Week - 2 Swing Trading - Basics

Welcome back guys and girls to WEEK 2 on Swing trading

Last week we started with an intro on stage analysis. This week I am going to give you a broader view on all four stages and three phases associated with every stage.

Lets get started rite away, We will do a quick lesson on Elliot wave this week, that would complete the major lessons on swing charting (not trading).

I firmly believe that to compete in the market arena, the four stock market stages will be one of your weapons to time the move perfectly and add confidence in buying any rally. But this comes only with practice, take 10 charts a week, practice and practice until you master it. It is my advice to use this as a supporting point to any other analysis you perform.

The chart (from last week) for reference again

Lets take a look at all the stages and phases.

Stage 1A – Bottom Found.

                First sign of strength after a down trend (typically)

Stage 1 – Pattern forming.

               

Breakout of the down trend and price putting out higher lows in tight range (Starter position, with tight losses)

Stage 1B – Pattern Breakout.

Breakout – This is where we come in as Swing trader.

Stage 2A – Retrace - First Breakout.

Retrace to test, fib levels, pivots, supports, trendlines etc.

Stage 2 - Advancing Stage

The move happens, and the ticker gets overbought and keeps moving.

Stage 2B – Parabolic move or a huge % gain candle.

(I try to keep an eye for any parabolic moves here, if it happens,I quickly plot out trendlines, and watch for trendline supports on different time period or use 10 SMA instead of trendlines ).  

Stage 3A – Price action slowing, signs of weakness.

Look for reversal chart pattern to begin forming. (look for consolidation volume)

Stage 3 – Top heavy. (decreasing volume on push ups is one way to spot this)

Scale out inside the reversal chart pattern

Stage 3B – Breaking down.

Watch for 20 SMA or Trendline support to break.

Stage 4A – Downtrend begins.

Break down and trend down.

Stage 4 - The Declining Stage.

Here there may be a retest of up trend line that was broken, be sure to watch for shorts typically will lose at the trendline resistance. (Very few stocks breakout again, AAMRQ recently is a good example of this).

Stage 4B - Late in downtrend.

Forget the ticker for a while, let it cool. Move on to the second ticker from your list.

On all these stages, you should keep an eye on Volume and Price. Any technical indicator you use or read about is based on either one or both. Nothing else.

Note: A leading indicator cannot be a leading indicator, because the price and volume has to develop completely for the indicators to generate or confirm a signal.

Stock market stages occur in all time frames on every chart you look at. Sometimes can be hidden in a weekly chart, or 30 min chart or 5 min chart. It is up to you to decide what time frame you want to look at, and see if you have enough reward to risk ratio. If you don’t find it good enough, move on, we have 10,000+ stocks trading why get stuck with crappy tickers? .

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ELLIOT Wave (http://www.elliottwave.com)

(I am going to just touch the basic here, this is very complicated to locate the pattern, there are various views discussed on this, but honestly I don’t use it, well with that being said, the overview from my perspective of Elliot theory is any breakout will retrace, that’s all I need from these 300+ books that talks about Elliot's theory).

The Elliott wave pattern defines that securities tend to move in a five + three wave patterns that consists of a Trending and a consolidation phase.

This is how an Elliot wave is described to be. 

To show some Live examples of Elliot wave, below is a chart again TSLA – it is familiar and has what I was looking to add an example.

On the above chart you can see there is one complete Elliot wave (I, II, III, IV, V), and One incomplete Elliot wave ((I), (II), (III)) It is incomplete because the (IV) and (V) is missing. Hindsight can tell you lot of stories. Will TSLA complete the missing moves??? Only Elliot and his firm believer can bet on it, Not me.

If you can successfully spot an Elliot wave (especially 3 or III or iii) and time it perfectly, you are a genius and you are going to over take any so called stock market teachers monthly gains, I am serious, lol. 

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- Next week we will get into SMA vs EMA, what to use? and how to use?

I am not going to talk about Golden cross, Silver cross, Bronze cross (I am yet to see platinum and diamond crosses lol), you can find all that information on every site available, whether it is paid or free. The methods i describe here are some techniques i use and how i use moving averages. 

I have added a feedburner subscription above the article, if you would like to receive an email on new posts. subscribe.

Week - 1 Swing trading - Basics

I am taking a different approach for my blog, rather than discussing indicators, I want to give a basic insight of Swing trading, and those who are not interested can close and walk away, just like you leave money on the table right now. I will try to add weekly articles on swing trading. Once I complete the basic lessons I will also start adding my weekly watch lists for Swing trading the following week.

Swing trading securities could be a challenge for those who ignore the technical analysis.

First thing you need to understand is technical indicators vs Market Sentiment.

Secondly, the market is going to challenge you, no matter how good you are. I lost money in the first year. But now I constantly make 10-20% a week. Add those up over an year (1.10 ^ 52 = 140) if you start with just $1000 and swing trade for 10% every week, will add up to $140,000 ideally. Now the question to you is how are you going to do it?

Three Simple disciplines (get a tattoo if you have bad memory)

1) Plan your trade over the weekend (Scan and analyze)

2) Trade the Plan (Take positions)

3) Exit when you mess up (Have set mental stop losses)

If you cannot perform the first step, you cannot execute the next two steps. So scanning for stocks is a vital step.

Before we get further into strategy scanning, let me try to define what “I” mean by swing trading?

A trading strategy for securities to capture short term moves in the stock market. I typically hold a stock for 2 to 5 days, unless I get stopped out on day one. This to me is a perfect time frame for non-day traders and to capture explosive moves in a stock in a very short period of time. (This explosive moves happen over and over again, you will love it when you learn all my tricks and tactics)

As a swing trader I am not worried

• About the fundamentals of a company. (I run it through very quickly at times if I am playing a reversal play, catching a falling knife is tough)
• What kind of products they sell. (I look for their Price to Sales ratio, and yearly sales % increase, market sector, and projected EPS and etc...... if any, just to decide if its going in for a trade bucket list *)
• What the name of the company is. (Of course, I will look at it if it has to hit my trade bucket *)

(* note: doesn't apply for my swing trading strategies)

The decision I make solely from Technical scanning, Analysis and Plan the trade.

• I scan with RSI, MFI, ADX, MACD, PPO, SMA, EMA, and sometimes Stochastics.
• I look for price pattern, short interest on a security depending on what I am interested in the stocks, Bottom bouncer or Breakouts

I pick the stocks with just two criteria,

• Is the stock getting money? (Increasing volume)
• How much is the Risk/Reward ratio is.  (This varies with strategies)

That’s about it, if you can follow these, swing trading can be easy.

Lets start with a technical analysis, (Stage Analysis)

It is a classic method by Stan Weinstein’s, described in his book from 1988 “Secrets for Profiting in Bull and Bear Markets“

Definitions of the Stages 

Stage 1 - Bottom Phase. Or Accumulation Zone.

Stage 2 - Advancing Stage

Stage 3 - Top Area

Stage 4 - Declining stage

I will try to do an in-depth lesson on stage analysis (each stage will be a weekly lesson), showing some examples later. But this should give you an idea of what is stage analysis.

Hindsight shows us, this method is beautiful. It’s not as easy as it appears when making a decision. Therefore, we need more confirmations.

-      Leave any questions in comments section; I moderate the comments, so I will post those comments, if it is helpful.

Most profitable plays in my books - Enjoy guys,

After a great dilemma, I have decided to disclose how to spot the pending breakout plays, yes based on the requests i got for this. This is a setup for Big money in and Massive money out kinda plays.

I am not going to share my scan settings here, I am still in the process of fine tuning, may be in future. 

What you are going to see might seem crazy. I buy overbought conditions. No its not a mistake, yes I buy when a stock hits overbought conditions. Why? I will answer at the end of this article.

Note for day traders, Please for the love of your trading account, PLEASE PLEASE don’t use this strategy in 1,2,3,5,10,15,30 minutes, 1,2,3,4,8 hour charts, this is for those who cannot watch the market 8 hours (+5 hours of non-market hour trading).

Before we start this, I would want you guys to have a clear mathematical understanding on RSI and MACD. (I love Mathematics). Use all you learnt in your high school and understand it, because it is very very very very IMPORTANT!!!!, If you want to understand a stock movement in Overbought conditions.

First, Get a cup of coffee, because I don’t want you to fall asleep. Because I am going over few mathematical relationship between price movement and RSI (first) and Stochastic (second)

LETS START.

                    100

    RSI = 100 (-) --------

                   1 + RS

    RS = Average Gain / Average Loss (for any given time period)

If you are evaluating RSI for 14 (5min/30min/day/week/month, whatever it may be), first calculations for average gain and average loss are simple 14 period averages.

 First Average Gain = Sum of Gains over the past 14 periods / 14.

 First Average Loss = Sum of Losses over the past 14 periods / 14

The second, and subsequent, calculations are based on the prior averages and the current gain loss:

Average Gain = [(previous Average Gain) x 13 + current Gain] / 14.

Average Loss = [(previous Average Loss) x 13 + current Loss] / 14.

This smooths the curve. Lets just look at the simple approach.

Lets do a reverse analysis by assuming RSI is 70.

                  100

    70 = 100 - --------

                 1 + RS

              100

    30 =    --------

             1 + RS

 1 + RS = 100/30 = 3.333

RS = 2.333

From what we see here, In order to hit RSI = 70, The stock has gained 2.333 (Avg gain/Avg loss) times in 14 days.

Putting it in lay man terms, one can say for every 10 (sellers) in the stocks, there are 23 (buyers), in the last 14 days taking long positions with equal $ amount and etc............ Which means, the mass crowd is interested in the stocks, and it will explode.

Who would not love this stock? Particular swing traders who loves buying a stock in oversold conditions (don't want to name the chat room, but definitely not Promotion Stock Secret) and wait for few months or years possibly to sell it at overbought, oops..... yes they sell it.

This is a little trick, not every average trader uses, but they always dream, capturing the greatest move. I did that too....

Are you guys ready? Lets get started, Sip the delicious coffee again.

For the ease of explanation I want to use TSLA stock as an example. (Of course fundamental traders, there are fundamental reason why this moved. Like Short squeeze, good earnings etc… ), but remember charts show all those in terms of volume and price movements.

First, define timeline for the stocks. Do not use daily, or anything lower, you will fail miserably, I want you guys to get this straight in your head. Never use this on daily chart. Never use this on daily chart. 

Never use this on daily chart or any lower timelines, until you get really comfortable with RSI overbought conditions, then start using it on daily to day trade. 

I cant stress this enough. Infact, I just started using this strategy, only for the reason it takes few months to take profits, and years to test this strategy, lol. 

SEVEN SUPER STEPS (SSS - SCAN and Execute), (oh btw, SSS - NYSE traded stocks hits trendline support, might have a 20% gain if played perfectly)

1)  Start your analysis with Weekly Chart.

2)  You need to look for stocks making new high on RSI in 52 weeks (1 year), or 104 weeks (2 years, best for explosive move, hard to find). Why in 52 weeks? Which tell me that the stock is absolutely loved by the masses recently over the year. The new high also indicates that the stock gained good momentum ofcourse is a momentum oscillator, (if you don't know whats momentum in a stock, seek a mentor right now).

3)  Look at MACD, if the MACD line is making new high in 1 or 2 year period.

Ok you spotted bunch of stocks, now what?

4)  Read the stories. You like it, then

5)  Look for the RSI to retrace to previous resistance or support points

a.  It could be trendlines or horizontal lines. (incase of TSLA it was horizontal).

6)  Look at the Candle, for Support and resistance

7)  Look for the SMA 50

All looks great, now wait for the accumulation zone.

Open Daily chart, Plot out support and resistances, also watch for RSI to hit oversold (lucky if this happens). Place your trade. And enjoy the ride. Easy to say, but Imagine locking up $10,000 for 200+ days, will a day trader do it? or will a swing trader do this? I have to confess! I rarely do it. YES, rarely. Smart way is swing trade such a stocks. JMO. 

Lets complete it with few examples

FORD did this in 2004,

FORD did it again

If you would have heard me mention about CSIQ quite a few times this year, Here is why?

--- Will add more charts if time permits for reference. I don't think i need to answer why I buy overbought?

ONVO - was the recent winner from this strategy. will post the chart this weekend, Unfortunately, trading view doesn't have price history during the time it spent on otc. May be some other time. 

I always wanted to keep this to myself, and just was not ready to share it. I think you guys can have it. There is ofcourse a lot hard work behind this, years of work and researches, please treat it as a highly valued material.

This article is not complete, this is really like a single page summary of "In Search of Lost Time", there are more than a few things you need to look for in such a trade. Like BB and KC squeeze conditions along with Momentum Indicators, Pivot squeezes / missed monthly or weekly or yearly (really rare, i would avoid if you find yearly pivot not tested in one year) pivot points, EMA ribbons reversal conditions, and few others secondary conditions. 

NOTE: This article is just the Basic and the most important aspect of this setup. Following only this on every ticker you find may turn out to get stopped out for a loss.

Any question or clarifications or suggestions. or email me or leave a comment.