Understanding How Stocks Set Up To Give Us Good Swing Trades
In this article I am going to cover the various ways that individual stocks can set up to provide us with good swing trading entries. Upon completion of reading this article you will have a good idea of how and why stocks behave the way they do and will understand and recognize the various Swing Trading Setups you will come across on a regular basis in trading. What’s more, you will know exactly how to take a Swing Trade off the different trade setups.
The Three Basic Trade Setup Scenarios. A trending stock will give us one of three different swing trading setups to play. The setup types are determined by the degree and extent to which the stock pulls back after making a new move to higher prices. These are characterized as:
Super Deep Pullbacks
The 75 Day SMA Is The Key To Understanding Swing Trading Pullbacks. Before we examine each of the different types of Pullbacks one by one it is important to understand how they relate to the 75 day SMA. In my research I have found the 75 Day Simple Moving Average to be the best moving average for not only trend verification, but also to provide as a visual reference point for the Swing Trading Cycle for the stock you are trading. A shallow pullback will typically occur in a stock that is in a very strong trend and after the stock makes a new move higher, the stock will only pullback 2-3 days remaining high above the 75 period. A Deep pullback on the other hand is characterized by 5-8 lower days after a new pivot high is made and many times the pullback extends all the way back down to the upward sloping 75-Day SMA. Finally, a Super Deep Pullback is where a stock suffers an extensive sell-off of 10-14 days and drops well below the 75-day SMA.
2-3 Day Pullback High Above 75-Day SMA
5-8 Day Pullback Down To 75-Day SMA
10-15 Day Pullback Well Below 75-Day SMA
Investopedia defines a Pullback as “A falling back of a price from its peak. This type of price movement might be seen as a brief reversal of the prevailing upward trend, signaling a slight pause in upward momentum.” Investopedia explains that, “Often pullbacks are seen as buying opportunities.”
Good Source For Trending Stocks www.investors.com
Swing Trading Scenario #1 – The Shallow Pullback Setup. We will take a look at each of the Swing Trading setup scenarios one by one. In our first example of the Shallow Pullback, (See Chart Below) you will notice that the Stock Pivot Trade Analyzer software triggered a Shallow Pullback entry on PWR at $27.45 after the stock pulled back after only 3 days. The software detected that this stock was in a super strong, high-octane up trend and so was on high alert for the Shallow pullback alert. If you would plot various moving averages on a stock like this you would notice that it is probably trading above an upward sloping 15 day SMA – 20 day EMA because of its strength.
Swing Trading Scenario #2 – The Deep Pullback Setup. In our second example, we will look at a Deep Pullback. (See Chart Below) you will notice that after making a PIVOT HIGH the stock goes in to a longer pullback of 10 days all the way back down to the upward sloping 75-Day SMA. The Stock Pivot Trade Analyzer software triggers a Deep Pullback Swing Trading Setup on AMGN at $116.90 just above the 75-Day SMA.
Swing Trading Scenario #3 – The Super Deep Pullback Setup. In our third example, we look at a Super Deep Pullback. (See Chart Below) You will observe that a Super Deep Pullback actually breaks down well below the 75-Day SMA (takes a major winger!) as part of the setup. We can see up to 10-14 days of heavy selloff as the stock price plunges. The Super Deep Pullback attempts to catch a stock that has become extremely oversold after it comes off a major high and takes advantage of the fact that there will be a ton of Bargain Hunting Long Traders coming out of the woodwork to buy the stock while at the same time all of the SHORT players will begin to BUY and COVER to exit out of their winning short positions. The two actions occurring at the same time creates a major oversold bounce and the stock typically retraces all the way back up to the 75-Day SMA.
A Fourth Kind Of Swing Trading Setup – The Convergence Breakout
A Convergence Breakout Setup is a special hybrid type of Swing Trading Pattern that can occur during both a shallow pullback or during a deep pullback. (But not during a Super Deep Pullback) It is best characterized by the stock getting stuck in a small temporary range that puts pressure on and squeezes the stock price. Eventually the price is able to break free of this short term range and potentially make a very large move in your favor.A Variation Of The Convergence Breakout Setup
One variation of the Convergence Breakout Setup occurs when the stock attempts to break out of the squeeze pattern in a LONG RANGE DAY. Instead of issuing an overhead PRICE TO WATCH – TRADE TRIGGER LINE the Stock Pivot Trade Analyzer Software will issue a LIMIT PRICE to watch below the close of the break-out day.The Stock Pivot Trade Analyzer Helps Traders Improve Their Game!
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