopped out now, it will be a good trade!

Trailing Stop Loss Order: Day Five

So far this has been a great trade. But, now this stock is approaching the previous swing point high (that black candle) which will likely be a resistance area. Avoid the temptation to sell because you think that the stock will begin to fall. Just continue trailing your stops...

Trailing Stop Loss Order: Day Six

Once again, your trailing stop loss order will go under the previous days low because it is lower.

Trailing Stop Loss Order: Day Seven

On this day, your stop loss order is triggered and you get stopped out of this swing trade with a nice profit. Nice trade! Remember the sentence, "My trailing stop loss order needs to go under the current days low or the previous days low - whichever is lower."? Well in this example trade we never put our stop loss order under the current days low because the previous days low was always lower. Here is an example (on the same chart) of when you would put your stop loss order under the current days low.

Imagine that the green highlighted candle is the current day and the market has closed. Since the current days low is lower than previous day, then you need to put your stop loss order under today's low. This will make for a very tight stop loss order and the majority of the time you will get stopped out. But, as you can see from this example, sometimes you won't get stopped out and the stock will continue to move in your favor. Trailing your stops in this manner is a great way to remove the emotion from a trade. There is no guesswork involved. You just move your stop loss order up in the manner described above and you can eliminate the "emotional selling" that seems to plague so many traders.

Some Things to Consider

Consider abandoning this trailing stop strategy if the stock that you are in suddenly moves significantly in your favor. You do not want to give up huge gains by trailing your stop loss order under a wide range candle! When a stock moves up to test the next resistance point, consider selling half your shares and trailing your stop loss order on the remaining shares. You do not want to get stopped out prematurely if the stock that you are in is at the beginning of a trend. Keep your stop loss order further away so that you can ride the trend to completion. There are no hard and fast rules for every single trade because every trade will be different. Just remember the #1 rule of trading: Keep your losses small and let your winners run.

ELLIOTT WAVE PATTERN

Learning the basic elliott wave cycle
The elliott wave pattern is a structure that defines how a stock behaves. All stocks tend to move in a basic five wave structure that consists of a motive phase and a corrective phase. For swing traders, the motive phase is what we are interested in. You will see that the elliott wave theory falls neatly into my favorite type of trade: The First Pullback Trade. First, look at the following graphic to to get an idea of what the pattern looks like...

The Phases
The motive phase of an elliott wave cycle consists of five waves. You can see the waves labeled on the chart above numbered 1 through 5. Think of the motive phase as a detailed view of an uptrend. The corrective phase is labeled on the chart above as Wave A, Wave B, and Wave C. This is the phase that "corrects" the uptrend. We are not really concerned with this phase, but I wanted you to learn the basic cycle!

Wave One
This wave breaks the previous downtrend and begins a new uptrend. This marks the beginning of the trend. You want to start watching for a pullback when this wave starts.

Wave Two
The pullback! Now you want to start looking for an entry using candlestick patterns. This sets up our First Pullback scenario. You are hopping on board at the beginning of an uptrend.

Wave Three

Wave three of an elliott wave cycle is the longest and the strongest of all five waves! That is why we want to get on board during wave two (the pullback) right as wave three is beginning to unfold. When you can find stocks that are beginning a wave three, you want to hold on to your position for a longer time frame. Dont treat is at a little swing trade, instead, treat it as a trend trade. You want to ride this powerful wave to completion! Why? Because you will make the most amount of money in the least amount of time. Ya, gotta love that!

Wave Four
This wave is pretty disappointing for those that bought this stock too late. The stock moves a lot slower and is a signal that the best part of the trend is over.

Wave Five
Again, this wave is usually sluggish and not near as dynamic as the third wave of an elliott wave cycle. This also marks the last burst of buying before a new downtrend starts.

Wave A, B, and C
These waves finally start the downtrend. You will notice that wave A looks like just a regular pullback. Nope. This is a bull trap. You will also notice that wave B doesn't get higher than wave 5. This is the first pullback of the downtrend and wave C is the third wave in a downtrend!! This is where you would look for shorting opportunities.

MARKET TIMING
How to Time Your Trades to the Market
Your market timing strategy is critical to your success as a swing trader. When the stock market rallies, 3 out of 4 stocks will move up with the market. On the other hand, when the market sells off, 3 out of 4 stocks will decline with it. Knowing this, doesnt it make sense to time your trades to the market? Yes!

Market Timing Using Moving Averages Market Timing Using Moving Averages
The first thing you want to look at is a chart of the S&P 500. Look at the 10 sma and 30 ema to determine if you should be focusing on long positions or short positions. Here are the rules for timing your trades to the market using moving averages. If the 10 sma is above the 30 ema, you should be focusing on long positions only. If the 10 sma is below the 30 ema, you should be focusing on short positions only. This simple technique will tell you what type of trades you will be concerned with right now. It identifies the underlying trend to keep you on the right side of the market. Here is an example:

Looking at the chart above, you can see how these moving averages create focus. The green lines identify times when the 10 sma is above the 30 ema. The red lines identify times when the 10 sma is below the 30 ema. This part of your market timing strategy answers the question of what types of trades to focus on. Moving averages are trend following indicators. As such, they will only work well in trending markets - not when they are the market is trapped in a trading range. Ok, now we know whether or not we will be trading on the long side or the short side. Now we need to answer the question of when to buy and when to sell. That is where Williams %R comes in

Market Timing Using Williams %R

Im not really a big fan of technical indicators but Williams %R is useful to get a general idea of when the market has reached a short term extreme and is likely to reverse. It calculates the close in relation to the range over a set period of time. The default setting in most charting packages has it set at 14 periods, but we would like it to be a little more sensitive than that so we will use a 3 period setting. Here are the rules for timing your trades using Williams %R.

When the 10 sma is above the 30 ema, we will look to go long when Williams %R is less than 80 (over sold). When the 10 sma is below the 30 ema, we will look to go short when Williams %R is greater than -20 (over bought).

The more over bought or over sold Williams %R gets, the more likely a reversal will take place. Look for those times when Williams %R gets to -90 or below for long positions, and -10 or above for short positions. Here is an example:

In the chart above of the S&P 500, notice how we ignore short positions when the 10 sma is above the 30ema and only focus on longs. Even though Williams %R is over bought, above -20, we only want to trade in the direction of the trend. Also, notice how we ignore long positions when the 10 sma is below the 30 ema and only focus on short setups. Again we only want to trade in the direction of the trend. On the right edge of the chart the 10 sma has just crossed down through the 30 ema so we can no longer trade on the long side. Instead, we will manage our existing trades and wait for Williams %R to get above -20 to focus on the short side. See how we are NOT predicting what is going to happen in the future? That is a waste of time. Instead, we are reacting to whatever the chart tells us to do. Use this market timing method to identify when to establish long or short positions. Once you are in a stock, trade the chart of the stock itself and forget about the market. Then, use your specific entry and exit strategy to get into and out of individual stocks.

CHART PATTERNS
Chart patterns for swing traders
Here are three profitable chart patterns that you can use the next time you are looking for entries into individual stocks. Wait! There is no holy grail. These patterns can and will fail. You must manage your money correctly to make them profitable!

T-30

This is the one chart pattern that I trade the most often. If you are new to trading stocks, then start with this pattern! It is easy to identify, easy to learn, and easy to trade. What more could you ask for? T-30 Pattern

Ghost Town

Some potentially explosive moves can result from trading this pattern. The best thing about this pattern is that you can usually get a low risk entry. Ghost Town Pattern

Swing Traps

What happens when swing traders and momentum traders get trapped in a stock and have to take a loss? The stock rallies!

SWING TRAP
How To Trade The Swing Trap Chart Pattern
You will see this chart pattern ALL the time. It took all of about 5 minutes to run a scan and find an example for this page! Learn it. It is one of the most reliable patterns I know of. You'll see why in a second.

The Setup
Like the name implies, this chart pattern "traps" swing traders (and momentum traders) right in the middle of a move. In Elliott Wave theory this pattern is known as an A-B-C pattern - just on a smaller scale. I call them "swing traps" because it's a lot more descriptive! Let's look at a chart...

The highlighted area is what we are interested in. See how it looks like a lightning bolt? That is what you want to look for when you are running your scans. It is very easy to identify this pattern. You'll recognize it in a second! This is what is happening in the pattern: This stock rallies hard to $50.39 (see chart). It then pulls back real nicely into the TAZ, and ends in a doji. This would have been a nice pullback to trade. But look at what happens next. It rallies up a little bit, but then it fails and goes right back down. This traps the swing traders who are long this stock. They put their stop loss orders underneath that doji. The hammer at $46.55, took out their stops! Now that the majority of sellers are out of the trade, the stock can rally. And that's exactly what it did.

How To Trade This Pattern

The key with this chart pattern is to look for the "shakeout". The final swing MUST go below the low of the first swing. Many times, this final swing will end in a hammer. This hammer will take out all of the stop loss orders and you are ready to go!

The Entry
Wait for a candlestick pattern to develop on the final swing (in this case, it was a hammer). Then you can buy the stock on the day of the pattern, or wait, put in a buy stop above the high of the candlestick pattern. It's up to you how you want to enter the stock.

Your Stop Loss Order

Nothing special here. Just put your stop where it makes the most sense. Usually this will be under the low of the day of entry, but look to the left on the chart to identify support and resistance levels.

Taking Profits
On the exit strategy page, you will find several options for trailing your stops. If the stock is entering into a stage two cycle, then I will usually want to give the stock a little room. In this case I would just trail my stops off of the weekly chart (a trend trade versus a swing trade).

Trading Tips

The secret to this pattern is for the final swing to go below the low of the first swing. This is crucial. You will find this exact pattern on the short side also. The pattern is just reversed. This pattern is not limited to the daily chart. You will see it in all time frames. Your going to love trading this chart pattern. It represents a short term extreme in the market that gets a lot of potential sellers out of the stock before you get in.

MONEY MANAGEMENT STRATEGY

How to manage your money
As a swing trader, your money management strategy is the one variable that will give you the biggest edge in trading stocks. Believe it.

You cannot control the markets but you can control your money and your risk on each and every trade that you make. William O'neill, founder of Investors Business Daily, has said that, "The whole secret to winning in the stock market is to lose the least amount possible when you're not right." I would agree with that! Your money management strategy answers these questions:

How much money should I risk on this trade? How many shares should I buy? A good trading system or strategy is absolutely worthless without a method of managing your money. You like to trade stocks right? You like to make money in the markets right? Well, you will not have any money to trade with if you do not follow good money management practices! Your #1 goal as a swing trader is to preserve your capital so that you can stay alive long enough to have some big winners that cover the costs of your losing trades AND make a profit. You accomplish this through a sound money management strategy.

The 2% Rule
Most traders would agree that you should not risk more than 2% of your trading capital on a single trade. The stock market is mostly random. No one else is going to tell you this, but this is the reality of trading stocks. So no matter how good the chart looks, there is a chance that the stock will not go in your desired direction and you WILL lose money on the trade. How much money will you lose if this happens? On the first of each month, look at the total amount of money in your trading account. Lets say you have $30,000 dollars. Two percent of this amount is $600.00. That is the maximum amount you can lose on a trade.

Position Sizing
Now lets say that you see a stock that has pulled into the TAZ and is now trading at $25.00. It is looking like it is going to reverse so you decide that you are going to trade this stock. You first have to figure out where your stop is going to be. Do not think about how much money you can make on a trade, think about how much money you can lose if your wrong! To keep track of my trades I use a trade management software program called Trade Trakker. Click here to read my review of this software and view screen shots. You determine that your stop is going to be at $24.00. So if you buy the stock at 25.00 and your stop is at $24.00 then your risk is $1.00 per share. Since you have already determined that the most you can risk on a trade is $600.00 then you can buy 600 shares of this stock. This is because if you get stopped out you will lose $600.00, the maximum amount you are allowed to lose. Actually the number of shares that you buy should be a little less because you have to account for slippage and commissions. By managing your money correctly on every trade you can relax because if you incur a loss it will be insignificant to your account. This will also relieve the emotional pitfalls that plaque so many traders. This is only one trade! If you lose money on this trade, just move on to another. If you have a string of several losses in row either stop trading or reduce your position size to 1%. And discipline is your key to survival and success as a swing trader.

HOW TO READ STOCK CHARTS

Learn how to read stock charts
Reading charts is an art form that can take years to fully master. Why do we read charts? Because, by reading charts, we can determine what the "big money" is doing! You have to be able to analyze a chart and come to a conclusion about whether or not to risk your hard earned money on a trade. That is really the bottom line. By analyzing these factors, we can determine with high probability which direction a stock will move. There several questions that you want to ask yourself when you look at a stock chart. Here they are...

What stage is this stock in? Is this stock in and uptrend or a downtrend? Is the stock at the beginning, middle, or end of the trend? How strong is the trend? Where are the trend lines? What wave is this stock in? What do the moving averages tell me? Was there a breakout recently? Is the chart "smooth" or "sloppy"? Are there any chart patterns? Are there wide range candles in the direction of the trend? Are there any gaps in the direction of the trend? Are professionals selling strength or buying weakness? Where are the support and resistance areas? Is this stock at a Fibonacci level? What does volume tell me? I know it seems like a lot of information to try and keep track of but all of the above questions are essential to chart reading mastery! Now, copy and print out that list of questions and keep it handy next to your computer. Make several copies so that you can check off and make notes as you analyze your next chart. In the heat of battle, when emotions are running high, it is very easy to forget to look for some of the most basic things on a chart. I've done it. That is, until I made this list! You will be able to read charts with lightning fast speed. In just a couple of seconds you will be able to glance at a chart and know all the answers to the questions above.

Stages, Trends, and Waves

Let's look at an example chart...

Nice chart! This stock broke out through a consolidation in July and now it is in a nice strong trend. The green arrow is the day on which we see this stock. So, what questions can we answer just from glancing at this chart?

This stock is in stage two.

You remember the stages right? Stage one is a consolidation, stage two is an uptrend, stage three is another consolidation, and stage four is a downtrend. This stock was in a stage one in July but at the end of July, it broke out into a stage two. It is currently still in a stage two.

This stock is in an uptrend.

This is the easy part. If a stock is heading toward the upper right corner of a chart then it is in an uptrend! For some reason, this tends to elude some traders!

This stock is near the middle or end of the trend.

How do we know that? The breakout signals the start of the trend. There has already been one significant pullback. Had we bought stock on the first pullback, then we would have concluded that we are at the beginning of the trend. But since this is the second pullback, then we know that this trend may not last much longer.

This stock is in a strong trend.

The ADX indicator (not shown) is near 30 which we consider to be a fairly strong trend. The higher the ADX, the stronger the trend. This stock is at the lower trend line. You can see by the thick green line that this stock has hit the lower trend line. You can draw the trend lines in manually, but after you have been trading for awhile, you will not need to draw them. You will be able to see them automatically.

This stock is in the fourth wave.

In Elliott Wave theory, a stock goes through 5 waves in an uptrend. In the chart above, the first wave after the breakout is wave 1. The first pullback is wave two, the next wave up to $17.33 is wave three, and the pullback that we are in now is wave four. There is one more wave to go!

Conclusion
Now we have identified that the possible future direction of this stock is up. Nothing is ever certain in the stock market! However, by looking at this chart we can be certain that the probabilities are on our side for a continued move to the upside. After you finish reading this tutorial, run your scans and go through some charts. Try to identify the various factors mentioned above. Just understanding the nature of stocks and the different stages, trends and waves that all stocks go through will greatly improve you trading. Soon, all of this direction analysis will become second nature. You won't even have to think about it. Were not done yet!

ADX INDICATOR
How To Use The ADX Indicator
The ADX indicator measures the strength of a trend and can be useful to determine if a trend is strong or weak. High readings indicate a strong trend and low readings indicate a weak trend. When this indicator is showing a low reading then a trading range is likely to develop. Avoid stocks with low readings! You want to be in stocks that have high readings.

This indicator stands for Average Directional Index. On some charting packages there are two other lines on the chart, +DI and DI (the DI part stands for Directional Indicator). Ignore these lines. Trying to trade according to these two lines is a great way to lose money! The only thing that we are concerned with is the ADX itself. Note: This indicator measures strong or weak trends. This can be either a strong uptrend or a strong downtrend. It does not tell you if the trend is up or down, it just tells you how strong the current trend is! Lets look at a chart:

In the chart above, the ADX indicator is the thick black line. The green and the red lines are the +DI and DI (ignore these). The highlighted areas show how this indicator identifies trading ranges. ADX is showing a low reading and the stock is chopping around sideways. Now look at what happens when the indicator gets into higher territory. A strong trend develops! These are the type of stocks that you want to trade. On the right side of the indicator panel you will see a scale from 0 to 100 (only 10 through 50 are marked). Here are my guidelines for using the scale:

ADX Indicator Scale

If ADX is between 0 and 25 then the stock is in a trading range. It is likely just chopping around sideways. Avoid these weak, pathetic stocks! Once ADX gets above 25 then you will begin to see the beginning of a trend. Big moves (up or down) tend to happen when ADX is right around this number. When the ADX indicator gets above 30 then you are staring at a stock that is in a strong trend! These are the stocks that you want to be trading! You wont see very many stocks with the ADX above 50. Once it gets that high, you start to see trends coming to an end and trading ranges developing again.

Tips
The only thing I use the ADX for is an additional filter in my scans, so that I can find stocks that are in strong trends. I do not even have the ADX indicator on the charts that I look at when I am looking for setups. Since the ADX is already factored into the scans, I don't need it added to the chart itself.

I don't pay any attention to the rising and falling of the ADX indicator. Stocks can go up for long periods of time even though the ADX may be falling (indicating that the trend is getting weak). The ideal scenario is that the ADX is rising, but I don't find it necessary to take a trade. I don't use any technical indicators on my charts. I found out that technical indicators just clouded my judgement. One technical indicator may indicate a buy and one may indicate a sell. Needless to say, this can be very confusing and it just takes you attention away from the only thing that matters - PRICE.

So what is the ADX indicator good for?

This indicator is best used for screening stocks and writing scans. By adding this indicator to your scanning software, you can eliminate all of the stocks that are in trading ranges. You can then set up your scan to find only those stocks that are in strong uptrends or strong downtrends. The ADX indicator does not give buy or sell signals. It does, however, give you some perspective on where the stock is in the trend. Low readings and you have a trading range or the beginning of a trend. Extremely high readings tell you that the trend will likely come to an end.

CANDLESTICK PATTERNS
10 Best Candlestick Patterns
There are many candlestick patterns but only a few are actually worth knowing. Here are 10 candlestick patterns worth looking for. Remember that these patterns are only useful when you understand what is happening in each pattern. They must be combined with other forms of technical analysis to really be useful. For example, when you see one of these patterns on the daily chart, move down to the hourly chart. Does the hourly chart agree with your expectations on the daily chart? If so, then the odds of a reversal increase. The following patterns are divided into two parts: Bullish patterns and bearish patterns. These are reversal patterns that show up after a pullback (bullish patterns) or a rally (bearish patterns).

Bullish Candlestick Patterns

Engulfing: This is my all time favorite candlestick pattern. This pattern consists of two candles. The first day is a narrow range candle that closes down for the day. The sellers are still in control of the stock but because it is a narrow range candle and volatility is low, the sellers are not very aggressive. The second day is a wide range candle that engulfs the body of the first candle and closes near the top of the range. The buyers have overwhelmed the sellers (demand is greater than supply). Buyers are ready to take control of this stock! Hammer: As discussed on the previous page, the stock opened, then at some point the sellers took control of the stock and pushed it lower. By the end of the day, the buyers won and had enough strength to close the stock at the top of the range. Hammers can develop after a cluster of stop loss orders are hit. Thats when professional traders come in to grab shares at a lower price. Harami: When you see this pattern the first thing that comes to mind is that the momentum preceding it has stopped. On the first day you see a wide range candle that closes near the bottom of the range. The sellers are still in control of this stock. Then on the second day, there is only a

narrow range candle that closes up for the day. Note: Do not confuse this pattern with the engulfing pattern. The candles are opposite! Piercing: This is also a two-candle reversal pattern where on the first day you see a wide range candle that closes near the bottom of the range. The sellers are in control. On the second day you see a wide range candle that has to close at least halfway into the prior candle. Those that shorted the stock on first day are now sitting at a loss on the rally that happens on the second day. This can set up a powerful reversal. Doji: The doji is probably the most popular candlestick pattern. The stock opens up and goes nowhere throughout the day and closes right at or near the opening price. Quite simply, it represents indecision and causes traders to question the current trend. This can often trigger reversals in the opposite direction.

Bearish Candlestick Patterns

Youll notice that all of these bearish patterns are the opposite of the bullish patterns. These patterns come after a rally and signify a possible reversal just like the bullish patterns. Ok, now its your turn! Ill let you figure out what is happening in each of the patterns above to cause these to be considered bearish. Look at each candle and try to get into the minds of the traders involved in the candle.

Kickers
There is one more pattern worthy of mention. A "kicker" is sometimes referred to as the most powerful candlestick pattern of all.

You can see in the above graphic why this pattern is so explosive. Like most candle patterns there is a bullish and bearish version. In the bullish version, the stock is moving down and the last red candle closes at the bottom of the range. Then, on the next day, the stock gaps open above the previous days high and close. This "shock event" forces short sellers to cover and brings in new traders on the long side. This is reversed in the bearish version.

Confirmation?
Most traders are taught to "wait for confirmation" with candlestick patterns. This means that they are supposed to wait until the following day to see if the stock reverses afterward. This is absolutely ridiculous!

I aint waitin for no stinkin confirmation! Hows that for good grammar! Seriously, think about it for a second. If a stock pulls back to an area of demand (support) and I have a candlestick pattern that is telling me that buyers are taking control of the stock, then that is all the confirmation I need. As a swing trader I have to get in before the crowd piles in, not when they get in! In other words, I want to be one of the traders that make up the pattern itself! That is the low risk, high odds play.

CHART PATTERNS
Chart patterns for swing traders
Here are three profitable chart patterns that you can use the next time you are looking for entries into individual stocks. Wait! There is no holy grail. These patterns can and will fail. You must manage your money correctly to make them profitable!

T-30

This is the one chart pattern that I trade the most often. If you are new to trading stocks, then start with this pattern! It is easy to identify, easy to learn, and easy to trade. What more could you ask for? T-30 Pattern

Ghost Town

Some potentially explosive moves can result from trading this pattern. The best thing about this pattern is that you can usually get a low risk entry. Ghost Town Pattern

Swing Traps

What happens when swing traders and momentum traders get trapped in a stock and have to take a loss? The stock rallies!

SWING TRAP
How To Trade The Swing Trap Chart Pattern
You will see this chart pattern ALL the time. It took all of about 5 minutes to run a scan and find an example for this page! Learn it. It is one of the most reliable patterns I know of. You'll see why in a second.

The Setup
Like the name implies, this chart pattern "traps" swing traders (and momentum traders) right in the middle of a move. In Elliott Wave theory this pattern is known as an A-B-C pattern - just on a smaller scale. I call them "swing traps" because it's a lot more descriptive! Let's look at a chart...

The highlighted area is what we are interested in. See how it looks like a lightning bolt? That is what you want to look for when you are running your scans. It is very easy to identify this pattern. You'll recognize it in a second! This is what is happening in the pattern: This stock rallies hard to $50.39 (see chart). It then pulls back real nicely into the TAZ, and ends in a doji. This would have been a nice pullback to trade. But look at what happens next. It rallies up a little bit, but then it fails and goes right back down. This traps the swing traders who are long this stock. They put their stop loss orders underneath that doji. The hammer at $46.55, took out their stops! Now that the majority of sellers are out of the trade, the stock can rally. And that's exactly what it did.

How To Trade This Pattern

The key with this chart pattern is to look for the "shakeout". The final swing MUST go below the low of the first swing. Many times, this final swing will end in a hammer. This hammer will take out all of the stop loss orders and you are ready to go!

The Entry
Wait for a candlestick pattern to develop on the final swing (in this case, it was a hammer). Then you can buy the stock on the day of the pattern, or wait, put in a buy stop above the high of the candlestick pattern. It's up to you how you want to enter the stock.

Your Stop Loss Order

Nothing special here. Just put your stop where it makes the most sense. Usually this will be under the low of the day of entry, but look to the left on the chart to identify support and resistance levels.

Taking Profits
On the exit strategy page, you will find several options for trailing your stops. If the stock is entering into a stage two cycle, then I will usually want to give the stock a little room. In this case I would just trail my stops off of the weekly chart (a trend trade versus a swing trade).

Trading Tips

The secret to this pattern is for the final swing to go below the low of the first swing. This is crucial. You will find this exact pattern on the short side also. The pattern is just reversed. This pattern is not limited to the daily chart. You will see it in all time frames. Your going to love trading this chart pattern. It represents a short term extreme in the market that gets a lot of potential sellers out of the stock before you get in.