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How to Draw Trend Lines on a Stock Chart

Drawing trend lines is an art form that can take a while to master. That is because everyone has their own unique way of drawing them! There is no perfect way to draw them and it seems that no one can agree on the best way!

What is the purpose of drawing trend lines?

The purpose of drawing trend lines is to identify where possible reversals will take place. They can also signal that a change in trend may occur.

In a uptrend, draw the line along the lowest points in the trend without letting the line cross through prices. You need at least two touches of the trend line.

Like this:

That is the proper way to draw a trend line. You can see how the stock found support near the line after we got a least two touches. That would have been a great opportunity to establish a position in the stock.

But the stock market is not perfect...

You can see in this chart of QQQQ, that there was a trend line break but it did not result in a change of trend. Just because a stock breaks that line that you drew, does not mean that all of a sudden the stock is going to tank!

On this chart, you can also see how a stock can often run into resistance near a trend line, if it is broken (top of chart).

So what do I do if the stock breaks the trend line? You draw another one! Like this...

Sometimes, you can have several trend lines on a single chart. Here is another example on a chart of the Dow Jones Industrials:

After the first trend line break, we discovered that a change in trend was not going to occur, so we drew another one at this point. After that, we would just wait for another touch of the line and look for a reversal pattern to establish a position.

Here are some more trend line tips

The more times a stock touches a trend line, the more significant it becomes.

It takes two touches to draw a trend line, but 3 to confirm it as being a valid one.

In a down trend, draw the line along the highs of prices.

The steeper the trend line, the less reliable it will be.

A trend line break does not mean that the trend will change.

In conclusion...

I have a confession. I do not draw trend lines very often! After you have looked at thousands of charts, you can see them without having to actually draw them in. And I certainly would never buy a stock just because it is hitting a trend line.

They are just a piece of the puzzle

The 3-Step Method That Predicts a Change in Trend 80% of the Time

In the book, Trader Vic - Methods of a Wall Street Master, Victor Sperandeo gives three steps for identifying a change in trend. This three-step method will help you avoid losing trades and find great trading opportunities. It correctly predicts a trend change 60 to 80% of the time.

So, this is definitely worth learning!

The three steps are:

1. A trend line is broken.

2. There is a retest and failure.

3. Price falls below the prior low

These three steps define a stock that has moved from an uptrend to a downtrend. Learn these three steps and you will never trade on the wrong side of the trend again.

Let's take these one at a time:

Step 1. A trendline is broken

This chart shows that the trendline has been broken. The trend has not changed yet. Stocks will often break a trendline and then continue to move in the direction of the prevailing trend. At this point we are concerned about the trend - but we do not know if the trend will change.

Step 2. There is a retest and failure

We know that a stock in an uptrend makes higher highs and higher lows. When a stock fails to do this, we should be begin to question the trend. This stock has now tested that prior high - and failed. So, this stock is no longer making higher highs. But, it is not making lower lows either!

So far, there is no confirmation that the trend has changed.

Step 3. Price falls below the prior low

This stock has now fallen below the previous swing low. We now have confirmation that the trend has changed. Why? Because this stock is now making lower highs and lower lows. And that is the definition of a downtrend!

This trend change example shows a stock moving from an uptrend to a downtrend. What about a stock that moves from a downtrend to an uptrend?

It's reversed:

It's official. This stock is now in an uptrend because it is making higher highs and higher lows.

How does this help you as a swing trader?

First, you want to be cautious of swing trading stocks after a trendline break. You can still trade them but watch carefully to see what happens next. If there is a retest and failure, the trend might change. If the trend does change, then you might consider trading it in the opposite direction.

Second, you want to trade stocks that are at the beginning of the trend because these stocks have the most potential for explosive moves.

How do you find these stocks?

You can use a moving average crossover scan to help you find stocks that are at the beginning of a trend. Here is an example:

The 10 period moving average has just crossed down through the 30 period moving average. This stock has the potential to change from an uptrend to a downtrend. But, we won't have confirmation until we see if it falls below that prior low (rule 3).

Using Trader Vic's 3-step method will help you find winning trades and avoid losing ones.

Memorize it, and you will be able to spot trend changes instantly just by glancing at a stock chart.

Master it, and you'll be able to jump onto a trend...long before the crowd does.

How to Use Moving Averages

Moving averages help us to first define the trend and second, to recognize changes in the trend. That's it. There is nothing else that they are good for. Any thing else is just a waste of time.

I won't be getting into the gory details about how they are constructed. There are about a zillion websites that will explain the mathematical make-up of them. I'll let you do that on your own one day when you are extremely bored out of your mind! But all you really have to know is that a moving average line is just the average price of a stock over time. That's it.

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. Let's look at an example:

You can see in the chart above how these lines can help you define trends. 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 mid August and the trend is down. Then, the 10 SMA crosses back up through the 30 EMA in September 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. The 10 SMA must be above the 30 EMA.

2. There must be plenty of space in between the moving averages.

3. 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 intra-day (15 min, 60 min) charts.

The 200 SMA is the most important moving average to have on a stock chart. You will be surprised at how many times a stock will reverse in this area.

Use this to your advantage!

Also, when writing scans for stocks, you can use this as an additional filter to find potential long setups that are above this line and potential short setups that are below this line.

Support and resistance?

Contrary to popular belief, stocks do not find support or run into resistance on moving averages. Many times you will hear traders say, "Hey, look at this stock! It bounced off of the 50 day moving average!"

Wrong!

Why would a stock suddenly bounce off of a line that some trader put on a stock chart? It wouldn't. A stock will only bounce (if you want to call it that) off of significant price levels that occurred in the past - not a line on a chart.

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.

How to Identify Support and Resistance Levels on a Stock Chart

Support and resistance identify areas of supply and demand. But what exactly is 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!

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.

Ok, you probably already knew all that but here is something that most traders do not know. 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.

Here is an example:

The chart above shows how stocks run into resistance and find support. When this stock reached a prior high (resistance), it fell. When it reached a prior low (support), it rose. Now, look at the next chart...

This stock broke through resistance. When it pulled back, it found support at the prior high. This chart shows how resistance, once broken, can become support.

Tip: The more times a stock hits a support or resistance area the weaker it becomes (and the

possibility of a breakout increases). Look back up at the previous chart. That stock hit the

$26.50 area several times before finally breaking out.

Look again at the those areas that I highlighted in yellow. What are these traders doing buying stocks that are running up into an area of supply (resistance)? Why are they selling their stocks when it is falling down to an area of demand (support)?

They do that because they are novice traders. They always buy after significant buying has already taken place into areas of resistance, and they always sell after significant selling has already taken place into areas of support.

This is the opposite of what you should do!

So...

YOUR JOB AS A SWING TRADER IS TO IDENTIFY THE NOVICE TRADERS BECAUSE THOSE TRADERS ARE THE ONES YOU WILL PROFIT FROM.

How swing traders use support and resistance

So, how does this apply to swing trading? You are looking for stocks to pull back to a prior resistance area. Then, you look for signs that the stock is going to reverse. Here is an example:

The highlighted area in green is where you would buy the stock.

It works just the opposite for shorting stocks. You short stocks after they rally to a prior support area. Like this:

The highlighted area in red is where you would short this stock.

But wait! There are other forms of support and resistance that are not so common. For example, look for stocks that pull back and find support halfway into a prior wide range candle. Like this:

Or, look for stocks to pull back and find support halfway into a gap...

The bottom line is that you want to be buying stocks where buyers will likely come into the stock (support). You want to be selling stocks where sellers will likely come into the stock (resistance). Novice traders do just the opposite of this.

Don't follow the novice traders!

The Psychology Behind Technical Analysis

The psychology behind trading stocks is the force that moves the stock market. A stock chart is nothing more than a picture of human emotions. Painted on the canvas are the emotions of greed, fear, hope, and euphoria. As a disciplined trader, you capitalize on the psychological demons that plague othertraders.

Should I buy?

Should I sell?

Should I take profits?

Should I take a loss?

These are some of the questions that destroy trading accounts because the novice traders asking these questions do not have a plan. If you asked a professional trader one of these questions he or she would say, "I don't know. What does your plan tell you to do."

So what ends up happening? They get excited and buy at the worst possible time. Then the stock reverses. Fear creeps in and then the stock goes lower... and lower... and lower. Finally the pain becomes too much to bear so they sell taking a huge loss.

You cannot take big losses and expect to be a profitable swing trader and if you cannot take a small loss, then you will take the mother of all losses! Believe it!

Now let's look at the psychology behind what happens when a stock does go in the desired direction:

Excitement! Euphoria! Yeah, I'm making money! "I had better sell to lock in these profits since I have had several losing trades in a row." The trader then ends up selling too soon!

By now I'm sure that you have heard the saying, "Keep you losses small and let your winners run". Look at what just happened in the above example. The un-disciplined trader has just done the opposite! They have let their losses get big and they have limited their winners!

All of this mental anguish can be eliminated by having a decent trading strategy and the mental discipline to stick with it. Write down a plan for the trade before you trade the stock. Then trade it according to the plan that YOU have written. Remember that you have devised a plan before you got into the trade when your emotions were stable. Now you can trade your plan with confidence.

For most novice traders, it is not their strategy that is causing them to lose money. It is themselves that is their biggest enemy.

Traders psychology on a stock chart

Learning to trade stocks and applying technical analysis to charts is mostly about human psychology - not chart patterns and candlestick patterns themselves. You have to understand the psychology behind these patterns. Take a look at the following chart:

Here is a breakdown of what happens:

Breakout Traders - These traders bought the breakout. They operate under the "greater fool theory". They are just praying that other traders come along and buy higher than they did.

Novice Traders - These traders just have no idea what they are doing. There are buying shares of stock that the breakout traders are now selling to them.

Momentum Traders - These traders are buying the pullback and tend to buy near the 10 MA. They are likely going to put their stop below the low of the hammer.

Swing Traders - This is where we come in. The stock falls below that hammer and the momentum traders get stopped out. By now most of the novice traders and momentum traders have sold. See how the volume has tapered off? Previous resistance now becomes support.

Novice Traders - Once again, the novice traders are buying at the worst possible time. We need these traders so that we can sell our shares to them and make a profit.

This happens over, and over, and over again - on every stock chart in every time frame.

Remember this is all just speculation. We obviously aren't mind readers - but we can understand how other traders think. How do I know all this? Because I used to be a breakout trader... and I used to be a novice trader... and I used to be a momentum trader!

So I have a general idea of how they think, where their stops are, and what they might do next.

As swing traders, all we really have to know is the psychology behind the moves in the stock market. We have to learn how to control our own emotions first and then we have to learn how to profit off of those that have not learned how to control them!

How to Interpret Volume on a Stock Chart

The volume on a stock chart 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. In fact, you could trade any stock without even looking at it!

First a definition...

Stock chart volume is the number of shares traded during a given time period.

Usually plotted as a histogram under a chart, volume represents the interest level in a stock. 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.

Let's 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 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 (circled) 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 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 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 can't buy something unless someone is selling it to you and you can't 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.

The Top 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

Ok, let's begin with the first one...

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. That's 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. Learn more about how to trade a doji candlestick pattern.

Bearish candlestick patterns

You'll 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 it's your turn! I'll 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.

Should you wait for 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 ain't waitin' for no stinkin' confirmation!

How's 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.

Just the way I like it.

How to Trade a Doji Candlestick Pattern

A doji occurs when the opening and closing price is the same (or close to it). Many traders think that this candlestick pattern is one of the best ones to trade. Heck, Steve Nison devotes a whole chapter to it!

The reality is that this pattern doesn't tell you a whole lot. At best, it only tells you that the previous momentum has stalled.

But you can make this pattern work for you. Here's how.

The first thing that you need to know is that a doji is only significant after an extended move to the upside (for a short setup) or an extended move to the downside (for a long setup). Also, the doji should be at a support or resistance area.

Here is an example:

This stock formed a doji after consecutive up days and moved right into a previous support area at $17.50. We know that a support area can become resistance once it is broken so this is a nice candidate for a short setup.

So far, so good.

But how can you tell if this stock is likely to reverse to the downside or just continue to the upside?

Move down to a lower time frame and see what is happening inside of that doji.

That is the only way to know.

You can't tell from looking at the daily chart what the heck is going to happen next! You have to move down to a lower time frame. I use the hourly or the 15 minute chart. Here is the hourly chart:

This stock has formed a diamond top reversal pattern and it has two "tails" that show that the sellers are getting aggressive at this price area.

In a scenario like this you could short this stock on the day of the doji (for an aggressive entry) or wait until the following day to see if it trades decisively under that reversal pattern. Either way, your stop would go above those tails.

This stock traded down 5% on the following day:

Of course it doesn't always work out this way. But, you can significantly improve your success rate trading a doji candlestick pattern by hunting for those hidden reversal patterns in the lower time frames.

Don't see a reversal pattern?

Then it may be wise to look for another stock to trade.

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.

And this is what separates the novice trader from the professional. There are several factors on a chart that make it worthy of trading. 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.

Go ahead, I'll wait...

Got it printed out? Great! Now you won't forget anything important when it's time to analyze a chart for your next trade. 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!

Ok, now let's go through the list one by one to make sure that you know how to answer the questions correctly. Don't worry, with practice, you will not even need to think about these things. It will become automatic.

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 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 a while, 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!

Chart analysis

Price, as interpreted by candles, is the most important factor to consider on a chart. Put away the technical indicators. You do not need them. Technical indicators serve one purpose: to confuse novice traders! There isn't anything on a chart that can be learned from them. Everything you need to know is right in front of you in the candles!

Ok, let's go back to our chart example:

There are some very significant things happening on this chart. Do you see them? You will in a minute. We continue answering questions...

The moving averages are lined up.

We want the 10 SMA above the 30 EMA and we also want there to be plenty of space in between the two moving averages. This creates the Traders Action Zone (TAZ) that we can trade in. If the moving averages move too close together, then a trading range or basing pattern will likely develop. We don't want that!

There was a breakout recently.

This is good! We want to buy a pullback as close as possible to a breakout as we can. Why? We want to know that there is interest in a stock. Remember that institutional traders have to accumulate shares over time. They can't buy tons of shares all at once. They have to buy a little at a time. By looking for break outs, we can expect them to have to buy more in the future. This will propel the stock higher.

This is a smooth chart.

We don't want to trade stocks that are whipping around everywhere! That is a good way to get stopped out on trades. This stock is in a smooth uptrend that can be traded with confidence, and without fear of getting shaken out of the trade.

No significant chart patterns.

In this example, there aren't any significant chart patterns. This is fine. You don't need any kind of a chart pattern like a cup and handle pattern, or a triangle to trade a stock. You do, however, want to be able to identify them when they are there. This could add some weight to the setup and may make us favor one trade over another.

There are wide range candles in the direction of the trend.

See how at the end of August there are three wide range candles that close near the top of their range? There was also a wide range candle on the breakout in

July. This is very significant! In fact it may be one of the most significant things on the chart. Stocks tend to move in the direction of wide range candles.

There is one significant gap.

There is only one significant gap to the upside on the breakout in July. Ideally, we would like to see more. A better case scenario would be if there was a more recent gap. Why? Because stocks tend to move in the direction of gaps! Be careful though. After three or more gaps, a stock can become overbought and may not continue to move forward.

Professionals are buying weakness.

How do we know this? We know by looking for "tails" or "shadows" at the bottom of the candles. On the sixth of September there is a tail, and on this day (green arrow) there is a tail. This is very significant! You want to see that the big players are coming in to support the stock. You want them to protect you from any downside risk.

This stock is at support.

This stock has pulled back to a prior high made in the middle of August. This is identified by the red/green support line drawn on the chart. When a stock pulls back to a prior high it is known as minor support. It is still a significant support area, just not as significant as if it pulled back to a prior low.

For example, if the stock pulled back to the prior low at $15.68 (see chart), then it would be major support. Also, notice how the lower trend line and the support line converge into one right at today's candle (green arrow). This is very significant! This increases the strength of the support.

This stock is at a Fibonacci retracement level.

There are three Fibonacci retracement levels that you look at: 38.2%, 50%, and 61.8%. This stock has pulled back to the 38.2% level (not shown on the chart above). You want to trade pullbacks to this level or the 50% level. If it goes down

to the 61.8% level, it may be signaling weakness. Avoid those stocks. Note that this level also corresponds with the support line.

Volume is showing that there is interest in the stock.

See the big volume on up days and the lower volume on down days? This is the ideal scenario but it isn't absolutely necessary. I tend to favor low volume pullbacks over high volume pullbacks but I will trade both. If a stock is pulling back on low volume, it means that traders have lost interest in the stock and things get really quiet. This is usually when institutional traders come in: when everyone forgets about the stock!

Conclusion

This concludes our analysis of the stock. We have determined that we are going to trade this stock! Want to see what happens next?

Nice! All of our analysis has paid off. This stock has successfully moved in our favor and now we can just trail our stops under the lows of the candles until stopped out.

I know it seems like a lot of work went into analyzing this chart but what can I say? Trading stocks does take some work! It will, however, get faster with time. After you look at thousands and thousands of charts in this manner, everything will become second nature.

Instead of it taking minutes to look at a chart - it will take seconds!

Learn How to Read Stock Charts Like a Book

You can read a stock chart like a book. It breaks down into 3 components: title, chapter, and the words - just like a book. And, all of these components make up the story.

The Title

This is the chart pattern that you want to look for first. It is the "big picture" look at the daily chart. And, like a book, it tells you if the "story" might be interesting to read. So, set your daily chart to go back 6 or 7 months. This will give you plenty of room to identify patterns.

Here is an example:

This looks like a good potential trade on the short side. It has entered a stage four down trend. Now we just need a price pattern.

The Chapter

The price pattern is just a pull back on the daily chart. Here is the same chart as the one above a few days later.

This is a near perfect setup on the short side. This stock has rallied up to resistance and it is the first pull back after a break down. Nice. But, there is one thing missing...

The Words

Candlestick patterns are the words in the chapter. It looks like this:

There were three up days in a row and then a down day. This is a good sign that the previous momentum has shifted from buyers to sellers. Ideally, a bearish candlestick pattern like a shooting star, engulfing, or a dark cloud cover pattern will show up here.

Here is what happened...

Most new traders don't look at charts this way.

They tend to focus exclusively on the "title". Or, they get caught up in the "words". It's almost like they have a sort of tunnel vision and only look at one aspect of the chart. And, I'm sure I had the same problem when I first started trading.

Every stock chart tells a story. The next time you trade a stock, look for the title, the chapter, and the words that make up the story.

Hopefully, your story will have a happy ending!

Should You Use Technical Indicators?

Are technical indicators worth using? Which ones should I use? Is there one indicator that is better than another? MACD? Stochastics? RSI? Stop the madness! The only thing you need is an understanding of price action.

If you are new to trading stocks you will do yourself a great disservice by trying to use technical indicators to trade stocks. You are far better off by first learning to trade stocks based on price action alone. So put away your OBV, CCI, and PPO for now and just focus on the chart.

Leading And lagging indicators

Technical indicators are generally classified into two categories: Leading Indicators and Lagging Indicators. Leading indicators like stochastics are supposed to lead the price action. Lagging indicators like moving averages follow price action.

This is what they are supposed to do but in reality all technical indicators are lagging indicators because they cannot draw on a chart until after the price action has already been established.

Remember that all technical indicators are generated by using the high, low, open, close, or volume of a stock. It gets this information from the price action in the stock first, then it shows up on your chart as RSI, MACD, etc. Therefore, these indicators can never tell you anything more than what the chart is already saying!

Using technical indicators is like using binoculars at a rock concert when you are in the front row! Why would you do that? Put the binoculars down and just look at the stage! It is the same thing with charts. Just look at the price action.

Learn how to interpret price first

Ok, now that you know the truth about technical indicators, you can finally relax. You can stop looking for the perfect indicators to solve all your trading problems. So what should you look for on a chart? Good question! The main thing that you are trying to figure out on a chart is the psychology of other traders.

You are trying to figure out where they are going to buy and where they are going to sell. You are trying to get into their heads! You want to know if they are excited, nervous, scared, or uninterested.

Every stock, in every time frame, alternates between these four emotional extremes. A stock breaks out of a consolidation (excited), momentum slows down (nervous), traders begin to sell (scared), the selling finishes and there is indecision (uninterested). This cycle repeats over and over again.

As a trader you look at price to find the point at which one emotional state is about to evolve into another. Candlestick patterns are useful to determine these turning points. They will give you these signals far in advance of any technical indicator!

Using technical indicators the right way

You still want to use indicators in your trading? That's fine, just use them the right way - to indicate! If you like using RSI then use it to tell you that a turning point may be coming. Then just forget about it and focus solely on the price action in the stock.

Too often I see traders buying stocks just because and indicator is overbought or oversold. A stock can become overbought or oversold for a very long time. In the meantime you have a position in the stock and you are losing money!

Look for divergences. If there is one thing that technical indicators can be useful for is the ability to identify those times when price is at odds with the indicator. This can signal that a turning point may be coming. As always look at the candles (price) for validation.

Use the right indicator for the job. For analyzing trends using trend following indicators like moving averages. For trading ranges, use oscillators like RSI.

Remember that you do not need any kind of indicator to trade stocks and you certainly should not be using them until you have a full understanding of how to interpret the price action. Even then you may opt to never use them in your trading. I don't use any on my charts.

Practice makes perfect

Print out 20 charts of random stocks. Do not put one technical indicator on the chart! Don't even put moving averages or volume on it. Now find a quite spot in your favorite chair, fire up a nice premium cigar, and just look at the candles.

Look for support and resistance, trend lines, and emotional extremes. Take a piece of paper and cover up the "hard right edge" and try to get into the heads of these traders. Can you feel what they are feeling? More importantly, can you anticipate what will come next?

It has been said that "technical indicators are for novice traders who do not know how to interpret price".

I would have to agree with that.

Looking For The Holy Grail of Trading Stocks?

Looking for the holy grail to trading stocks? Looking for the holy grail of technical analysis? Most will tell you it doesn't exist. But it does. Does it exist in one specific trading system? Nope. Is it a magical technical indicator? Nope. It must be a chart pattern, then right? Not even close.

Yet there it is - right in front of you.

The problem is that your perception of it is flawed. You think that you are going to find a the perfect system, strategy, or indicator and never again have a loss in the stock market. That will never happen. There is nothing that can achieve that goal because there are too many random variables that affect the market.

There are, however, two different factors that we can combine together to come up with what can be defined as the holy grail of trading stocks. Ready?

We can divide it into two parts: Technical Analysis and Management

Technical analysis

Who are the most profitable traders in the world? Anyone? The most profitable traders in the world are the market makers and the specialists. They have consistently made money since the market was created. So why are they so successful?

They are successful because they trade opposite the crowd. They are always on the other side of the orders. When you buy, they are selling to you. When you sell, they are buying your shares. They know what you are going to do next. How? Because human psychology doesn't change.

Hundreds of thousands of traders came before you and made the same mistakes over and over. These novice traders sell into support and buy into resistance and the smart traders profit from them.

The holy grail of technical analysis is to first identify the novice traders because they are the ones you will profit from. In order to consistently make money trading stocks, you need these traders to make the money for you! Without them you would not be able to make any money at all and the stock market wouldn't work.

You profit off of the mistakes of others.

The big name institutions do the same thing, just on a larger scale. They accumulate shares of stocks in bear markets and sell them off to the public during the course of a bull market. They profit off of the novice investors.

So how do you identify the novice traders? Just look at any chart and you will see them. They are the ones selling after significant selling has already taken place into areas of support. They are the ones buying after significant buying has already taken place into areas of resistance.

You must buy when the novice traders are selling. You must sell when the novice traders are buying. You are doing exactly what the market makers and specialists do on a day to day basis. You are trading opposite the crowd, yet the crowd is helping you to become one of the few traders that actually succeed at short term trading.

Isn't it ironic that new traders search for the holy grail of technical analysis only to find out that it had to do with THEM all along?

It's all about management...

Earlier, I said that there are "too many random variables that affect the market". That's why it is impossible to avoid losses while trading stocks. There a bad earnings reports, global problems, terrorist attacks...the list goes on and on.

So, in order to protect yourself from these happenings, you need an extreme self-management, money management, and trade management policy in place. This brings us to part two of the Holy Grail...

You biggest enemy in the stock market will always be yourself. Not anyone or anything else. You are human and you have emotions that will get in the way if you do not know how to manage them. You can be excited, nervous, scared, greedy, happy, and fearful. All of these emotions can cause you to lose money.

How do you prevent this from happening? You must have a plan ahead of time. You must know exactly what you are going to do before you get into the trade when emotions start running rampant. But a plan is not enough. You must have the rock-solid discipline to follow the plan. You must learn the art of self-management and master your emotions.

Even if you follow your plan to the letter, you will still lose money on trades. How much will you lose if you are wrong? This is where money management comes in. You have to know ahead of time how much you are going to lose on a trade if you are wrong. This amount should never exceed 2% of your trading capital.

By risking such a small amount, it shouldn't matter to you if you have a losing trade. It is only one trade. There will be many more. You have only lost a small

amount of money temporarily. You will make the money back on your next trades. So relax!

How will you manage your trades? Use trailing stops! If you are swing trading, use tighter stops. If you are trading a trend, use looser stops.

Determine ahead of time before you get into the trade how you will exit the stock. Remember, you want complete emotional detachment from the trade. Trailing stops is the best way to accomplish this.

The holy grail

There it is. That is the holy grail of trading stocks. Every profitable trading system or strategy, in one way or another, is designed to profit from the weak and misinformed - the novices. Behind that trading system is a person that executes a strict self-management, money management, and trade management policy with precision and discipline.

Do you have what it takes to be a trader? Maybe. Most people don't have the psychological make-up to be traders. It has been said that 80% of traders fail and either quit or lose all their money the first year.

This makes perfect sense. The stock market was designed so that the majority will fail.

That is the only way that the minority can win.

How to Trade Stocks Using Multiple Time Frames

Looking at multiple time frames can give you a better idea of what is happening with a stock. For swing trading, we can break this down into 4 time periods: The daily, weekly, 60 minute, and 5 minute time frames.

Looking at a stock through different time frames can be confusing if you are a new trader. Why? Because each time frame looks different! A stock may look great on the daily chart, but look horrible on a 5 minute chart.

I am going to try and simply it on this page but if looking at all these multiple time frames is confusing the heck out of you, then STOP. Just stick with the daily chart and the hourly (60 minute) chart. You'll do just fine.

The daily time frame

This is where you will spend the majority of your time as a swing trader. When you run your scans, you are running them off of the daily chart. This is where you will seek to find trading opportunities.

Your daily chart should go back 5 to 7 months or longer. You want it to show enough data so that you can find support and resistance points. Remember that each candle represents one day of trading.

Here is an example using QQQQ.

Obviously, your chart will be much bigger than this. Make it fill up your entire screen. The bigger the better.

You still would like to get an idea what the longer term trend looks like. This is where the weekly chart comes in.

The weekly time frame

Think of the weekly chart as the time frame that allows you to step back and get a look at the longer term trend. You can only fit so much data on the daily chart so it is hard to see what is really going on with a stock.

On the weekly chart, you want to see that the stock is in an uptrend and if there are any significant chart patterns. Many investors and institutional traders use this time frame to make buy and sell decisions. So ask yourself, "If I were them, would I want to buy the stock now?"

Here is an example using the same chart (QQQQ):

We can see from this time frame that QQQQ has formed a double bottom! We couldn't see that on the daily chart because there wasn't enough data. But, by looking at the weekly chart, we may be quite a bit more bullish now that we know that it has formed this pattern.

In this time frame, you can go back two or three years (each candle represents one week of trading). There really isn't any reason to go back further than that for swing trading. And, you don't need to spend a whole lot of time in this time frame.

After all, you are a swing trader that only holds a stock typically for a few days.

The 60 minute time frame

Think of the 60 minute chart (hourly) like you were getting out of pair of binoculars and analyzing what is going on with the individual candles on the daily chart. When you buy pullbacks off the daily with consecutive lower highs (long positions), you will see that the stock is in a downtrend on the 60 minute chart.

You are looking for a break of that trend line in this time frame.

When you say, "I'll buy when the stock trades over the previous high.", what you are really doing is buying that trend line break on the 60 minute chart.

Here is an example using QQQQ again:

Your hourly chart should go back 15 to 20 days (each candle represents one hour of trading). You can see that by analyzing this time frame, it is easier to see (and possibly anticipate) a trend line break. And sometimes, you will see a stock bottoming out in this time frame that may not notice on the daily chart. And now it is time for your entry...

The 5 minute time frame

This is where we will get our entry. So far, we have found a great setup on the daily chart. We checked the weekly for chart patterns and to make sure that the

stock is in an uptrend. We zoomed in using the 60 minute chart and watched for a break of that trend line.

We have already made our decision that we are going to buy the stock.

The five minute time frame is used to buy the stock at the best possible price. You really don't need to spend a whole lot of time analyzing this chart. Just look for the stock pull back to a support area (on the long side) to get your entry price. Simple.

You only need to look at the 5 minute chart with the current days data (each candle represents five minutes of trading).

The 15 minute time frame

There is one other time frame that is useful. That is the 15 minute chart. Why would you look at this time frame? Because sometimes, the day traders will make the 5 minute chart look sloppy! Using the 15 minute chart can smooth out the whipsaws that show up on the 5 minute chart.

You may even decide to use the 15 minute chart instead of the 5 minute chart.

Trading tips

Each time frame affects the other. A news event affects the intra day (5 minute) chart. This affects the hourly chart, which affects the daily chart, which affects the weekly chart.

You may be able get a better entry with a tighter stop loss order using the 60 minute chart rather than the daily chart.

Use the 200 SMA in all time frames - even on intra day charts. You'll be surprised to see how stocks react when they get close to this moving average!

Analyzing different multiple time frames can improve your success as a swing trader. However, you will rarely find a stock the looks absolutely perfect on the weekly, daily, and intra day charts. Your main goal is to identify support and resistance areas that could affect the stock in that time frame.

The important thing to remember is to pick your main time period then look at a time frame above it and a time frame below it. The lower time frame tells you what is happening now and the higher time frame tells you what could happen in the future.

Swing Trading Entry Strategy

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 page explains 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. What's 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.

Identifying reversals using swing points

For a swing point low:

1. The first candle makes a low.

2. The second candle makes a lower low.

3. 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:

1. The first candle makes a high.

2. The second candle makes a higher high.

3. The third candle makes a lower high.

This third candle tells us that the buyers have gotten weak and the stock will likely reverse.

For our long entry strategy, we are trying to find stocks that have pulled back and made a swing point low.

Let's look at some examples:

See how the pattern consists of a low (1), lower low (2), then a higher low (3)? This is a classic swing point low. 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.

See how the pattern consists of a high (1), higher high (2), then a lower high (3)? We would look for an entry on the third candle.

It is worth noting that not all swing points will result in a powerful reversal. However, a reversal will

not happen without a swing point developing. Take the time to go though a few stock charts and look

at the reversals that happened in the past so that you are able to quickly identify this crucial price

pattern.

Consecutive price patterns

Ideally, we want to trade stocks that have consecutive down days prior to the swing point low developing. This is the best case scenario. Here is an example on the long side:

This is reversed on the short side. In this case, you want to look for consecutive up days prior to the swing point high developing.

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.

Also, sometimes you may want to be more aggressive with your entry. Check out this page for an alternate entry strategy.

Ok, now that we know how to get into a trade, how do we get out?

We need an exit strategy.

Alternate Entry Strategy For Swing Traders

The standard entry is described here in detail but it mainly consists of three candles:

A swing point high (some traders call it a "pivot" high) consists of a high, a higher high, and then a lower high.

A swing point low (or a "pivot" low) consists of a low, a lower low, and then a higher low.

This is much easier to understand by looking at a chart:

On the left side of the chart, you can see a swing point high. We would look to short this stock on the day of the third candle because it made a lower high and traded below the previous days low.

In the middle of the chart, you can see a swing point low. We would look to buy this stock on the day of the third candle because it made a higher low and traded above the previous days high.

It is important to understand that not all swing points will result in a reversal. But many do. There are many more swing points on this chart. Can you find them?

Ok, now let's look at an aggressive entry.

The aggressive entry

An aggressive entry is an entry in which you buy or short a stock before it makes a swing point low or a swing point high. You are buying (or shorting) in anticipation of a swing point low or a swing point high developing.

Let's look at a chart:

This is the same chart with another swing point low. Here you can see a low (1), a lower low (2) and then a higher low (3). Typically we would buy on the third candle (the higher low). But look at the second candle. It is a bullish engulfing candle and it traded over the previous days high.

In this scenario, an aggressive entry would be to buy this stock on the second candle (2) in anticipation of a swing point low developing.

Here is another example of an aggressive entry on the long side:

This stock has not made a swing point low yet. But, it does show a piercing candlestick pattern. So, you might want to buy this stock on the second candle in anticipation of a swing point low developing.

Which entry strategy is better?

One isn't really better than the other. It just boils down to risk versus reward. A standard entry is less risky because the stock has moved in your desired direction. But, often times, waiting for swing point to develop messes up your risk to reward because your stop is further away.

An aggressive entry is usually riskier because the stock hasn't reversed yet. But, your risk to reward is better because your stop is usually closer. Look at the chart above. For all I know, this stock could jump 10% on the next trading day! Then I probably wouldn't be able to trade this stock because my stop would have to be so far away.

I usually opt for the aggressive entry if I can find a pattern suggesting a reversal on the hourly or 15 minute chart. And, if there is a hammer candlestick pattern, then I will buy on the day of the hammer instead of waiting to see if there is a higher low on the following day.

Why are identifying swing points important?

They are important because they tell you when the balance of power has shifted when you are shorting rallies or buying pull backs. Think about it...

Day One: A stock makes a high

Day Two: A stock makes a higher high

Day Three: A stock makes a higher high

Day Four: A stock makes a higher high

Day Five: A stock makes a lower high

[Note: It doesn't have to be exactly 5 days.]

What happened on the fifth day? The bulls were able to push the stock to new highs on day one through four but on the fifth day they failed to do this. This means that the buyers are getting weak and the balance of power is shifting (from buyers to sellers).

The above scenario formed a swing point high. The same thing happens when a stock forms a swing point low.

Day One: A stock makes a low

Day Two: A stock makes a lower low

Day Three: A stock makes a lower low

Day Four: A stock makes a lower low

Day Five: A stock makes a higher low

What happened on day five? The bears were able to push the stock to new lows on day one through four but on the fifth day they failed to do this. The balance of power has shifted from sellers to buyers and a swing point low has developed.

I hope all of this isn't too confusing. Just remember this: swing trading is a game - nothing more, nothing less. Your opponents are other swing traders! Everyone is trying to get into a stock before the other traders do.

Get in too early and you will lose. Get in too late and you will lose.

It's challenging but this is what makes the game so fun to play!

Swing Trading Exit StrategyYour exit strategy consists of two parts:

1. Where will you get out of the trade if the stock does not go in your favor?

2. 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 in order to consistently make money in the stock market.

1. Setting your initial stop loss order

When you first buy (or short) a stock, you must set an initial stop loss point. This protects your capital if the stock goes against you. There are two types:

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.

Note: See this page for why you may not want to use an actual order placed with your broker.

Before you get into a trade you will need 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?). Whether you use a mental stop or a physical

stop, you will always want to exit the trade when you predetermined plan tells you to.

Where is your initial stop going to be? 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 doesn't 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 initial 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 reverses 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 swing point low (circled).

Want a real easy way to set your initial stop? Put you stop loss order under the 30 period EMA. A

strong stock should not fall very far below that moving average. If it does then you want to be out of

the stock anyway.

Why you should use a time stop

When you buy or short a stock, you are expecting the stock to go in your favor within a few days. What happens if it doesn't? Do you continue to wait for it to move in your desired direction? No. You will want to sell (or cover) your shares and move on to something else.

You don't want to tie up your trading capital on a stock that is just trading sideways. Treat a stock like an employee. If it doesn't do what you want it to do - fire it!

2. Profit taking strategies

Now you know how to get out of a stock if it does not go in your favor. Now we will talk about several exit strategies that you can use to take profits (this is the fun part!).

How to use trailing stops

Using trailing stops 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:

The arrows point to the lows of the candles. Your stop loss order would go under these candles.

Note: See this page for a more in depth study of using a stop loss order.

If you are able to find a stock at the beginning of a trend 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:

On this chart you would trail your stop underneath the swing point low every time the stock makes a new high.

Selling at resistance

When you buy a pullback, look to the left on the chart at the previous swing point high. That is the first resistance area that the stock will encounter. Of course, you hope that the stock will power through that area. If it doesn't, sell it. Here is an example:

If you bought this stock on the pullback (arrow), then you would sell it at the previous swing point high (red highlighted).

Why you should sell into strength

There are times when you may want to take some profits and sell into a powerful rally. Looking again at the same chart (different area)...

A stock is prone to a sell-off once it gets extended above the 10 period moving average. In this example you can see how after you bought the pullback (arrow), this stock exploded through the previous swing point high. You should take profits here.

If you would have waited to get stopped out, you may have lost a big portion of your gains. So it makes sense to at least take a portion of your profits off the table (and put a little money in your pocket!).

There is no perfect strategy

I've tried just about every exit strategy out there. None are perfect. Sometimes you sell too soon. Sometimes you sell too late. That's the bad news. The good news? You do not need a perfect exit strategy to be successful. You just need to be able to protect your money when you are wrong - and take profits when you are right.

How to Short Stocks With Precision

How do you short stocks with better accuracy?

How can you pick out a of list of 10 stocks, which ones are the best stocks to short?

This is pretty simple. Use a combination of the daily and hourly charts with the 200 period moving average.

You can short stocks with better precision using the 200 period moving average on the hourly charts. You'll be stunned when you see how many times stocks reverse in this critical area on a stock chart!

Take a look at the following stock:

This stock has a classic head and shoulders pattern. But, the circled area is what we are concerned with. How would you be able to anticipate the impending drop? It's hard to tell on the daily chart. Now, look at the hourly chart:

This stock formed a double top right near the 200 period moving average (dotted line) on the hourly chart! This happens often because stocks tend to reverse near that 200 period moving average.

Here are five more examples of stocks reversing near the 200 period moving average on the hourly chart.

Example 1

Example 2

Example 3

Example 4

Example 5

Practical applications

The best way to use this swing trading technique is to run a short scan of potential setups off of the daily chart. Move all of these stocks to a watch list and then go through the hourly charts of each stock. Which ones are rallying up against the 200 period moving average? Now look to the left on the stock chart. Is there a resistance area? If the answer is yes, then you definitely want to consider trading the stock.

This swing trading trick will improve your accuracy on short setups - even if you have never shorted a stock before!

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!

Let's look at a chart:

In the chart above, the ADX indicator is the thick black line (arrow). The other 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 0 through 80 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 won't 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 up trends or strong down trends.

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.

Learn This Little Known Swing Trading TrickHere is a little swing trading trick that many traders do not know about. When you run your scans, look for pullbacks into wide range candles. Then follow the examples below.

This swing trading trick will improve your swing trading results. Here it is:

Stocks often find support when they fall within the range of a previous wide range candle.

Here are some examples:

Why does this work?

It works because those traders that missed the big move (wide range candle), now have a second chance to get in. It sounds simple, but you would be surprised how often this simple little trading trick works.

So, when you run your pull back scan, look to the left to see if the pull back has fallen within the range of a wide range candle. Then look for a candlestick pattern and check the lower time frames for an entry.