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Disclaimer
The information provided is not to be considered as a recommendation to
buy certain stocks and is provided solely as an information resource to help
traders make their own decisions. Past performance is no guarantee of
future success. It is important to note that no system or methodology has
ever been developed that can guarantee profits or ensure freedom from
losses. No representation or implication is being made that using this eBook
will provide information that guarantees profits or ensures freedom from losses.

Copyright © 2009-2019. All rights reserved. No part of this book may be

reproduced or transmitted in any form or by any means, electronic or
mechanical, without written prior permission from the author.
What is swing trading?

Swing trading is a short term trading method used for trading a variety of investments,

such as stocks, bonds, commodities, options, and currencies. Unlike day trading where

positions typically last only one day, swing trading positions usually range from two to

five days, but can last as long as two or three weeks. Swing traders use technical analysis

and disregard fundamental analysis. They aren’t interested in the intrinsic value of stocks,

but rather they look for stocks with short-term momentum that can allow them to capture

gains in just a few days.

Introducing Technical Analysis

Technical analysis is the study of past market data, through the use of charts, to predict a

security’s future price. Unlike fundamental analysis, technical analysis does not focus on

studying a company’s financial statements and earnings to determine a company’s

intrinsic value, or its actual worth. Instead, technical analysts use charts and technical

indicators to identify patterns that can suggest future price movements. They disregard

the underlying data that causes the price movements and focus on what the market is

valuing the stock at.

The charts themselves do not cause market action, but rather, they indicate the actions of

the marketplace and what has already happened. Charts reflect trades by all market

participants, such as buyers, sellers, and even insiders. Analyzing charts means that you

are analyzing the behavior of all these traders. Each price on the charts reflects the

actions or lack of actions by all the traders in the market.

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 Technical analysis can be applied to any security with historical trading data. This

includes stocks, futures and commodities, fixed-income insecurities, forex and more.

Although we will usually analyze stocks in our examples, keep in mind that these

concepts can also be used on other types of securities.

For further clarifications, see how technical analysis is different from fundamental

analysis.

Technical Analysis Assumption

In author Tony Plummer’s book, The Psychology of Technical Analysis, he paraphrases a

quote by Oscar Wilde by stating, “A technical analyst knows the price of everything, but

the value of nothing.” Technicians are more concerned with the “what” rather than the

“why.”

The study of technical analysis is based on three main assumptions:

1) The market discounts everything.

2) Prices move in trends.

3) History tends to repeats itself.

1) The market discounts everything

Technical analysis is based on the Dow Theory that the market discounts everything and

that all past, current, and even future information, is reflected in the security’s price. This

information includes fundamental factors, psychological factors, and any recent news

about the company.

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Technicians believe that if everything is already reflected in the market price, then it is

only necessary to study price charts. They believe that by studying price charts, you are

indirectly studying the fundamentals of a company, as well as the psychology of the

marketplace for that company. For example, if prices are going up, they assume that

demand must be exceeding supply, indicating that the fundamentals are bullish. If prices

are falling, they assume that supply must be exceeding demand, indicating that the

fundamentals are bearish.

Since the market discounts everything, technicians ignore the factors that cause price

movements and exclusively study price history and volume data.

2) Prices Move in Trends

Technicians believe that prices are not always random and tend to follow trends, such as

an uptrend or downtrend. Most technical trading strategies are based on the assumption

that once a trend has been established, the future price movement is more likely to be in

the same direction as the trend than to be against it. Since technical analysis can be

applied to many different time frames, it is possible to identify both short-term and long-

term trends.

3) History tends to repeat itself

A study of history shows that set patterns tend to repeat themselves over long periods.

The repetitive nature of price movements is attributed to market psychology, meaning

traders tend to have a consistent reaction to similar market stimuli over time. Since

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 investor behavior repeats itself so often, technicians believe that predictable price patterns

will develop on charts.

By relying on price patterns, we can identify optimal trade entry and exit points.

Recognizing trends in their early stages allows us to trade favorably in the direction of

those trends until it shows signs of reversing.

How to Read Stock Charts

One glance at a stock chart might seem daunting. However, once you learn how to read

stock charts, you will find it to be second nature. The nice thing about stock charts is

you don’t need a finance degree to analyze it. With enough practice, you will be able to

understand it easily so that you can use it to making your trading decisions.

A price chart is a series of prices plotted over a specific time period. There are many

different types of stock charts, such as bar, line, OHLC (open-high-low-

close), candlestick, point-and-figure and more. They can all be viewed in different time

frames, whether it’s intraday, daily, weekly or monthly. Each type of stock chart displays

various kinds of information and has its own advantages and disadvantages, but they all

reveal valuable price and volume information.

A stock chart looks like a regular graph, where the price is plotted on the y-axis, or

vertical axis, and the time is plotted on the x-axis, or horizontal axis.

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Types of Stock Charts

Below are the most popular stock charts:

Bar Chart

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One of the most popular charting methods is the OHLC chart, where the high, low, close

and open prices are needed to form each price bar. The length of each vertical bar shows

a stock’s trading range for that time period. The top of the bar shows the highest price the

stock was purchased for during that period, and the bottom of the bar shows the lowest

price the stock was purchased for. A short horizontal line to the right side shows the

closing price while a line to the left side shows the opening price.

It is also important to know the stock chart’s time frame and the time that each price bar

represents. On a daily stock chart, each price bar represents the high, low, open, and close

prices of the security during that day. On a monthly chart, each price bar represents the

prices the security traded during that month.

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Line Chart

Line charts only show only the close of the day and do not show the open, high, and the

low data points. Some traders think that the closing price is the most important. Line charts

show less clutter, however they do not provide as much detail as the other charts.

Candlestick Charts

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Candlestick charts show the open, high, low, and close prices. Many traders like this type

of chart because its contrasting colors provide fast visual interpretations. The open and

close prices are represented by horizontal lines and they form a box, called the body.

White candles form when the close price is higher than the open price and black candles

form when the open price is higher than the close price. The lines extending from the

body are called shadows and represent the high and low. Here are the 10 most popular

candlestick patterns.

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Stock Chart Analysis

When you look at a stock chart, there are several questions that you should ask yourself.

First, identify whether the stock is an uptrend or downtrend. If a stock is heading upwards

toward the right corner of the chart, then the stock is in an uptrend. Likewise, if the stock

is heading downwards, then the stock is in a downtrend.

Next, identify if there is a level of support or resistance. A support level is when the

stock cannot drop past a certain price level and a resistance level is when the stock cannot

break through a certain price level. The below chart shows Apple’s stock trading in a

trading channel, which is the space between an asset’s support and resistance levels. The

price stays within these levels until a breakout occurs.

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The vertical lines at the bottom of stock charts show the stock’s volume, or the number

of shares traded during the specific time frame of the chart. A trading signal with high

volume enhances that signal. For example, the stock finally broke out through that

resistance level on February 1 on high volume. This high volume means that the buying

interest is strong and that an uptrend is likely to occur. As you can see, the price is

trended upwards toward the right corner of the chart for the next two months.

Some traders might make multiple trades when a stock is in a trading channel, buying

when the price gets to the bottom of the channel and selling when the prices gets close to

the top of the channel. This trading strategy is known as range-bound trading. By

finding major support and resistance levels, traders can make profits on the price spread.

They repeat this process of buying at support and selling at resistance until the stock

breaks out from the channel.

Why do we study stock charts?

Technical analysts, or technicians, study stock charts to analyze price information and

forecast future price movements. Knowing how to read a stock chart is a great

advantage because they provide an easy-to-read illustration of a security’s price

movement over a specific time frame and can help you make better trading decisions. It is

also essential for those interested in swing trading.

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 Swing Trading Strategies

One of the main appeals of swing trading is being able to capture significant gains in

less than a week, and without having it to be a full-time job. Of course, you must still

work hard to find these short-term opportunities to take advantage of. It is helpful to

understand some of the swing trading strategies that successful traders use and it is

important that you have a set of your own trading strategies.

First, let’s briefly go over the definition of swing trading.

Swing Trading Methods

Markets often go nowhere. They usually rally a few days, decline a few days, pause and

then rally again. Small swings in the markets are common and it is our interest to capture

profits from these small swings.

Most of the swing trading strategies involve studying chart patterns to find trade entry

and exit points. These strategies differ and there isn’t any one “right” strategy. Every

trader has his or her own preferred methods and strategies. Study and apply these

strategies to different charts and see which ones work best for you. You can also have

more than one strategy.

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1. Trend Following Strategy

Most swing traders assume the “Trend is your friend.” Trend following is the most

popular type of swing trading strategy where you find a trending stock and trade along

its trend. This strategy is used by both long-term investors and short-term traders. For the

purpose of swing trading, the trend following strategy is used to spot patterns and trends

that happen over a short period of time. For example, if the security is in an uptrend, the

swing trader will be bullish and go long on the security by buying shares or call options.

The trader plans to hold the security short-term and sell when he or she sees signs of

reversals. Likewise, if the overall trend is down, then the trader will be bearish and can

short shares or buy put options.

Drawing Trend Lines

It is helpful to know how to draw trend lines on a stock chart. A trend line is a straight

line that connects at least two price points and acts as a line of support or resistance. An

uptrend line has a positive slope and is formed by drawing the trend line along the lowest

points in the trend without letting the line cross through prices. The second low point

must be higher than the first low point in order to have a positive slope. A downtrend line

has a negative slope and is formed by drawing the trend line along the highest points in

the trend without letting the line cross through prices. The second high point

must be lower than the first high point in order to have a negative slope.

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You can apply trend lines to find securities with channel patterns. Channel patterns serve

as a trading range and consist of two parallel trend lines, where the lower trend line acts

as support and the upper trend line acts as resistance.

Trend Following Entry and Exit Points

Swing traders normally enter the market after the trend has established itself, betting that

the trend will continue. Below is an example of a trade that I executed. The first green

arrow is where I entered the trade. Microsoft was one of the stocks that I was watching

and I saw that the uptrend validated itself, as indicated by the third orange circle. I

typically wait for at least three to four points to hit my trend line to confirm the trend’s

validity before I make any action. As the price bounced up from the third circle, I bought

shares. About a week later, the stock hit my target price and I got out.

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How to Trade Channel Patterns

The strategy of trading channel patterns is to identify valid trends and trade in the

direction of the trend. When the price touches the support trend line, or the lower trend

line, of an ascending channel, a buy trade is signaled. When the price touches the

resistance trend line, or the upper trend line, a short trade is signaled. It is also important

to pay attention to the volume of the stock. If the stock breaks support with high volume,

it is a greater indication that the trend is broken. However, if the stock breaks support

with low volume, it is okay to hold a little longer since it could be a false breakout. If you

choose to hold a little longer, make sure you have a stop loss.

2. Breakout Trading Strategy

Besides entering a trade in a channel pattern, you can also enter a trade when a breakout

occurs from the channel. A breakout is when the price closes above or below the

boundaries of the pattern.

The below chart of Amazon stock shows a breakout from the uptrend. The increase in

volume also signifies that the uptrend is broken and a downtrend might be imminent.

Swing traders may see this as an opportunity to short this stock.

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A breakout doesn’t necessarily have to occur from an uptrend or downtrend pattern. For

example, if a stock goes up and down in the $10-$15 range for a long time and then it

breaks out from this range on high volume, it also signifies a breakout. Breakouts are also

opportunities that I watch out for. However, you need to be careful of false breakouts. If

the volume is weak, the price breakout might only be temporary and can pull back into

that range.

3. Japanese Candlestick Charting

The Japanese candlestick is a popular charting technique used for short-term outlooks.

Candlestick charts displays the opening, close, high, and low prices for a security each

day. Many traders find candlestick charts easier to look and more useful than traditional

bar charts because it reveals more about a stock’s price action. The shape and color of

candlesticks help traders gauge the emotions around a stock by showing us if there is

more buying (greed) than selling (fear). There are many candlestick patterns and it is

important to understand what is happening in each pattern. Japanese candlesticks are a

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way of looking at prices and should be used with other technical indicators for them to

be useful.

Bullish candlestick patterns – The below are examples of candlestick reversal

patterns signaling a chance of a rally. For any of these patterns to signal a rally

means that there must have been a preceding downtrend.

Bearish candlestick patterns – The below are examples of candlestick reversal patterns

signaling a pullback. For any of these patterns to signal a sell means that there must

have been a preceding uptrend.

These are a few of the popular swing trading strategies. It is important to use

multiple indicators and not trade on any one technical concept in isolation. There is

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 a higher chance for a profitable trade if many technical tools are signaling the same

message. Regardless of the strategy and the technical indicators you use, you

should always enter a trade with a clear trading plan. This means you should have a

target price and a stop loss. Through analysis and experience, you can determine

which swing trading strategies work best for you.

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