Thursday, March 11, 2010

Swing Trader

Swing Trading Rules:

  • Look for stocks breaking out of bases or chart patterns on strong volume. Lots of stocks break out of bases and fail, so I want to stress the importance of strong volume on the BO bar. Strong volume means accumulation.
  • Once the swing trade is underway, we need a follow through day to confirm a high probability of success. Ideally, the follow through day should close in upper half of the day's range with good relative volume. How long after the BO should we expect to see a follow through day? It depends on whether or not there is a wide gap accompanying the BO. A wide gap can take several sessions to consolidate.
  • Identify a target using Fibonacci extensions. On a measured move basis, price should extend 100% of the depth of the base from low to high. The same goes for chart patterns.
  • Manage the trade with the 6 day EMA (pastel blue on my charts below). If price breaches the 6DMA on a closing basis, exit the trade, otherwise stay in the trade until price approaches the target. Stops should be set with some wiggle room especially in consolidation zones.
  • Scope out support/resistance zones including unfilled gaps as areas to take partial profits.

APKT, which we discussed back on February 24th, is a great example. The stock broke out of a lengthy base with a wide gap. It consolidated the gap by forming a perfect bull flag pattern. The follow through bar took well over a week - time for the flag to form. Price held the 6DMA on a closing basis throughout the ascent. Exit the trade as price approached the 100% FE of the flag pattern. Shortly after taking out the target, price formed a top and began to retrace.

I was late getting in this one - started buying as price consolidated between two blue line segments

AAPL gapped up on Friday after announcing scheduled launch of the ipad. The follow through day occurred on Tuesday, again with good volume. With separate accounts for swing and day trading, it makes sense to day trade these swing stocks as they propel higher.

RIMM broke out of a multi-month base on Monday following an analyst upgrade (HCPG pick from daily newsletter). Notice how the 100% FE of the base lines up perfectly with the gap fill.

MA was a failed bear flag pattern. Failed patterns usually result in fast moves in the opposite direction. I closed my position on the gap fill, but price is consolidating nicely so I will be ready to get back in.

I missed the GS trade, but it's a good example of a BO out of an ascending triangle. Also the bearish trendline has been broken.

BIDU broke out of a base in January, but failed to follow through and fell back down. A second gap BO in February which I didn't swing, reached full extension in early trade today.

N.B. These charts are from yesterday. I started writing this post last night, but got distracted.


Anonymous said...

Awesome post Jamie!

Kogi said...

Jamie ! Great post, I was looking for that for a while.

What about using NR7, Two bars inside on dec. volume, C&H patterns in swing trading as well ?

Thanx Kogi.

Jamie said...

Thanks Jim. I've been meaning to do this for a while.

Jamie said...

Thanks Kogi,

Yes, NR7, inside bars and C&H are all good for swing trades. Hopefully, we'll find some of those soon :)

Day Tradr said...

Wonderful post Jamie.

Online Trading Graphs said...

An excellent read and very interesting graphs! I just launched my new trading blog and added your blog's feed to my reader to keep up with your news. I'll be checking back quite often.


JTT said...

Hi Jamie, Thanks for the incredible post. I'm wondering if you can elaborate on the risk of time in a swing trade as well. I'm thinking mostly in the placement/moving of stops. If the trade starts to consolidate for several days after being triggered, in the case of no gap, would you move your original stop up to just below the consolidation period or leave the stop where you originally placed it on execution? Or do you keep it as simple as only looking at your swing trades at the EOD and exiting in the am if the prev close was below the 6ma on the daily and moving stop up if a new higher high is made? Hope that makes sense:0) Thanks in advance. JTT

Jamie said...

Good Question JTT,

For the most part I'm trading these on a mechanical basis. But there are exceptions - as noted in the post we look for a follow through day after entering the swing trade to provide confirmation. In your example, price consolidates prior to follow through, so I wouldn't want to risk more than BE. If the stock makes a new closing high, you can move the stop to PBL. Once you find yourself in a winning swing (after follow through day) the main objective is staying in the trade as long as possible.

Other exceptions would be earnings day. I'm not going to hold my full position through earnings especially with high beta stocks such as RIMM and AAPL.

Nina Athena said...

Thank you for sharing such valuable and helpful information and knowledge. This can give us more insights! Keep it up. I would love to see your next update.

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