Swing Trading 101: Do you have the patience to let the trend come back to you?

(PART ONE)

A trend (correction: a strong trend) may be one of the most difficult market environments to trade. I think that between strong mark up or mark down stages and possibly distribution (volatile, sideways ranges) many traders will be tempted to chase and/or enter too aggressively in expectation of follow-through.

Consider that a trend is an organized market opinion or sentiment that continues because of the momentum is behind it. A downtrend can have temporary bullish momentum while maintaining an overall negative sentiment just as an uptrend can have temporary bearish momentum while maintaining an overall positive sentiment. It’s the overall direction of the individual time frame that I feel must be identified and measured first. Without this understanding, it would be very difficult for me to gauge a correction versus a trend reversal. The ideal way to capitalize on a trend and help minimize risk in my opinion is to wait for a correction. There are a number of levels that can be considered a correction as long as the trend is up or down. (e.g. Fibonacci levels, psychological numbers, trendlines) I measure this using a combination of my 34EMA Wave, clock angles, and lookback. For example, let’s look at the charts below for some current views of trends.

In terms of market psychology clarity, I am seeing that the 240-minute time frames are offering some excellent views of swing trades. By the way, I think defining what I think is a swing trade would be well-placed here. For me a “swing” is a retracement or correction WITHIN THE CONTEXT OF AN ESTABLISHED TREND. Sorry for all the caps but that last part is IMPORTANT.

Without a trend, the movement up and down is simply range-bound movement and volatility which in my opinion can be incredibly difficult to trade. By the way, I believe that’s one of the main reasons a distribution market stage is such an account killer…

9-28-2010 DTE 1.jpg

9-28-2010 DTE 2.jpg

9-28-2010 DTE 3.jpg

Notice that all three charts have data going back to June 29 which means that there is roughly eight weeks of price action in the chart view. This is specific to a 240-minute chart where I prefer to view six to eight weeks (no less than four weeks) of data in order to make decisions about recent highs, lows, rallies, sell-offs, overall market movement, as well take the “clock angle” of my 34EMA Wave. The clock angle gives me to stage of the market.

Stages.PNG

An uptrend is a “two to four o’clock” angle (Stage 2) while an downtrend is a “four to six o’clock” angle (Stage 4).

These three pairs are trending higher in reaction to the weakening U.S. Dollar so the set up in getting long would mean that the U.S. Dollar bounces within its downtrend to push these three pairs lower into the support of (preferably) the 34EMA Wave which consists of three 34 period exponential moving averages: one on the high, one on the close, and one on the low.
I think the simplest use of the 34EMA Wave in a Stage 2 or Stage 4 is to wait for the correction to the Wave itself and enter when prices retrace to it. The idea behind entering on corrections in a trending market is that 1) the trend is still intact and 2) the pullback or bounce (correction) is not a reversal. The Wave helps identify that too by the way. If prices either flatten out the Wave (which indicates a shift to possibly either Stage 1 or Stage 3) or if price action breaks the Wave support of the uptrend or the Wave resistance in a downtrend, the swing strategy is no longer valid.

Chartology is written by Raghee Horner, trader/author at RagheeHorner.com, Chief Currency Analyst at InterbankFX, and Autochartist Chief Market Analyst.

*Forex trading is one of the riskiest forms of investment available in the financial markets and suitable for sophisticated individuals and institutions. The possibility exists that you could sustain a substantial loss of funds and therefore you should not invest money that you cannot afford to lose.

  • Stock Market

    I really appreciate your post and you explain each and every point very well.Thanks for sharing this information.And I’ll love to read your next post too.
    Regards:
    Stock Market