Buy Swing Trading for Dummies here: https://amzn.to/3WUSVnK

People have been using stock charts to help predict what the market will do for centuries.

Why?

Because they work.

All charts convey two basic concepts: price and volume.

Of these two things, the patterns within price are the most meaningful, but that doesn’t mean you should ignore volume.

Volume communicates the conviction of the buyers or sellers. The heavier the volume, the more committed the buyers or sellers are.

Heavy volume is an indicator that the institutions are moving in or out of a security. You want to ride their wave.

When swing trading trends, buying on heavy volume is a must! You want to see a buy signal (chart pattern or indicator) with at least 1.5 times the average daily volume over the past 50 days.

There are many types of charts: line, bar, Heikin-Ashi, etc.

The one most traders use is the candlestick chart.

The candlestick chart, once you know how to read it, effectively shows the opening, high, low, and closing prices of a security.

They are made up of two parts. The range between the open and close is called the body. The price movements above and below the body are the shadows or wicks.

They can be any color, but generally green signifies a bullish close (the security closed at a higher price than when it opened) and red signifies a bearish close.

Candlestick patterns are great for confirmation of a trend or reversal, but don’t rely on them solely when making trades.

Most of the time, a security will go through a known cycle of events: accumulation, expansion, distribution, and contraction.

If you can’t identify what stage of the cycle a security is in, it is best to skip it.

The accumulation phase is usually the longest phase, lasting several weeks or months. It is when the smart money is quietly accumulating shares of an undervalued company.

The price action will be moving sideways and volume is usually light. It is in a trading range.

You can trade during the accumulation phase by buying near support and selling near resistance. This is called a range trade. It is only worthwhile if the gap between support and resistance is large enough to make the profit worthwhile.

After a security has been in accumulation it will break out into expansion.

If you want to swing trade trends, look for securities moving out of accumulation into expansion.

The earlier you get in, the more money you will make.

A true expansion phase will not reenter accumulation ranges. Look for strong volume for confirmation.

Distribution marks the end of increasing prices. Share prices start to even out and move sideways. Volume will also weaken.

Distribution and accumulation can look very similar. The way to tell the difference is by what happened before entering the sideways action. A price climb precedes distribution. A price drop precedes accumulation.

Additionally, a company’s fundamentals are usually weaker during accumulation.

When you spot a distribution phase, stay away. And if you own a position, it is time to exit.

The final stage of the cycle is contraction, or the markdown phase.

It is characterized by an overall drop in price.

Often, after a drop in price, the security will rally and you may think it has hit the bottom. Do not be fooled into buying it.

Trying to time a security’s bottom is a losing game. The price may drop rapidly again right after you buy.

The best thing to do is stay away. Wait until it is clearly in an accumulation phase or entering expansion.

The ability to spot chart patterns is essential for the swing trader.

But there are a lot of them and interpretation can be somewhat subjective.

For this reason, it is best to only trade the most common patterns, and only do so when they are very clear.

Here are five common patterns that are relatively easy to identify.

The Darvas box is a classic representation of the accumulation phase.

It is when a security is clearly trading between a range of support and resistance and forms a rectangle pattern.

To trade a Darvas Box, first you must identify it. Then wait until it breaks out of the resistance level on heavy volume. This is the time to buy. Place your stop-loss below the breakout point (if the breakout is genuine, it won’t reenter the box). If the security then rises and forms a new rectangle, raise your stop-loss to just below the new support level.

The head and shoulders pattern is one of the most reliable chart patterns there is.

It is a distribution pattern that marks the end of an uptrend.

As the name suggests, it resembles a head and shoulders. It has three peaks with the middle peak being the largest (the head) and the two others around the same height as each other (the shoulders). Drawing a trendline through the lows of the shoulders creates the neckline. The pattern is not complete until it breaks below this neckline.

Measure the distance between the head and the neckline. This same distance from the neckline down is the minimum you can expect the price to fall.

The head and shoulders pattern also works in reverse (inverse head and shoulders) although it is not as reliable.

This is a bullish pattern which signals an upcoming price rise.

They are a continuation pattern which means they must be preceded by an uptrend. Volume should rise heavily on the breakout of the handle.

Also confirm the security’s general market and industry group are strong.

There are three types of triangles: ascending, descending, and symmetrical.

As a bullish swing trader, you want to look for ascending triangles. In this case, every decline stops at a higher level than the previous decline. Eventually, the security will break upward out of the triangle. Look for increased volume on the breakout for confirmation.

A gap in price occurs when there is a larger price change of a security while the market is closed.

There are four types of gaps.

Common gaps are when a price gaps up or down but quickly ‘gets filled’ within days. They typically have light volume. Do not trade a common gap.

A breakaway gap occurs on heavy volume (at least double) and moves up or down more than 5%. Take note of breakaway gaps but don’t do anything yet until you get confirmation of the move.

A continuation gap happens in the middle of a trend, either up or down. Enter a position on a continuation gap in the direction of the gap. Put your stop within the gap.

Finally, an exhaustion gap occurs in the direction of a trend (like a continuation gap) but marks the end of the trend. You can tell an exhaustion gap because it will fill quickly. Don’t do anything.

Like chart patterns, there are also many candlestick patterns that you can look for to indicate which way a security will move.

But also like chart patterns, only a handful of them are worth paying attention to.

A hammer candlestick signifies the end of a downtrend.

It has a long lower shadow with a small body and may or may not have a small upper shadow.

A hammer is more reliable as a bottom indicator when it extends below recent price action.

Always wait for confirmation after a hammer. It should form on heavy volume and subsequent price action should not extend below the hammer.

The hanging man is the same as a hammer but it occurs at the end of an uptrend.

It too should occur on heavy volume and be confirmed in the following days.

Engulfing candles can be bullish or bearish.

A bullish engulfing candle will occur at the end of a downtrend. It opens lower than the previous candlesticks close and closes higher than the previous candlesticks open.

In other words, it engulfs the previous candlestick.

The bearish engulfing is the opposite.

Look for confirmation in subsequent candlesticks.

Star patterns are another type of reversal pattern.

Morning stars signify the end of a downtrend and are made up of three candlesticks.

The first candlestick is a long bodied bearish candlestick - usually either black or red in color.

The second candlestick will gap lower at the open and have a small body.

The final candlestick will be bullish (usually green or white in color) with a long body. It will gap higher than the first candlestick and close near the upper portion of the first candlestick.

Evening stars are the opposite.

Trendlines can be drawn by connecting the tops or bottoms of candlesticks together and are used to visualize support and resistance levels. They will either be horizontal, rising, or falling.

Trendlines are not perfect, and you should not expect the candlesticks to perfectly align. There will almost always be outliers to the trendline, but if the trendline is valid, you can safely draw the trendline through them.

When a valid trendline gets broken, it may signify the start of a new trend.

The validity of a trendline can be judged using the following three guidelines:

• The trendline must touch at least three different price points.
• The more times the trendline is touched, the more reliable it is.
• The longer the trendline, the more reliable it is.

Trendlines should not be hard to see. If you can’t readily identify support and resistance clearly, either horizontally or sloping, then it is best to find a chart where you can.

You can make trades based on trendlines. If you can draw horizontal support and resistance, you can range trade. Buy near support and sell near resistance.

When a trendline gets breached, it often becomes the new support or resistance.

To draw an uptrend line, connect several lows. This is the support level. Buy a long position and place your stop just below the supporting trendline.

Read the next chapter here.

Buy Swing Trading for Dummies here: https://amzn.to/3WUSVnK