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The Complete Swing Trading Strategy

Now lets put everything together into a swing trading strategy. This trading plan is for discretionary
traders. Your success will depend on how well you use your discretion!
After you understand the concepts, then modify this trading strategy into a strategy of your own.
Feel free to change things around a little. Maybe you want to add some other kind of technical
indicator. Or, maybe you would like to incorporate some fundamentals into the mix. Whatever you
decide, make it your own.
You will be far more successful with a trading strategy that YOU design, rather than just blindly
following someone else’s plan! Ok, lets get started with our trading strategy. We will begin by
preparing for the week ahead.

Preparing For The Trading Week

On Sunday mornings, I get up early, grab a cup of coffee and head to the computer to get ready
for the trading week ahead. I am wanting to know what types of trades I will be focusing on for the
upcoming week (long or short). This part is easy. Using our market timing strategy, we look at
the moving averages to determine if we will be biased to the long or short side of the market.

Staying in cash and out of the market IS a strategy. You do not have to trade!

Once we find out what type of trading we will be doing, it's a good idea to get a feel for what will
likely affect the market for the week ahead. These are some of the things I look at:
• Economic Calendar
• Industry Groups
• Charts
I look at the economic calendar to see what types of reports are coming out that could influence
the market. I also look at charts for all the major industry groups to see which ones are strong,
which are weak, and which ones have potential to make major moves.
Have a notebook handy next to your computer to jot down ideas about the upcoming week. When
you are trading you will forget about your weekend research! Having you notes next to you will
come in handy.

Scanning For Stocks

Now we’ll run our scans to find some potential trades. Remember that we are looking for stocks
that have pulled back into the Swing Traders Action Zone.
Specifically, we are looking for stocks that:
• are in Stage 2 or Stage 4
• are in strong trends
• have relative strength or weakness
• are at a support or resistance level
Sift through your scan results and find the ones that show these specific characteristics. Add these
to your watch list.
Trading Strategy
Using this trading strategy, we will wait for Williams %R to give us a signal to go long or short.
Once that happens, then run through your watch list to find potential trades. It may be that the
scan that you ran on Sunday will not offer any good setups, so run your scan again to look for
trades using the same criteria as outlined above.
Now you are looking for a specific entry into a stock using candlestick patterns.
WAIT! Before you get into a trade, make sure you check the news to make sure that they
are not coming out with their earnings reports or releasing any other type of financial
Once you are in a trade, forget about the market, forget about the news, and forget about
opinions! Trade the chart. Use your exit strategy to either take profits or losses. If you have
managed your money correctly, then you should have small losses and by trailing stops your
profits will cover these and more!
The success of this trading strategy relies on your discretion to find good stocks to trade and how
well you manage your money. While I cannot guarantee that you will have success with this
trading strategy, I will guarantee that some of these concepts will improve your success as a swing


The Trading Strategy
The Traders Action Zone (TAZ) is a buy and sell zone on a chart that swing traders can use to
identify possible reversals in a stock.
This is just simply "area" that we look at to see if a stock that is in a strong uptrend, after pulling
back to this area, will likely reverse.
First of all, let’s take a look at all of the different types of traders involved in the stock market
when looking at a daily chart.
Then, we will look at where they buy stocks. We'll focus on the long side only.

Position Trader
This type of trader is looking to hold stocks for long periods of time. They buy stocks that are first
breaking out of basing patterns into a stage two uptrend. This is likely where you will see
institutions buying stocks. This buying pressure is what starts the uptrend. They are hoping that
the next two groups of buyers will push the stock higher.

Momentum Trader
This type of trader buys stocks that are, well, showing momentum! They buy stocks right after a
major move in a stock and hold for a short period of time. They are hopping on a board a fast
moving stock looking to capture short term gains quickly.

Swing Trader
This is where you come in! You are trading the swings within the trend.
Here is a chart that may help you to better see how everything unfolds…

Now you can see where you fit into the big picture of this animal we call the stock market! Ok, I
forgot to mention the day traders that make up each of the individual candles but I think you get
the point.
Traders Action Zone
On the chart above you can also see the traders action zone which is the area in between the 10
sma and 30 ema. This is where you, as a swing trader look for reversals back to the upside when
going long and reversals to the downside when shorting stocks. I've drawn arrows on the chart to
show where you get buy (green) signals and short (red) signals to enter a stock. Pretty cool, huh?
It doesn’t matter whether you use sma’s or ema’s. There is little difference between the two so
don’t get caught up in the variations. We are just using these moving averages to create a zone
that we will find our entries for long and short positions. We’ll cover the entries (and exits) on a
separate section of this site.
What is so special about this zone?
I have found that for swing trading, a lot of reversals happen in this area. So in order to create a
focus in your trading strategy, it is helpful to narrow down your potential stock setups to one area
on a chart. This zone provides a plethora of setups on a daily basis.
We are not really concerned with the moving averages themselves. When a stock pulls back into
this zone, look to the left to identify support and resistance, trend lines, candlestick patterns, etc.
You are looking for multiple signals all pointing in the same direction.

Will this strategy make me a profitable trader?

You may be surprised by my answer.
The answer is no. There isn't ANY trading strategy that will make you a consistently profitable
trader. Sorry to disappoint you. The only thing that will enable you to consistently pull money out
of the markets is YOU.
YOU must have discipline. YOU must be able to take losses. YOU must be able to take your profits.
YOU must eliminate fear. Put simply, you must be able to control the emotional and psychological
problems that prevent success.
That will be your biggest challenge in learning how to trade stocks with any strategy.
Buy Weakness and Sell Strength
Buying weakness and selling strength is the art of buying pullbacks. Stocks that are in up trends
will pull back offering a low risk buying opportunity and stocks that are in downtrends will rally
offering a low risk shorting opportunity.
As a swing trader, you have to WAIT for these opportunities to happen because…
Doesn’t it make more sense to buy a stock after a wave of selling has occurred rather than getting
caught in a sell-off?
Doesn’t it make more sense to short a stock after a wave of buying has occurred rather than
getting caught in a rally?
Absolutely! If you are buying a stock then you want as many sellers out of the stock before you get
in. On the other hand, if you are shorting a stock, then you want as many buyers in the stock
before you get in. This gives you a low risk entry that you can manage effectively.

Buying Pullbacks And Shorting Rallies

Where do you buy a pullback
and where do you short a
rally? You buy them and short
them in the Traders Action
Zone (TAZ).

Here is and example on the

long side:

See how you are buying

stocks in strong uptrend after
a wave of selling has

Ok, now here is an example

on the short side:
Now you can see how you are shorting stocks after a wave of buying has occurred.
When going long, wait for the decline into the TAZ and when going short, wait for the
rally into the TAZ.
Are all of them created equal? Nope. You have just a standard pullback like in the example above
and then you have…
The First Pullback
These are exactly what the name implies. It is the first one after a change in trend. How do you
identify a change in trend - when the 10 sma crosses the 30 ema. After that happens, you look for
an entry when the stock gets into the TAZ. Here is an example:

This is the most reliable type of entry into a stock and this is the likely area where institutional
money is going to come into the stock. If you only trade one pattern, this should be it! You can get
into a stock at the beginning of a trend, at a point of low risk, and you can take partial profits and
ride the trend to completion! What more could you ask for?

First Pullback After A Breakout

There is one other type of pullback worth mentioning and that is the first pullback after a breakout.
If you are looking at a stock that is trading sideways or forming a basing pattern, and it suddenly
breaks out of the pattern, you can look to buy the first pullback after the breakout. This also gives
you a low risk entry into a stock that will likely continue the current trend.
Most traders are going to buy breakouts. The word breakouts sounds so exciting doesn’t it? The
problem with buying breakouts is that it is hardly every low risk. Think about it. If you are buying
stocks when everybody else is, then who is left to buy the stock after you get in?
Forget buying breakouts. Step away from the crowd. Wait for the breakout buyers to get scared
and sell. This sets up the pullback that you can get into with low risk, high odds, and a profitable
How to Get a Good Entry on a Stock
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
This is 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.
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
Swing Points
For a swing point low, the first candle makes a low, the second candle makes a lower low, and
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, the first candle makes a high, the second candle makes a higher high,
and the third candle makes a lower high. This third candle tells us that the buyers have gotten
weak and the stock will likely reverse.
Here are pictures of the candles to help you better understand swing points:

For our long entry strategy, we are trying to find stocks that have pulled back into the Traders
Action Zone that have made a swing point low.
Like this:
You can see on the chart above that this stock is in a nice uptrend with the 10ma above the
30ema. The stock has pulled back into the TAZ and made a nice swing point low (highlighted).
See how the pattern consists of a low, lower low, then a higher low? Great! 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. We are looking for a stock in a nice downtrend with the
10ma below the 30ma. Then we wait for a rally into the TAZ that forms a swing point high.
Like this:

See how the pattern consists of a high, higher high, then a lower high? We would look for an entry
on the third candle.
Consecutive Price Patterns
Ok, now check this out. Look back up at the first chart where the stock pulls back into the TAZ. You
will notice that the pullback consists of three consecutive down days with lower highs and lower
That is what you want to look for in a pullback. You can buy the stock the first time it trades above
the previous candles high. This will complete the swing point low.
On the second chart, you will see that the stock has three consecutive up days with higher highs
and higher lows. The fourth candles still makes a higher high and a higher low. The fifth candle
finally makes a lower high and a lower low - completing the swing point.
Pullbacks do not have to consist of exactly 3 consecutive up days (for short trades) or
down days (for long trades.) Sometimes you will run your scans and find stocks that
have more than that.
One final note: 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.
Ok, now that we know how to get into a trade, how do we get out?
We need an exit strategy.
How To Take Profits And Control Your Losses
Your exit strategy consists of two parts: Where will you get out of the trade if the stock does not go
in your favor? 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 before you can place the trade!

Your Stop Loss Order

First, lets put to rest the debate about where or not you should use a physical stop or use a mental
stop. 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.
Before you get into a trade you will have 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?).
What difference would it make whether or not you have an actual order placed with your broker or
if you are going to pull the trigger yourself? There is no difference. In either case, you will get out
of the stock when your plan (exit strategy) tells you to!
Personally, I always use physical stop loss orders placed with my broker. This is because I do not
want to sit at my computer and look at a monitor all day long! I think I would rather go to a funeral
than stare at candles forming on a chart! Ok, maybe that’s a slight exaggeration, but you get the
Where is your stop going to be? First of all 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 stop should go under a support area and a swing point low. Like this:
You can see in the chart in previous page, that the stock comes down into the TAZ and then forms
a bullish hammer 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 low of the hammer.
Ok, that takes care of the first part of our exit strategy, now let’s look at second part – taking

Taking Profits
Use trailing stops! This 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:
There is a day by day example of a trailing stop loss order on this page.
If this is a first pullback scenario, 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.

In either case, you should always determine where your stop is going to be and how you are going
to take profits before you get into the trade. Have a solid plan in place (write it down). This will
take all of the emotion out of the trade. Then you can relax and trade the “map” that you have
created. This will make your exit strategy easy to follow and it will put you on the path to success.
How to Time Your Trades to the Market
Your market timing strategy is critical to your success as a swing trader. When the stock market
rallies, 3 out of 4 stocks will move up with the market. On the other hand, when the market sells
off, 3 out of 4 stocks will decline with it.
Knowing this, doesn’t it make sense to time your trades to the market?

Market Timing Using Moving Averages

The first thing you want to look at is a chart of the S&P 500. Look at the 10 sma and 30 ema to
determine if you should be focusing on long positions or short positions. Here are the rules for
timing your trades to the market using moving averages.
If the 10 sma is above the 30 ema, you should be focusing on long positions only.
If the 10 sma is below the 30 ema, you should be focusing on short positions only.
This simple technique will tell you what type of trades you will be concerned with right now. It
identifies the underlying trend to keep you on the right side of the market. Here is an example:

Looking at the chart above, you can see how these moving averages create focus. The green lines
identify times when the 10 sma is above the 30 ema. The red lines identify times when the 10 sma
is below the 30 ema. This part of your market timing strategy answers the question of what types
of trades to focus on.
Moving averages are trend following indicators. As such, they will only work well in
trending markets - not when they are the market is trapped in a trading range.
Ok, now we know whether or not we will be trading on the long side or the short side. Now we
need to answer the question of when to buy and when to sell. That is where Williams %R comes
Market Timing Using Williams %R
I’m not really a big fan of technical indicators but Williams %R is useful to get a general idea of
when the market has reached a short term extreme and is likely to reverse. It calculates the close
in relation to the range over a set period of time.
The default setting in most charting packages has it set at 14 periods, but we would like it to be a
little more sensitive than that so we will use a 3 period setting. Here are the rules for timing your
trades using Williams %R.
• When the 10 sma is above the 30 ema, we will look to go long when Williams %R is less
than -80 (over sold).
• When the 10 sma is below the 30 ema, we will look to go short when Williams %R is greater
than -20 (over bought).
The more over bought or over sold Williams %R gets, the more likely a reversal will take
place. Look for those times when Williams %R gets to -90 or below for long positions,
and -10 or above for short positions.
Here is an example:

In the chart above of the S&P 500, notice how we ignore short positions when the 10 sma is above
the 30ema and only focus on longs. Even though Williams %R is over bought, above -20, we only
want to trade in the direction of the trend.
Also, notice how we ignore long positions when the 10 sma is below the 30 ema and only focus on
short setups. Again we only want to trade in the direction of the trend.
On the right edge of the chart the 10 sma has just crossed down through the 30 ema so we can
no longer trade on the long side. Instead, we will manage our existing trades and wait for
Williams %R to get above -20 to focus on the short side.
See how we are NOT predicting what is going to happen in the future? That is a waste of time.
Instead, we are reacting to whatever the chart tells us to do.
Use this market timing method to identify when to establish long or short positions. Once you are
in a stock, trade the chart of the stock itself and forget about the market. Then, use your specific
entry and exit strategy to get into and out of individual stocks.
How to manage your money
As a swing trader, your money management strategy is the one variable that will give you the
biggest edge in trading stocks. Believe it.
You cannot control the markets but you can control your money and your risk on each and every
trade that you make.
William O'neill, founder of Investors Business Daily, has said that, "The whole secret to winning in
the stock market is to lose the least amount possible when you're not right." I would agree with
Your money management strategy answers these questions:
• How much money should I risk on this trade?
• How many shares should I buy?
A good trading system or strategy is absolutely worthless without a method of managing
your money. You like to trade stocks right? You like to make money in the markets right? Well,
you will not have any money to trade with if you do not follow good money management practices!
Your #1 goal as a swing trader is to preserve your capital so that you can stay alive long enough to
have some big winners that cover the costs of your losing trades AND make a profit. You
accomplish this through a sound money management strategy.

The 2% Rule
Most traders would agree that you should not risk more than 2% of your trading capital on a single
trade. The stock market is mostly random. No one else is going to tell you this, but this is the
reality of trading stocks.
So no matter how good the chart looks, there is a chance that the stock will not go in your desired
direction and you WILL lose money on the trade. How much money will you lose if this happens?
On the first of each month, look at the total amount of money in your trading account. Let’s say
you have $30,000 dollars. Two percent of this amount is $600.00. That is the maximum amount
you can lose on a trade.

Position Sizing
Now let’s say that you see a stock that has pulled into the TAZ and is now trading at $25.00. It is
looking like it is going to reverse so you decide that you are going to trade this stock. You first
have to figure out where your stop is going to be. Do not think about how much money you can
make on a trade, think about how much money you can lose if your wrong!
To keep track of my trades I use a trade management software program called Trade
Trakker. Click here to read my review of this software and view screen shots.
You determine that your stop is going to be at $24.00. So if you buy the stock at 25.00 and your
stop is at $24.00 then your risk is $1.00 per share. Since you have already determined that the
most you can risk on a trade is $600.00 then you can buy 600 shares of this stock.
This is because if you get stopped out you will lose $600.00, the maximum amount you are allowed
to lose. Actually the number of shares that you buy should be a little less because you have to
account for slippage and commissions.
By managing your money correctly on every trade you can relax because if you incur a loss it will
be insignificant to your account. This will also relieve the emotional pitfalls that plaque so many
This is only one trade! If you lose money on this trade, just move on to another. If you have a
string of several losses in row either stop trading or reduce your position size to 1%.
Money Management Calculator
If all of this sounds confusing, you may want to get a money management calculator. I got a free
one when I bought Trading Master Plan.
Here is what it looks like:

There are different money management models to choose from. I use the Fixed Percent Risk
model. On the right side of the calculator, you would type in the total amount of money that you
have to trade with. In this example, we are using $20,000. Under that, type in the amount you are
willing to risk per trade. In this example, it is 2%.
Then, on the left side, you type in the price that you are going to buy the stock at and the price
where your stop loss order is going be. In this case, we are buying the stock at $20.00 and our
stop loss is going to be at $19.50. Click calculate and it tells you exactly how many shares to buy:
Units to Purchase: 800
This calculator is a handy tool to have on your desktop when you want to quickly find out how
many shares to buy. Plus, it forces you to become a disciplined trader by only risking a small
percentage of your trading capital.
And discipline is your key to survival and success as a swing trader


Protect Your Capital
The 2 for 1 money management strategy is a conservative way of trading, however, if you are new
to trading stocks then this will help you to stay alive while on the learning curve. This money
management strategy will help maximize your profits while minimizing your losses!
The basic premise of this strategy is take profits on half of your position once the stock moves
equal to your original positions stop loss.
Money Management Example
Let’s suppose that you buy 500 shares of a stock at $35.00. You determine that your stop is going
to be at $34.25. You are risking .75/share. Now if the stock goes in your favor you will take ½ of
your profits at $35.75 and leave your stop on the remaining shares at 34.25.
What does this accomplish? Well, you took a partial profit on half your shares once the stock
moved equal to your positions original stop loss. Now, if you get stopped out on the remaining
shares you will have lost nothing!
By taking half your shares off the table, you have given yourself a "free trade" (minus
commissions). Assuming that the stock doesn’t gap down overnight, you can let the stock run!

Ok, lets look at an example:

On this chart you can see that this stock has pulled back nicely into the TAZ and has formed a
hammer. You decide to buy 400 shares near the end of the day at $32.35. Further, you decide that
your stop loss is going to go under the low of the hammer. You put in your order for your stop at
$31.25. Your risk is $1.10 a share.
Now you pull out your 2 for 1 money management strategy! You have already determined that
your risk on this trade is $1.10, so you add that to your buy price. This equals $33.45. That is the
price at which you will sell half your shares (200).
The next day you are a little disappointed because the stock does not hit your profit target
($33.45). But as a disciplined trader, you stick to your plan!
Bingo! The next day the stock moves in your favor and you sell half of your shares at 33.45. You
have made $1.10/share on 200 shares. Nice profit! Now you can relax. If you get stopped out on
the remaining shares you will have lost nothing!
In this example, we did not get stopped out on the remaining 200 shares. Instead we just trailed
our stop on the remaining shares of until stopped out.
The 2 for 1 money management strategy is a great way to protect your capital. This is a defensive
way of trading. If you are nervous about a position or the market itself, then this method of money
and trade management may come in handy!