„Swing trades“ in this case refers to trades that will typically last from 2 to 5 days. You should be looking to take several points of profit out of the market with each trade. Since holding overnight can be risky, you may wish to hold fewer shares. If you normally day trade 1000 shares at a time, consider trading only 200 to 500 shares on these setups. This limits your loss potential if after-market news on the company causes it to gap open against you. Fewer shares also allow you to use a wider stop-loss (typically I to I&I/4 points) so that you don't get hurt. This also allows more room for price to move around without stopping you out of a good trade. As the stock moves in your favor you can trail the stop-loss anywhere from 1 to 1 & 1/2 points behind it.

At some point the stock may trade in your favor to a price level where you want to go ahead and take your profit. Some reasonable exit points are a price support or resistance level, the other side of the channel on a trend channel trade, or if you get a daily „reversal bar“ setup counter to the trade direction. Your risk/reward ratio should be good (i.e. 1 to 3 or better). In other words, take the best setups that have the potential to give you 3 to 5 points. This way you are risking just a few hundred dollars for a profit of 1 to 2 thousand dollars (and sometimes more). Trade these setups along with your regular day trading to add SSS to the bottom line. A worksheet of potential setups is provided later in the manual. It includes both a day trade and swing trade section for your analysis and stock picks for the upcoming trading day.

TREND CHANNEL (and trendlines)

A trend channel (for an up trending stock) is constructed by drawing a trendline through or very near 2 or more swing lows on a daily bar chart, if a line parallel to the initial trendline can be drawn through at least 2 swing highs on the chart then you have a trend channel. The tighter and more defined the channel is, the better. A stock often continues to trade within the channel if the trendiines are projected into the future on the chart, [n an up trend you can buy subsequent dips down to the bottom of the trend channel. Using confirming factors increase the odds of success. For instance, if the dip to the bottom of the trend channel also coincides with a bounce on the 50 day moving average, and / or a bounce on a price support level, and / or you get a „reversal bar“ pattern setup to buy, then the odds are stacked strongly in your favor. In a downtrend channel you would sell price rallies at the upper trendline. After entry, expectations are for price to attempt to trade to the other side of the trend channel. Near this area may be a good place to take your profits. Actual examples are presented later, but an up trending channel should look like the diagram:

1–2 MONTH BREAKOUTS

If a stock enters into a relatively tight trading range for 1–2 months, be prepared for a breakout to the upside. This is especially true if the prior trend was up, and you are in a bull market environment. The breakout day should close above the highest high of the consolidation range and trade on heavier than average volume. You should expect a several day follow-through in the direction of the breakout. This trade setup is even stronger if the stock price recently bounced up off of the 50 day moving average. Also, if the top side of the price range has a well defined resistance area, then the penetration to the upside will often be even more dramatic. This is a rough sketch of what the setup should look like.

CUP with HANDLE

This name was coined by the founder of Investor's Business Daily, William O'Neil. The chart pattern resembles the profile of a coffee cup. The cup pan of the pattern can last anywhere from several weeks to several months. The stock initially puts in an intermediate term price high, then begins selling off. After a while, buying comes back into the market pushing price up to, or very near, the earlier intermediate term hieh. This completes the right side of the cup. At this point the stock sells off again only slightly, trading sideways to down. It then trades back up to the right edge of the cup pattern to complete the handle. Be looking for a day that breaks out of the horizontal resistance area across the top of the cup and handle. This breakout begins an often substantial move up in price. Also keep an eye on volume. The setup is stronger if volume tends to decrease when price is selling off and increase when price is rallying. Here is a diagram of how price might look.

50 & 200 DAY SIMPLE MOVING AVerages

Many times the 50 and 200 day moving averages will lend to halt price. As mentioned earlier, fund managers key off of these indicators. This is where the „big money“ can come into the market and affect price. If a stock is trading above the 50 day moving average and is selling off, often it will bounce up off of the moving average line (and vice versa). Conversely, a stock that has a day which strongly penetrates up or down through one of the moving averages Typically follows through in that direction, at least for the short term (several days or longer). Knowing where the 50 and 200 day lines are for stocks that have trade setups can only help. It may be just one other confirming reason to take the trade, or it may help rule the trade out.

A CURRENTLY PROFITABLE DAY TRADE

As you near the end of a trading session you may have one or more open day trades with profit in them. Before closing them out, evaluate each of them to see if they have a strong chance of continuing their move for several more points over the course of a few days. If so, then consider selling only 700 of your 1000 shares to book the bulk of the profit. This puts money in your pocket but also allows you to participate in more of the price move.

SUMMARY

These setups for multiple day trades should be considered separate from your day trading. Sometimes, if you are taking losses in your day trades, you may want to cash in an open and profitable swing trade. Resist the temptation. Let the swing trades stand on their own, and manage them that way. In the long ran this will only add to your income. NOTE OF CAUTION: Although day trading can be risky, holding stocks overnight can be even more so for a short term trader. A 10 or 20+ point gap against you on the open just once, can really ruin a day, or a week, or a month. Trade only as many shares as you are comfortable with. Always be aware of any upcoming news or earnings on a stock that you are holding for more than one day. Also, know when economic data is being released or when the Fed meets, etc. They can cause significant market gaps that may so against your position.

Support and resistance are the actual outcome, or the result of, the interaction between fear and greed and supply and demand. Understanding how they all work together is like watching a magnificent, orchestrated dance. It also gives you a giant advantage for making money.

As you read, keep this statement in the forefront of your mind: for every action, there is a reaction.

Support and resistance will form the foundation for every trading decision. You can trade without oscillators and indicators and moving averages. You can even eliminate charts altogether from your financial decisions (although I wouldn't recommend it). But even floor traders in commodities pits who rarely see a chart will mentally compute where price resistance and support lie, even as they shout and use hand signals (called „open outcry“) to get their orders filled.

The concept behind support and resistance is a simple one, and once you digest it, you will have absorbed the basic premise underlying market moves.

Picture this: You're standing in the living room of a house, on the first floor. In your hands, you hold a ball. This ball equals the price of a stock. You toss the ball over your head. It soars upward, and hits the ceiling. The ceiling keeps it from rising higher, so the ceiling equals resistance. Now, the ball falls back down and bounces on the floor. The floor stops it from falling further, so the floor equals support.

Next, you spot a hole in the ceiling. You throw the ball as hard as you can, and it flies through the hole in the ceiling. It rises to the second-story ceiling and hits it. That ceiling equals resistance. Then, the ball falls to bounce on the second-story floor, which now forms support. Understand that the first-story ceiling supports the second-story floor. Result? Resistance becomes support.

Continue by running upstairs and grabbing the ball. Throw it back through the hole, down into the first-story living room. When it drops through the hole in the floor, it breaks through support. It falls to bounce on the living room floor, or previous support.

Then, it rises to hit the ceiling, or previous resistance. Run back down the stairs. Take the ball and toss it through a hole in the floor. The ball descends to the basement floor, which forms support. Then, it rises to bounce off the basement ceiling, resistance. Just above the basement is the living room floor, which uses to provide support. So now, previous support forms resistance.

The below figure illustrates support and resistance.

When the ball, which we'll now think of as a stock price, bounces off of support or resistance, we refer to it as a pivot point, which is illistrated in the below figure.

As you study support and resistance, remember, they are price areas. You will have to find a specific price to refer to, for example $54, but give it a little leeway. Picture yourself jumping on a trampoline. The trampolin.e supports you when you land on it, but the depth of your bounce varies a little each time. Also, just as heavier people stretch the trampoline base lower when they land, more volatile stocks need a little extra latitude in theif resistance and support areas.

Since you now know what support and resistance look like, let's quickly find out how they actually form. Go back to imagining the ball bouncing from floor to ceiling in the basement. Now, apply that to a stock in a Stage One, or basing price pattern. The basement floor is support, and we call it that because buyers are supporting the price. Were it to start lower, buyers (greed + demand) step in and accumulate, thus keeping the price from sinking lower.

When the price rises to the basement ceiling, it hits resistance. Resistance equals buyers who jam their hands in their pockets and refuse to pay a higher price for the stock. Also, resistance equals supply. At this point, some previous buyers, as mentioned before, revert into sellers. Afraid (fear) the stock will rise no higher, they offer their stock for sale, thus flooding the market with supply. If the stock falls here, the next time it rises to return to this price area, it may sell off again. Why? Because we have memories!

Say the stock shoots through the resistance (supply is absorbed). Maybe the sector it inhabits is in a favorable spotlight, the bulls are in control of the market, or the company itself enjoys a spurt of good news. The price will continue to rocket-maybe for hours or days-until a new factor suppresses it. When it „sells off,“ that pivot point creates fresh resistance. The stock then falls to the earlier resistance area, which is now the „floor,“ or support. It will hold there if buyers absorb the supply, and in so doing, „support“ it.

Support and resistance levels apply on every chart you'll ever see, whatever the time frame. In fact, you may have guessed by now that all the applications you'll learn about charts hold true on all time frames. That means the concepts you find in these pages pertain not only to swing-and-position trading, but also to strategies including active trading and traditional buy-and-hold investing.

The below figures show support and resistance areas on a weekly chart, a daily chart, and a fifteen-minute intra-day chart. As you study these charts and observe support and resistance levels, you may be amazed athow reliable they are!

Wedge

A wedge is a contraction in a stock's daily range. Each day will typically have a narrower range as it completes a shape that looks like a „wedge“ This compression in price over the course of several days to a couple of weeks may be followed by a strong breakout day. A wedge will look similar to this:

A wedge does not have to be exactly symmetrical. It may be tilted to one side or the other. For example:

Flag

The flag is similar to the wedge in that it is a consolidation pattern. Usually a flag forms after a strong run up or down in a stock. After this strong movement which can last several days, the stock takes a breather and may tend to trade sideways This is where a flag will often form on the daily chart. It should look something like this:

The flag will usually have a relatively light formation and smaller daily trading ranges. Typically a strong breakout will occur in the direction of the earlier trend. This is especially important if the flag forms at or near a recent or long term high for the stock The upper boundaiy of the flag serves as price resistance, and the lower boundary i$ support. A price breakout in either direction may be a good trade entry, especially when paired with analysis from the 1 to 3 day bar, and/or intraday trade setups(consoli­dation).

Consolidation of daily Highs and Lows

If you have 3 – 5 t daily highs or lows clustered together at the same price (daily consolidation) then you have the potential for a breakout day trade. Here is how it look for a buy setup:

New highs/lows

New highs and lows are important to watch for. This is signifying strength or weakness in a stock. The most significant arc all time highs and 52 week highs or lows. If you find a stock that is trading very near one of these areas (especially if you have several daily bars of consolidation), be ready for a day that may break through and run. Also, shorter term (6 to S week) new highs or lows can provide a substantial day trade or swing trade (several day) opportunity. These stocks may be traded on the actual day ofthe breakout or on the following day(s). Again, look at the 1 to 3 bar and intraday setups to determine when and where to enter The reason these work is that price is breaking through a significant and natural price support or resistance area. Other traders and fund managers aiso monito: and trade these longer term breakouts. This adds extra follow through and offers opportunities for day trading.

One variation on the new high or low setup lends to be an «specially strong pattern. When a stock first breaks out to a new high of trie past several months, sometimes it will pull back slightly and trade sideways from several days to a week or two. Often you will see a consolidation type of pattern as it is preparing ;o challenge the new high again. On the day ihe Stock breaks out to penetrate the prior high, you will usually see very heavy buying come into the stock that may drive it up several points If today appears lobe the day of the breakout, rely on your daily and intraday setups to enter the trade.

Summary

The longer term daily chart patterns help you to recognize consolidation patterns that lead to good breakout day trades. Also recognizing when you are in sideways price congestion will keep you from trading a stock while it is choppy and less predictable. Don't use these setups to blindly lire off a trade. Rather, use them to alert you to monitor the stock for a puce breakout and thus a high probability trade. At that point go to your 1 to 3 day and intraday analysis to time your entry. Trading with the trend in these instances increases your odds of success. Be aware of the overall market indexes; you'll want them on your side as well.

Conclusion

You've seen how to recognize and anticipate high probability trading patterns in several time frames. Putting them all together only increases the odds of a successful trade. Trading with the stock's trend and with the market direction (both daily and intraday) only enhances your win rate. Time your entry with the momentum on the market maker screen, and enter the market al the price you want. But remember, it is better to miss a good trade than to get a poor fill and subsequenlly lose $$$$. There will always be another good trade setup, so wait for it and take only the best trades.