How To Swing Trade: A Beginner’s Guide to Trading Tools, Money Management, Rules, Routines and Strategies of a Swing Trader

by Brian Pezim

Engulfing candlesticks and doji can indicate a trend reversal. You can trade these as a trend reversal and especially with other confirming indicators like the MACD and RSI.

I suggest that you find a couple of tools that you feel comfortable using and then focus on them rather than getting bogged down with trying to manage and find alignment with too many

The tools I will look at are ones that I use on a regular basis and include the following: support and resistance levels moving averages (simple and exponential) Relative Strength Index (RSI) MACD: convergence and divergence Average True Range (ATR)

tend to find price levels that are hard to break through. For stocks heading higher, these levels are called areas of resistance. Conversely, stocks that are dropping will eventually find price levels where buyers come in and prevent the price from moving lower. These are called areas of support.

you need to be aware that SMA and EMA tools do not work well in markets or in stocks that are trading in a limited range (where the price makes relatively small moves between support and resistance).

The SMA can be used to find a potential area of support or resistance.

Moving averages can be used as an indicator to enter a trade, to exit a trade and to stay in an existing trade. Therefore, it is a good tool in your arsenal when markets and/or stocks are trending up or down.

traders who use the RSI get interested in stocks that are either below 30 or above 70 on the index.

Index readings above or below these numbers provide an indication that the stock price may be due for a reversal in price trend.

I prefer 20 and 80 for swing trading because these are more extreme levels of overbought and oversold

In an uptrending market, the RSI value will run between 45 and 85, with the 45 area on the index acting as support. A downtrending market will result in RSI values of 15 to 55, with resistance being around 55.

I do not suggest that the RSI is a good stand-alone indicator as it is better used in combination with the other tools and indicators discussed in this book to confirm if a bottoming or topping in price action is happening.

Another common reversal tracking tool used by traders is the Moving Average Convergence Divergence, which is commonly referred to as the MACD.

Although the RSI is more commonly used as a momentum indicator, the MACD is another indicator that you can use to check the momentum of a stock’s price action.

the MACD and RSI charts can be overlaid to see if there is an alignment between these 2 momentum indicators. If there is, this will give you more confidence in taking a position.

The ATR is an indicator that measures the “volatility” of price action or, in other words, how much a stock price can swing over a certain period of time (such as a day).

Horizontal support and resistance lines are one of the most common tools and are relatively easy for novice swing traders to learn how to use.

There are a number of different time periods that the moving averages are commonly calculated for. These include the 20-day, 50-day and 200-day periods.

Listed below are a few of my favorite classic chart patterns that you should be aware of and watch for when you are reviewing charts for potential swing trades. These classic patterns include: double bottoms and double tops bull and bear flags bull and bear pendants ABCD patterns head and shoulders patterns

You should stay with the trend in swing trading because the trend is your friend.

The double bottom pattern resembles the shape of a “W” when looked at in a chart.

The bull flag starts with a strong price spike higher that often catches traders who are short the stock off-guard. The many market scanners do their work and identify the long opportunity, so momentum traders then get in long to help feed the buying frenzy and push the price higher. Eventually, the initial price spike runs out of steam and the price action starts to form an orderly pullback where the highs and lows are close to parallel with each other. Drawing the diagonal support and resistance lines forms a sort of tilted rectangle.

The opposite of the bull flag is referred to as the bear flag. It has the same chart pattern as the bull flag except it is inverted and results in the continuation of downward price action in a stock.

Flag patterns require a little patience while you wait for the flag to form after the initial run up or drop. Once you have recognized the beginning of the pattern, you should start to plot the upper and lower trendlines as they form.

The difference between the pendant and the flag is in the shape that the price action creates during this period of consolidation.

The ABCD pattern is another one of the basic and relatively easy patterns to recognize and trade. It is essentially a price move higher or lower, followed by a flag and then a continuation of a trend.

To summarize my trading strategy for the ABCD pattern: You look for stocks in a strong uptrend or downtrend. You will find these by using a scan (discussed later in this book) or through some other source such as social media. You then watch for the stock to transition into a consolidation period where the price action becomes choppy for a period of time. As the choppy price action continues, you draw your lines of support and resistance and plan your trade with an entry point, stop-loss price and exit strategy for a profit. You enter the trade when the price hits your entry point and then you follow your trading plan, taking profits either by a single sale or by scaling out if you think the trend will continue. If the trade does not go as expected, you stop out, take the loss and move on to the next opportunity.

Head and Shoulders Patterns The head and shoulders

Double bottoms and double tops are very good patterns to trade off of

Bull and bear flags are important to recognize for a swing trader. They can provide a good entry point for a trade or they can be recognized as a pause in a longer-term trend before an additional move in the trend direction.

A bull flag starts with a strong trend higher, followed by a period of consolidation where the price of the stock churns sideways before continuing higher.

A bear flag starts with a strong trend lower, followed by a bounce higher as shorts cover and bargain hunters buy because they think it is a bottom.

A pendant is also a consolidating price action similar to a flag. The distinguishing difference with a pendant is that the support and resistance lines drawn off of the highs and lows slowly converge to a point.

ABCD is a common pattern seen in a longer-term trend and is based on the principle that stock prices move in waves where the buyers and sellers are in a constant fight for control of the price.

The head and shoulders pattern is appropriately named because of the shape that the price action makes in a chart. Over a period of time, the candlesticks or bars trace out a left shoulder, followed by a head.

guiding principles that I build these strategies on. They are as follows: Keep it simple. Treat your swing trading activity like a serious business. Develop a work plan and stick with it. Actively manage your risk to reward ratio; focus on the entry. Measure your results and adjust accordingly.

I have thus far covered many different tools and indicators you can use to help you to make a decision. You do not need to use all of them to be a successful swing trader. Once you find 1 or 2 that work well for you, you should then stick with those.

Have a designated area where you do your research and keep all of your records.

Have a work plan and stick with it. Your work plan should include checking the market at the open and before the close.

Below are 4 of my rules for swing trading based on the risks of holding securities overnight or for an extended period of time: Rule #1: avoid holding positions on a stock through an earnings report. Rule #2: avoid holding positions through known events. (For example – the date a pharmaceutical company is scheduled to release a trial result.) Rule #3: research the company you are investing in and determine if the basic fundamentals support your forecast for the stock price. Rule #4: follow your risk to reward plan and do not over-invest in one position.

Rule #5: avoid trading over-the-counter (OTC) equities or stocks trading for under $1.00.

The following 3 strategies are the ones that I primarily employ: regularly scanning for trades short-term gap trades hot sector manias

sometimes the best trade is “no trade” at all.

scanning can be done through a very good website called Finviz (finviz.com).

ChartMill (Chartmill.com) is another site that offers a similar free scanning service.

if you choose to instead use your broker’s site, then you will likely go through a similar process as follows: review overall market conditions review performance of market sectors screen for opportunities review the short list of opportunities

Many professional traders have a rule of thumb called the “3-day rule”. This rule is based on the belief that if some event has moved a stock price, the effects will be felt for about 3 days before the volatility returns to normal and the price finds a new equilibrium

The 3 different strategies are summarized below. 1. Regularly Scanning for Trades Regularly scanning the market is one way to find opportunities for swing trades.

Checking the market sentiment and specific sector performance is a good step to take before entering a swing trade in an individual stock. It is usually better to take trades where the stock and sector are both moving in the same direction. Ideally, a swing trader wants alignment in sentiment.

Prior to entering a position in a stock, look for pending events that you might not want to hold your position through, such as an earnings report or a drug trial result.