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.
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.
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.
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…
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?
In case of 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.
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.
You can see on the Nifty chart above that .. yes Nifty is in a nice uptrend with the 10ma above the 30ema. The stock has pulled back into the Trading Zone and made a nice swing point low (highlighted in red Circle).
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.
Trading Strategy Extracted from http://www.swing-trade-stocks.com