SWING TRADING: A BEGINNER'SRULESAND BEST STRATEGYG ...

A BEGINNER'S RULES AND BEST STRATEGY

GUIDE TO TRADE FOR PROFITS. MONEY
MANAGEMENT, TRADING STOCK, CURRENCIES
AND CRYPTOCURRENCIES, TECHNICAL ANALYSIS
FOR THE SUCCESS IN THE MODERN AGE.

BRIAN PRICE

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© Copyright 2019 -All rights reserved.

No part of this book may be translated,

reproduced, stored in a retrieval system or transmitted,
in any form or by any means, electronic,
photocopying, recording or
otherwise, without prior permission in writing
from the author and publisher.

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Table of Contents
Introduction
Chapter 1 Basics of Swing Trading
Various Financial Instruments
Swing Futures Trading Tips for Beginners
Chapter 2 What Is Swing Trading?
A Swing Trader VS A Buy-And-Hold Investor
The difference between a swing trader and a day trader
How Much Time Do You Want To Put In
Swing Trading For Fun
Let's Talk Strategy
Decide which securities you plan to trade.
How to Pick a Style and Strategy
Chapter 3 Platforms for Swing Trading
Chapter 4 Market Rhythms
Order Flow
How Order Flow Produces a Landscape
Chapter 5 Understanding Chart Patterns
Trading patterns
Chapter 6 Making a Tradingplan
Analyze your situation
Find your objectives

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Chapter 7 Fundamental Analysis

Financial Reports to Read and Where to Get the Information
Financial Statements in More Detail
Earnings Calls
Price to earnings ratio
Open Interest ..Volume, Short interest and Put to Call Ratios
Chapter 8 Technical Analysis and Fundamental Analysis
Chapter 9 Strategy
Chapter 1O Candles and Candlestick Charts
What is the Candlestick Chart?
What is On A Candlestick Chart?
How Do You Read the Chart?
How Do I Identify a Bullish Market with Candlesticks?
How Do I Identify a Bearish Market with Candlesticks?
What Are Swing Traders Looking For?
Swing Highs
Swing Lows
Conclusion

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Introduction
If you are a seasoned stock market trader, then you already
know that there are different styles of trading stocks or
other financial market instruments. One of these styles is
swing trading.
Swing trading is a trading style where your main aim is to
make gains in a financial instrument such as stocks over
a period of time. This time period ranges from a couple of
days to several weeks. This type of trading is a short-term
trading style best suited for trading options and stocks.
As a swing trader, you will mostly rely on technical analysis
to identify profitable trading opportunities. You can also
expect to make use of fundamental analysis as well as pat-
terns and price trends analysis.
Why Swing Trading?
The main aim of swing trading is to find the major trend
and then apply swing trading strategies to the trend in
order to earn profits and make big wins. As a swing trader,
you will hold either a short or long position in the market-
ing often for a minimum of 2 days to probably 2 weeks.
This time frame is not exact because some trades conclude
pretty fast, while others may last for a few months. Even
in such rare instances, the strategy is still considered to be

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swing trade. Your aim in all instances will be to profit from

large price movements.
There are some swing traders who prefer less volatile and
more sedate financial instruments, while others opt for
very volatile ones. In both instances, a trader will try to
identify the direction of an asset's price before moving in
and eventually cashing in on the profit made from the price
movement. Successful swing traders aim to benefit from
large chunks of the desired price movement before proceed-
ing to the next available chance.
Technical Analysis
As a swing trader, you will use technical analysis just about
all the time so that you can identify the trend and benefit
from its movement. Most of the time, there will be neither
a bearish nor bullish movement at the markets. However,
sometimes a stock or other security may be moving in a
trend that is predictable, especially between the support
and resistance areas.
Even in this instance, there are swing trading opportun-
ities. As a trader, you should assume a short position close
to the resistance area or a long position. Sometimes, it takes
a couple of weeks or even months to benefit from an ex-
pected price movement.
It is crucial to note that swing trading can expose you to the
weekend or overnight risks. What happens is that you may

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enter a position during the day, but then, unforeseen events

take place overnight or in the course of the weekend. These
events could affect the price movement and substantially
affect your position in the markets.
There is an established and trusted risk versus reward ratio
used by swing traders to take profits. This ratio is largely
based on a profit target as well as established, pre-deter-
mined stop loss levels. The system can be set up such that
profit taking happens when a certain profit level is attained
or when a certain loss level is attained.
A Popular Trading Strategy
Swing trading has proven to be among the most preferred
forms of trading and making money. It is important to en-
sure that your technical analysis skills are up to scratch if
you are to trade and be profitable consistently. You will also
be assessing trades based on a risk versus reward ratio. This
is done using charts. Chart analysis will help you to deter-
mine where to enter a trade, when to exit and where to
take profits. As a swing trader, you will mostly rely on the
15-minute or 1-hour charts to determine the most suitable
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stop loss and entry points.
Apart from technical analysis, you will also need to ensure
that your fundamental analysis skills are up to scratch.
For instance, you may notice that a stock is on an upward
trend, and you want to get any benefit from its movement.

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Before doing so, you will need to confirm that its funda-
mentals are sound and secure.
As a trader, you can risk about $1 in order to make $3.
This is considered a reasonable and favorable risk to reward
level. However, risking $1 to make perhaps $1 or less is con-
sidered unfavorable.
Upward Trend Favored by Bullish Traders
Stock movement in the markets hardly follows a straight
line. Instead, the movement forms a pattern that is step-
like. As an example, a stock or other instrument might
trend upwards for a couple of days then take a dip for a
while before resuming its upward trend. When you closely
examine these patterns for a while and observe that the en-
tire movement keeps moving upwards, then we can declare
that the stock has an upward trend.
Bullish traders need to first identify the initial upward
trend of a particular stock before an expected pullback or
trend reversal. This reversal is also referred to as the coun-
ter-trend. After the trend reversal, you should expect to ob-
serve a resumption of the upward trend.
Collect Profits on the Uptrend
It is advisable to wait for the resumption of the uptrend
before entering a trade because we have no idea how long
a downward trend could last. Therefore, always watch out
for the upward movement, wait for the pullback, and then

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watch out for the trend to resume and then make a move.
This is true and valid for a bullish situation.
To effectively achieve this, you will need to be able to deter-
mine the most appropriate entry point. In most cases, this
is usually as soon as the upward trend resumes just after
the counter-trend. However, you will need to confirm this
using risk analysis. The entry point needs to be tested in
order to determine the target and assess any possible risks.
You will also need to determine the exit trade point. This
is the point at which you will exit the trade should it begin
a downward trend. It is also known as the stop-loss point.
This approach is necessary if you are to limit your losses.
Also, identify the peak or highest point of the new upward
trend. This peak should be considered as your take profit
point. Once this point is attained, you should take at least
some profit because there could be another counter-trend.
If the upward trend continues, then you will need to iden-
tify the best possible exit point or profit point so that you
ride the momentum even as you lock in some of the profits.
This is an excellent approach and is one of the easiest ways
of making money as a swing trader. The reward of any trade
is equal to the difference between the entry point and the
take profit point.
Basically, the potential to earn a profit needs to be about
twice the size of any possible losses. If this ratio is lower,

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then the trade is considered bad, but if it's higher, the

ratio is considered great. Therefore, when making a deter-
mination on whether a swing trade is worth entering, you
should use the risk-reward ratio of 2: 1 as the minimum.
The Downtrend
Some traders prefer to enter a bullish market and apply
swing trade strategies. Entry into such trade requires the
use of a limit order, specifically the buy-stop order. Most
traders prefer trading either stocks or options. Call options
are preferred in a bearish market as traders do profit under
such market conditions. Options trading a bearish market
can be rather complicated, but it is an art practiced and fa-
vored by many seasoned traders.
Stocks and options on a bearish market tend to follow a zig-
zag or step-like path. In such a case, a stock will decline in
value for a number of days, and then experience resurgence
before resuming the downward trend again. With close ob-
servation and time, the overall trend can be viewed in much
the same way as the upward trend.
Gains Collected on the Downward Trend
First of all, you should only enter a bearish trade after
carefully evaluating your risk versus reward ratio. We can
compare the entry point in this instance with the stop loss
point. If the stock option or stocks attain the lowest price
level of the most recent downward trend, then this point

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will be considered the take profit point, so it is advisable to

take profits and exit the trade.
Fading
As a swing trader, you will mostly fallow the trend set by
a particular stock on the market. Going with the trend is
advisable and is what most traders do. You must be super
talented or experienced to go against the trend. However,
there are traders who do this. Such traders are said to be
''fading."
Fading is simply another term for trading against the mar-
ket trend. There are other terms used to mean the same
thing. These include trading the fade, contrarian trad-
ing, and counter-trend trading. Sometimes, swing traders
choose to trade the fade. This is where they assume a bear-
ish position during an upward trend and a bullish position
during a downward trend.
As a trader, you want to exit any fading trades before the
end of the counter trends. This is because the trend will re-
sume its normal movement, and your positions could start
making losses.
Day Trading Versus Swing Trading
Day trading is similar to swing trading in certain aspects.
The major difference between the two is that trades entered
in day trading are closed that very same day. Trades usually
last only a couple of hours and sometimes even minutes.

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This is totally different from swing trading where trades

can last for days, weeks, and sometimes even longer.
Swing trading requires less time on the trading platforms
compared to day trading. You do not need to sit down all
day observing your screen and noting all the tiny move-
ments that occur during the day. Day traders can hardly
afford to leave the trading platform as they risk losing
money.
As a swing trader, you are able to maximize profitability
in the short-term by benefiting from most of the market
swings. You can also rely solely on technical analysis to
carry out trades and still be profitable.
The only major challenge when it comes to day trading is
that you can be exposed to unexpected risks on the week-
ends or overnight. This is likely to happen when major
events or announcements are made that can affect stock
price movement. You can sometimes lose money on your
trades when there is an abrupt or unexpected market rever-
sal. And sometimes you may lose out big time on long-term
opportunities by pursuing pretty short-term trends.
In essence, day trading and swing trading are very similar
in some aspects. The major difference is the holding time.
The minimum holding time with swing trading is over-
night while day traders have to close out their trades be-

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fore the expiry of the trading session. Positions are always

limited to a day.
When a position is held overnight, certain things can hap-
pen. For instance, the trend could head downwards, or the
position could suffer risks like gaps. Both day and swing
traders have access to trading margins from their brokers. A
margin is simply a loan granted by the broker to clients for
purposes of enhancing trades. Swing traders have access to
about 50°/o leverage, which means that a trader can receive
a loan of up to 5 0°/o from the broker.
Trading Tactics
Swing traders prefer dealing in multiple-day rather than
single-day charts. Common chart patterns that are favored
by swing traders include triangles, flags, head, and shoul-
der patterns, cup and handle patterns as well as the mov-
ing average crossovers. However, each trader is expected to
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come up with their own trading strategy that suits their

purpose, style, demeanor, and so on.
The best approach is to identify and come up with a strat-
egy that provides one with an edge over numerous other
trades. To come up with such a trade, a trader will need to
identify suitable trade setups that point towards predict-
able movements of the chosen asset. Achieving such a feat
is never easy, and even the best strategies do fail some of the
time.

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No trader is victorious on each trade. Even the most suc-

cessful and well-known traders such as Warren Buffet lose
out on some trades. All you need is to identify a suitable and
favorable risk versus reward ratio. In fact, to be profitable,
you will only require a very favorable risk to reward ratio
without the need to be successful in all your trades.

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Chapter 1
Basics of Swing Trading
Before you get into swing trading, you want to ensure that
it is the right trading strategy for you. You already know the
basic definition of swing trading, so now it is time to dis-
cuss what makes it special.
Swing trading is a mix of other basic trading strategies. It
isn't as fast-paced and stressful as scalping or day trading,
but it also isn't as slow as position trading. Swing trading is
perfect for anyone who wants to turn to the stock market
for their career but wants to see larger profits and stay ac-
tive throughout the day.
If you are comfortable with overnight risk, swing trading
might be right for you. The reason why holding stocks
overnight is risky is because you never know what they
are going to do during the 12 or so hours you are away
from your desk. The price of stocks can fall quickly, which
means you can have a good standing with the stock when
you close out at 4:00 P.M. on Tuesday. However, at 8:30
A.M. on Wednesday morning, you can find out the price of
your stock fell due to shocking news about the company
and now you have lost money. Of course, this risk increases
when you hold stocks over the weekend.

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Swing trading is unique because you are able to take time to

research the history of the stock, which means you will look
at its daily and weekly charts in order to find a pattern. This
pattern will tell you when the best time to buy and sell your
stock will be. You also have time to go through the news and
get an idea of how the stock market is doing every day. You
can spend time looking at various stocks to see which ones
are the best for you. When trading strategies move faster
than swing trading, you aren't able to spend as much time
on these factors.
Swing traders have a variety of options for trading. While
many people focus on individual stocks, you can also pur-
chase a basket of stocks. This is a large group of shares, such
as 100, that you buy for one price. Each share comes from
a different company. You can also trade cryptocurrencies
such as bitcoin.

Various Financial Instruments

While most people think of stocks when they are looking
into trading, there are other financial instruments that you
can focus on. Even if you use these instruments in a differ-
ent market, such as Forex, you can still be a swing trader.
Hence, you want to ensure that you understand what
financial instrument you want to trade before you take
yotlr first step into trading.

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Stocks
When discussing the stock market, this book focuses on
stocks. In fact, you have already learned a lot of information
about the stock market. Because of this, I won't spend a lot
of time discussing stocks as a financial instrument.
Exchange-Traded Funds (ETFs)
ETFs are becoming increasingly popular and known as a
basket of stocks, bonds, or other securities. People often
make ETFs by combining various stocks from the market.
This is helpful for several reasons. First, it gives you dozens
of companies, sometimes in the hundreds, with one pur-
chase. Because the stocks are smaller than individual stocks
you would purchase, ETFs are a decent price.
Second, they are known to help limit risk. This happens
because the securities in the ETFs will often balance each
other out. For example, if you have a blue-chip stock, it will
balance out any stocks that are performing poorly.
Third, ETFs can help people who can't watch the news as
often as they would like to. This might be because they
only trade part-time and don't have the ability to pay close
attention to the stock market. While you will still want to
do your thorough research just the same as any other stock,
if one of your stocks receives bad news, you don't have to
hurry to sell it. Instead, one of the other higher-performing
stocks will help balance out your ETF.

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Fourth, ETFs can automatically help with diversification.

This is when you have a variety of companies and securities
in your portfolio. It can help increase your knowledge of
the market and often gives you a stronger look as a trader.
The trick is you need to find the right level of diversification
when using individual financial instruments as too many
can be harmful to your portfolio. This is why ETFs are so
helpful. They are not individual as they include dozens of
instruments in one location.
Cryptocurrencies
This is a newer form of a financial instrument and one that
is quickly growing. They are similar to currencies but are
often called coins. Further, there are a variety of coins. One
of the newer cryptocurrencies that is about to make an ap-
pearance is known as Libra. This is Facebook's upcoming
coin that is meant to be global. Other coins that are cur-
rently popular and can be traded on the market are Bitcoin
and Ethereum.
Many experienced traders say beginners should not start
with cryptocurrencies because of the high risk they have.
The main reasons for this are because they can be easily
hacked and often receive negative press.
Currencies
Currencies are a different type of financial instrument be-
cause they have to be traded in pairs. They are bought and

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sold in the forex market and are typically matched a cer-

tain way. For example, you will pair the American dollar
with the Euro or the Canadian dollar with the Euro. Like
cryptocurrencies, experienced traders stated that begin-
ners should not start out with currencies. They can be
tougher to understand and carry a larger risk than stocks.
However, they are easier to trade than cryptocurrencies.
Options
When you use options to trade, you come to an agreement
with another party. This agreement tells you when the
financial instrument can be bought and sold. In order to
take part in options trading, you need to have these require-
ments.
1. You need to include an expiration date in your
agreement.
2. You can walk away from your agreement at any
time.
3. You need to follow the process of the strike
price, which is when the owner of the financial
instrument agrees to the price you set.
4. You need all the basic information on your
financial instrument. This means that you
don't decide on a company to trade in without
doing your research and analyzing any charts.

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Futures
Experienced traders feel that futures exchanges are the best
way to get yourself started in the market. Like options, fu-
tures are an agreement of when a stock can be bought and
sold. Sometimes there is no expiration date with futures;
however, people typically include this because the stock
cannot be traded until the agreed-upon price is reached. For
instance, if the two parties state the stock will be traded
once it reaches $450, then nothing can happen until the
stock hits this price. This means you have no real idea when
you will be able to buy or sell that stock.
One benefit of futures exchanges is that you are able to get
real-time training in the stock market without having to
spend too much time on various stocks. Instead, you can
get an idea of how to analyze charts, research the history of
companies you are interested in, and simply observe how
the market runs. The whole time, you are still trading in the
market because you have already set up an agreement.

Swing Futures Trading Tips for Beginners

There are dozens of tips that beginners can use to give them
the best trading experience from the start. Here are some of
the most popular tips to remember.
Research and Learn Every day
Before you start researching, it is essential that you read
everything you can about swing trading. You will want

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to completely understand what swing trading is, it's bene-

fits, risks, the best stocks to trade, and everything else in-
volved in the process. Take your time researching to ensure
you understand everything you are reading. Keep thorough
notes and make sure they are close to you when you start
trading. As you continue to learn, write down any valuable
information in your notebook.
When it comes to your daily research, you will want to pay
close attention to the historical charts for the stocks you are
interested in. You will analyze the daily and weekly charts,
so you can put together your trading plan for that stock.
This plan will tell you when the best time to purchase the
stock will be, depending on the stock's trends. You will also
write down the best time to sell and your escape plan. An
escape plan is when you set the lowest price you will hold
the stock at. Once it reaches this price, you will sell the
stock immediately. It doesn't matter if you haven't reached
the highest point you thought the stock would reach dur-
ing your analysis. In order to keep yourself from a greater
capital loss, you follow your plan to sell the stock.
Treat Swing Trading Like a Career
Whether you are swing trading full or part-time, you want
to treat it like you would any other job. You want to take it
seriously. This means you will set up your schedule, limit
distractions, and strengthen your self-discipline. You will
want to follow all the rules and guidelines, including the

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ones you establish yourself, to the best of your abilities.

Once you are able to do this, you are ready for a successful
swing trading career.
Keep Your Emotions Out of Your Trades
One of the biggest steps you want to take when you start
trading is to keep your emotions in check. If you need to
find strategies that will allow you to control your emotions,
such as meditation or deep breathing, you will want to
practice these daily. You never want to make a trade be-
cause you let your emotions take control. When this hap-
pens, you are more likely to make a mistake which can
cause you a lot of money.
Set Your Daily Schedule
Note the times of the stock market and make sure you are
sitting in front of your computer during those times. This
means you will want to start your day at least an hour
before the stock market opens. You need to allow yourself
time to read up on any news and get an idea of where
your stocks and the stock market sits. The busiest time for
trading is between 9:30 to around 11:00 A.M. and 2:00 to
3:30 P.M. Eastern time. However, you want to be cautious
of making any trades before 10:00 A.M. Eastern time. This
is because people are often trading their stocks between
9:30 and 10:00 A.M. because of the news they read about
the stock's company. The first half-hour is a very chaotic
time for the stock market, which can be very confusing for

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beginners. Therefore, it is best to wait to make any trades

until the stock market has started to calm down but is still
busy. Usually between 11:00 A.M. and 2:00 P.M. Eastern
time is when people are taking lunch or spending their time
researching and learning.
Once the stock market closes, you will want to take time to
save any charts from the stocks you bought and sold. You
will also want to make notes about your day in your jour-
nal. The notes you make can include how you were feeling
and what your environmental conditions were as you pur-
chased or traded a stock.
Don't Forget About Continuing Your Education
Sometimes one of the best ways to research is through
educational courses that are available through swing trad-
ing websites. For example, ''Guide to Stock Trading with
Candlestick and Technical Analysis'' is an online class that
will help you learn how to analyze candlestick charts with
technical analysis. This course is created for beginners and
is only about $60 to take. There are other courses for both
beginners and expert swing traders that you can consider
taking as a part of your trading day.
Join an Online Community
Other than a broker, you will want to find someone who
can help you learn the processes of swing trading. There
are dozens of online communities such as The Trading Her-
oes Blog and Elite Swing Trading. Once you sign up for an

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account-sometimes you do have to pay-you will be able

to connect with thousands of traders that will be happy to
answer your questions or help you achieve your next step.
Many of these community forums also keep everyone up-
to-date on the news that can affect your stocks.
Keep Yourself in the Right Mindset
To reach your dreams of becoming a successful swing
trader, you need to stay focused and stay in the right mind-
set. The basis of this mindset is having confidence in your
abilities as a swing trader. You want to imagine yourself
reaching your goals, whether this is building toward your
retirement account or living comfortably as a swing trader.
Another part of this mindset is to have patience. It will take
time to learn the stock market and be able to live off of your
trades. Moreover, you need to have patience when it comes
to the right moment. You don't want to purchase the stock
or sell it before the exact moment in your trading plan.
By remaining flexible, you will be able to keep yourself in
the right mindset. You want to understand that not every-
thing is in your control. Focus on what is in your control,
such as your actions. If something isn't in your control, ac-
cept it and move on.
You also want to keep your expectations realistic. Swing
trading is not a career that will make you rich overnight. It
will take time and energy to reach your desired success.

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Mistakes Are Going to Happen

Part of being realistic is knowing that you will make mis-
takes. It doesn't matter how many years of experience you
have as a swing trader, mistakes are going to happen. You
can spend two weeks analyzing the charts for a promis-
ing stock, buy the stock, and then lose some of your cap-
ital because of a small mistake you made. Sometimes this
happens because the stock market is unpredictable and no
matter how well you research, you can't predict the future.
When you do realize you made a mistake, learn from it
and move on. If you worry about your past mistakes, you
are going to affect your future trades. You will find your-
self lacking the self-confidence you need to stay successful.
Don't allow your mindset to decline because of a mistake.

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Chapter 2
What Is Swing Trading?
In this chapter we'll try to contrast swing trading with all
the other popular parts of trading. ''Swing'' trading is some-
what of a misnomer because it's one of the safest, least
''swingy'' forms of trading out there.
I want to help you decide just how much time you want to
devote to this, after all, if you're thinking of doing it once
in a while, you will need much less than someone planning
to make a living. We'll also look at how to form a cohesive
strategy for creating your trading plan.
Finally, we'll look at some of the most common swing trad-
ing mistakes, which you'll want to avoid.
There are countless ways in this world to make a living.
Usually, people will approach this by learning how to per-
form a certain skill at a very high level. Think of surgeons,
for example, they spend most of their best years studying
on how to open people up and fix them. We exchange time
for money in this subtle way, and the more in-demand your
skill is, the more you earn.
I'm not here to tell you that swing trading is strictly super-
ior in any way. First, let's look at the good part of mastering
a skill-you'll have safe income.

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What this means is that you'll have a near-guarantee that

your skill will be applicable in the future, and will help you
make a living. Even then, there's no true guarantee, for ex-
ample, your skills might simply not be in demand anymore.
For example, I haven't heard of a well-paid carriage driver
anytime recent.
On the other hand, mastering a skill like this also has a
downside-it gives you a limit. Given that you can only work
for so many hours until you fall down from exhaustion.
This means that eventually, you'll simply hit a wage cap
where you're not able to earn any more. This is the point
at which most get frustrated, due to their needs eclipsing
their earning potential.
Swing trading suffers from no such issues. It lets you make
money not based on sheer working hours, connections at
work, or even familial ties. Swing trading lets you make
money simply from your own skill in it. The trader lives
and dies by the quality of their trades.
The better you're trading, the more money you'll be earn-
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ing, you might even start hitting profits you couldn't im-
agine at the start.
Even in the world of trading, few are cut out to be swing
traders. Because it takes advantage of short-term fluctu-
ations in price, you need to always be ready and alert. On
the other hand, this can easily bring a hefty return value.

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Swing trading lets you make a great long-term portfolio,

which will continue to accrue value for as long as you trade.
On the other hand, swing trading involves possibly the
most responsibility out of all kinds of trading.
Not being disciplined can easily lead to reckless trades,
which are nothing short of gambling. You can easily land
yourself in a position where it's not bringing you any in-
come, or even one where you've lost money.
Do you know what the difference between a risky swing
trader and a failed poker player is? The bridge they sleep
under.
Now, we've done enough droning about this, so what really
is swing trading? Well, to answer this question, we must
first clarify what swing trading isn't.
Swing trading isn't day trading, nor is it buy-hold investing,
both of which can also be great avenues of profit. These
two other types of investors will take a wholly different
approach to the market, and will trade differently, and at
different frequencies. Heck, if you found a swing trader and
a day trader at a conference, chances are, they wouldn't
even be reading the same newspaper.
Despite how different they are in practice, it can sometimes
be difficult for people to fully grasp the extent of it. We'll
go over the differences section by section, and analyze what
makes all of these kinds of trading distinct.

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So, what does understanding these differences bring you?

It helps you focus on the parts of trading that are import-
ant to swing trading, rather than accruing general trading
knowledge.

A Swing Trader VS A Buy-And-Hold Investor

Let's look at one of the richest men in the world as our
example of a buy-and-hold investor. Warren Buffet is the
most successful buy-and-hold investor in the world, and let
me tell you, that man didn't care much for price swings.
In the buy-and-hold investment world, you won't short a
stock because the market has been going up, instead, you
study. What do you study you ask? You study the art of tell-
ing apart a quality company from one that is less so.
As a buy-and-hold investor, you'll be trying to make mas-
sive gains off of just a few companies.
As a buy-and-hold, from now on abbreviated as BAH in-
vestor all you will see in short term movements in price is
opportunities to get the securities you've been looking for,
or short them at prices that don't really reflect the value of
them.
To be perfectly fair, most BAH investors have a portfolio
turnover rate at 25o/o of even lower. The turnover rate is the
rate that says how often, and at which prices their portfolio
is being bought and sold.

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BAH investing is considered one of the most admirable

investing routes. Many investors choose this approach be-
cause it takes a lot less time than swing trading does, and
tends to be more about a ''gut feeling'' than cold, hard, facts.
On the other hand, if you have the aptitude, as well as the
diligence and interest in swing trading to get good at it, you
can get a much bigger income stream. On the other side of
the coin, BAH investors generally only care about preserv-
ing and growing their already owned wealth.
BAH investors don't invest for a living usually, because of
this kind of investment needing quite a while to pay off
often.
As a swing trader, you'll be timing your buying and short-
ing strategically in order to hold a variety of positions in
order to lessen your risk. As the good old saying goes,
don't put all your eggs in one basket. Most people won't
care enough to properly follow things such as domestic and
international stocks, and swing traders take advantage of
that.
Swing traders will grab a few securities in a set of assets and
try to get profits that are much higher than the people that
only put their money in it and invest passively.
Profits that are gained from price falls, and euphoria that
you get by selling out is simply irreplaceable and you won't
be able to find it anywhere else. In essence, shorting is a

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means for you to get profits out of prices dropping rather

than going up.
On the other hand, shorting has many risks that buying
doesn't. If you buy a stock, you can't possibly lose any more
than you've bought. On the other hand, you can make an
unlimited amount of money from it.
Shorting, on the other hand, is completely opposite. Short-
ing, even if the price of a security doubles, can only make
you back 100°/o of the money you put in if its price goes to 0.
While shorting will let you get some money from a decline,
the losses you can accrue from this are technically limitless,
but your gains are limited to the amount you've put in.
If something you've decided to short goes up by 50-60°/o
then you'll wind up owing some broker out there some big
money.

The difference between a swing trader and a day trader

Now, if you though the swing trader was the Opposite of the
BAH investor, then you were wrong. In fact, the day trader
holds absolutely no securities for longer than a day. That
is because, during the night, there may be a shift in price,
which can affect their trade. It could even end up wiping
out a good chunk of their account, rather than doing this
they check the price movements of their investments by
the minute.

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Day traders have the unique ability to ride the wave of

price movements that are short and intense. This involves
spending a huge chunk of one's time on it. Near-term price
movements are sometimes affected by a buyout, or pump,
rather than having anything to do with the company be-
hind it.
This is why instead of looking at companies, day traders
look at other investors. They want to know how others will
lay their chips. Unfortunately, day trading has some serious
downsides in it-such as a large number of commissions.
For example, if you make $10 000 from day trading, that
doesn't mean that you've made $10 000, it means you've
made $10 000-commissions.
This doesn't even include any further taxes the day trader
might need to pay to support this kind of trading. While
swing trading is also sometimes affected by commissions,
it's nowhere near as bad as the day trader.
Price movements that go beyond a few days or weeks are
generally affected by the company's success, rather than a
stock buyout. Because of this, the day trader tends to be un-
able to predict them. It's important to note that day trading
is probably the easiest way to start trading from scratch, re-
quiring the least investment.

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On the other hand, a swing trader can usually generate

more profits because they trade on a much higher level, and
usually volume.

How Much Time Do You Want To Put In

Now, before you storm out of yotlr room and make a broker-
age account, you want to consider which of the few types of
swing traders you're aiming to be.
On one hand, you have full-time traders or even trading
firms. This is the case in which your trade will be your life-
blood. You will live and die with the profits you get from
swing trading.
On the other hand, you might be doing swing trading only
part-time, and might not have the intention of becoming
a full-time trader. Most part-timers aim to one day go full
time. On the other hand, swing trading does allow one to
hold a job while still trading part-time. This is why a lot of
people choose it as an approach.
You'll find that many people simply use swing trading as
a way to increase their investments or even retirement
money, which can avoid issues with taxes.
Where I'm going with this is that you can be a swing
trader regardless of your state of employment. With that
being said it's extremely important to also adjust the things
you're doing depending on how much you're able to watch

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the market. If you've only got a few hours a day, then you
shouldn't really consider yourself full-time.
Considering it a different way, think about whether more
hours will actually end up in more money. If you watch the
market all day you might even wind up with losses because
many newbie swing traders end up overtrading, or over-
reacting to movements of the market.
Keep in mind that you'll need months, or even years to
gain enough experience to become a full-time swing trader.
In order to be successful, you'll need to dedicate multiple
hours in a day, every day, to swing trading. Many people are
simply not able to handle the pressure of swing trading full
time.
Think about it, are you really able to take the stress of
having all of your income being dependent on inconsistent
profits? Sometimes, you might think that taking a gamble
would be a good idea because you've got a few losses. If you
encounter a losing streak, instead of gambling, simply step
away and stop trading for a day. This helps you keep cool
and collected, in turn helping you not lose money.
Now, unlike what many movies would like you to believe,
swing trading doesn't actually require you to be a genius.
Sure, a high IQ and insane work ethics help, but they aren't
explicitly necessary for this.

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On the other hand, staying cold is. You need to keep your
thoughts and calculations cold and sharp. You can't have
losing streaks or emotions motivating your decisions. The
swing trader that feels is the swing trader that wakes up in
the morning feeling a hole in their wallet.
When you get a loss, you just move on. On the other hand,
if you encounter a winning streak, don't go quitting your
job just because you think you can make it work. If you're
planning to, let's say, make $5000 a month, then you would
need quite a bit of money. Even some of the World's best
swing traders simply hit their limit at 20-25°/o returns on a
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yearly basis.
This is why many swing traders simply swing trade in
order to complement existing income or investments. This
is by far the largest group of swing traders out there in the
world today.
This way, you have something that can help you out in case
your trades fall through. You can also swing trade while
having a full-time job. If you're a part-time trader, you'll
often analyze the market when you come back from work,
then implement all the trading you wanted to do the day
after.
Even though you won't be able to trade 24/7 you can still
have stop-loss orders implemented that will protect your
hard-earned money. Eventually, if you want to move to full-

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time trading, then you'll need to go through this stage of

growth before doing so.
As time goes on, you'll start figuring out how well your
trades are doing, you'll learn to tell a bad trade from a good
trade. This is where keeping a trading journal really be-
comes helpful. This will teach you how to be a much better
swing trader.
Most part-time traders are those with a passion for trading
but have a full-time job either because of lack of capital or
because of them wanting to keep down the security of a job.
You should be a part-time trader if you:
• Only have a few hours a week that you can dedicate
solely to swing trading, and can't spend too much
time analyzing markets.
• Are new to swing trading, and don't want to go
straight into the risk of doing it full time.
• Have a strong passion burning inside you for making
profits, and doing it by your own ability.
• Aren't tempted to gamble whenever you hit a losing
streak.

If this sounds like you, then swing trading part-time might

just be the way for you to go. Straight after starting out,
I'd tell you to start with a small portfolio, at most $5000
should go towards your first portfolio (and that's if you con-
sider $5000 disposable income.)

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It's also recommended to make your start by doing paper

trading, which is trading without actually putting assets
on the line. It is by far the best way to start, as it lets you
test your prowess against the market without accruing any
losses.
On the other hand, paper trading really can't compare to
the sheer emotional impact of trading with actual funds on
the line.

Swing Trading For Fun

I felt like this deserved its own section, some swing traders
don't do it for the profit. Some of us will get a massive rush
of adrenaline from the buying and selling process. Quite
akin to a gambling high, this isn't done in the hopes of mak-
ing money or supplementing their income, it's done purely
for the sake of it.
These swing traders simply get excited from market move-
ments, the ups and downs feel like a rollercoaster for these
people. Natu_rally, this can sometimes lead to significant
losses, much like gambling. Unless they set smart stop-loss
measures, they could soon be walking out of the room with
massive debt.
If you've got the idea of swing trading for fun, well, I've only
got one piece of advice for you: please don't. Get your adren-
aline high off of skydiving, or go battling hydras with Hera-
cles, it's far less dangerous.

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Trading for fun is simply risking your money for no real

reason, it's the equivalent of going and putting your hard-
earned money on the roulette table.
I wish I could count the number of traders that I've seen
lose their all due to getting too excited about security and
trying to prove to everyone they were right. If you utterly
must gamble in this way, I can at least advise using only a
little bit of your money for it.
Remember that your competition here isn't other punters,
it's people that are motivated by profit. They're motivated
by their families, by their retirement etc. There's really no
hope of you properly competing against them.

Let's Talk Strategy

Plan, planning, make a plan, make up a plan, analyze your
plan ...we'll be droning on and on about plans for the rest of
this book. In swing trading, the good old adage of ''fail to
plan and you're planning to fail'' rings true. There are a mil-
lion cliched movies out there that will show you what hap-
pens when a trader goes trading without a good plan.
Without a plan, you're most likely to start thinking up
things as you move along. Your behavior will become
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closer and closer to that of a very bad day trader. Now,

there are countless aspiring traders that think ''My plan is
in my head, I don't need to write it down." Luckily, there

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are enough bridges in the country for all of them to sleep

under.
In this series, we'll be looking at all of the important parts
of a proper swing trading plan. Now, I'll try to give you your
first sip, and talk a bit about what the most vital portions of
a trading plan are.

Decide which securities you plan to trade.

Your trading portfolio will be filled full of securities, but
which ones? The first step of your trading plan is deciding
on which securities you're going to trade. Swing traders
have a variety of options here, and no matter which one
you pick you won't be doing all that bad. The most common
security to trade are public equities, AKA stocks. Whether
they be Common stocks, or American Depository Receipts,
they still fall under the same umbrella. Oftentimes you'll
find that a swing trader will only trade in stocks, because
the infrastructure is there to support it, and it's a varied and
semi-easily predictable market.
If you're based in the US, you'll find that most stocks are
being traded on a daily basis. On the other hand, stocks on
other markets may be trading much less often (sometimes
even less than once a week.) If you're planning to make en-
tries and exists as easy as you can, then you should focus
on stocks that trade every day. If you're trying to sell 1000

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shares of a stock, and its daily trading volume is 2000 then

you won't be having much luck.
In this book, we'll mainly be focused on trading stocks, due
to how easy it can be to find information on firms, as well as
their popularity. The best thing about stocks is how easily
you can trade them at all points. Personally, I like stocks be-
cause that's what I'm good at.
Naturally, there are lots of other securities you're able to
trade, but these are by far and away the most popular ones.

How to Pick a Style and Strategy

This is where the art form of trading comes in. For example,
the decision to enter orders during or after market hours is
an arbitrary one, but it will affect the rest of your strategies.
For example, part-time swing traders will generally enter
their orders when the market's closed and put their faith
in limits and stop losses to help their strategy succeed. On
the other hand, full-timers can enter their orders while the
market is open and incorporate daily fluctuations into their
timing. This also helps them find more opportunities, due
to the amount of time they have to dedicate.
The way you trade will always refer to your various strat-
egies, which will help you make more money as time goes
on. After all, picking a strategy cannot be something I do for
you. It has to come from you because you'll be the one using
it in the years to come.

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So, let's dive into one of the most important aspects of strat-
egy now shall we?

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Chapter 3
Platforms for Swing Trading
Normally, foreign exchange involves selling and purchas-
ing of different currencies across the world. The number
of participants in this market is very large therefore the li-
quidity is very high. The most unique aspect of the forex
trade is that individual traders can compete against large
institutions such as hedge funds and commercial banks; all
one needs to do is to select the right account and set it up.
There are different types of accounts but the traders have
three main options namely mini accounts, standard ac-
counts, and managed accounts. Each account has its own
advantages and disadvantages. The type of account that
one opts for depends on factors such as the size of initial
capital, risk tolerance levels, and the hours one has to ana-
lyze the charts either daily or at different intervals.
Mini Trading Accounts
Simply put, a mini account is one that allows the trader
to transact using mini lots. For most brokerage firms, one
mini lot equals to 10,000 units. That is equal to 1/10 of
a standard account. Brokerage firms offer mini lots to at-
tract new traders who are still hesitant to trade with bigger
accounts or those who do not have the investment funds
required.

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The advantages of Mini accounts include low risk, low

capital required and flexibility. The trader can trade in
increments of 10,000 units therefore if he or she is inex-
perienced, he or she does not have to worry about blowing
through their account and capital. Experienced traders can
use the mini accounts to test new strategies without exces-
sive risk. A mini account can be opened with as little as
$100, $250 or $500 and the leverage can go up to 400:1. A
risk management plan is the key to successful trading and
in the case of selecting lots; a trader can minimize the risk
by buying a number of mini lots to minimize risk. Remem-
ber that one standard lot is equal to about 10 mini lots and
diversification reduces risk.
The main disadvantage of mini accounts is low reward. A
lower risk translates to a lower reward. A mini lot ac-
count can only produce $1 per pip movement if it is trad-
ing 10000 lots. In a standard account, one pip movement
equals to $10.
A subset of the mini account is the micro account which is
offered by some online broker. This account has very little
risk and also very little reward. The trade is 1000 base cur-
rency units and one pip movement earns or loses 10 cents.
These accounts are best suited for traders who have very lit-
tle knowledge about f orex trade and one can open using as
little as 25 dollars.
Standard Trading Accounts

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The standard trading accounts are the most common for

traders especially the experienced ones. These accounts
give a trader access to lots of currency worth 100,000 units
each. This, however, does not mean that a trader has to put
$100,000 in the account as capital so as to trade. The rules
of leverage and margin mean that all a trader need is $1000
to have a margin account.
The main advantage of this account is the large reward that
one might reap with the right strategy and predictions. One
pip movement earns $ 10. Again, individuals who own
such accounts get better services and perks because of the
upfront capital invested in the account.
The disadvantages include high initial capital and potential
for loss. The kind of capital required to set up a standard
account can deter many traders from venturing in it. Again,
the higher the risk, the higher the returns and the vice
versa holds, A standard account trader has a higher risk
of loss because if a lot falls with 100 pips, he or she loses
$1000. Such loses can be devastating for beginner traders.

Managed Trading Accounts

Managed accounts are accounts where one puts in the
capital but does not make the decisions to sell or buy.
Such accounts are handled by account managers such as
stockbrokers and stock managers. In this case, the traders

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set objectives for the managers (the expected returns, risk

management) and the managers have to meet them.
Managed accounts are categorized into two major types
namely Pooled funds and Individual accounts. In pooled
funds, the money of different investors is put into an in-
vestment vehicle referred to as mutual fund and the profits
generated are shared. The accounts are further classified by
risk tolerance. If a trader is looking for higher returns, he
or she may put his money in a high risk/reward account
while those looking for long term steady income can invest
in lower risk accounts. Under managed accounts, the indi-
vidual accounts are managed by a broker each in its own
capacity, unlike the pooled funds where the manager uses
all the money together.
The main advantage of managed accounts is that one gets
professional advice and guidance. An experienced profes-
sional f orex account manager will be making the decisions
and this is a benefit that one can use. Again, a trader gets to
trade without having to spend hours analyzing the charts
and watching for developments.
One disadvantage that deters traders from venturing into
this account is the high price. One should be aware that the
majority of managed accounts require one to put in at least
$2000 in the pooled account and $10000 for the individual
accounts. To add to this cost, the managers are entitled to
a commission which is calculated monthly or yearly. The

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managed accounts are also very inflexible for the trader. If

he or she sees an opportunity to trade, he or she will not be
able to make a move but will rely on the manager to decide.
Note
It is advisable for a swing trader to use the demo accounts
offered by brokers before investing in real money regardless
of the account he or she opts to use. Demo accounts allow
one to practice without risk and also to try out different
strategies. One rule that every trader should apply is to
never invest in a real account unless they are completely
satisfied with it. One of the main differences between suc-
cess and failure in forex exchange is the account selected.
Opening an Account
Forex exchange has been around for very many years and
some say that it is as old as the invention of national cur-
rencies. Over the years, the market has grown so much so
that it is the biggest market across the world. However, it
has not been accessible to the public as easily as it is today.
From the 1990s when the era of the internet begun, many
retail forex brokers have established routes through which
anyone can trade in currencies so long as they can access
the internet and have some money. There is a lot of hype
and information about f orex trade on the internet but not
everybody understands how to select and open an account.

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Currently, opening a forex account has become as easy

as opening a bank account or another type of brokerage
account. Some of the typical requirements are a name,
phone number, address, email, a password, account cur-
rency type, country of citizenship, date of birth, employ-
ment status, and tax id or Social security number. Opening
an account may also require one to answer some financial
questions such as their net worth, annual income, trad-
ing objectives, and trading experience. Before one starts to
trade on the foreign exchange market, they should make
some considerations to ensure that they have a positive, se-
cure and successful experience.
The Right Broker
The first step to trading well is to find the right broker.
The activities of forex exchange are decentralized and there
are hardly any regulations. Because of the over the coun-
ter nature, traders are advised to identify a reliable broker.
This involves conducting researches on the reputation of
the broker; to identify if there is a history of irregular prac-
tices. One may also want to comprehensively understand
the services offered by the particular broker before setting
up an account. While some brokerages support basic and
plain vanilla activities, others offer very sophisticated trad-
ing platforms. Some brokers will offer the trader analytical
resources to support better decision making while others
won't.

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Again, a trader should assess the fees and commissions

for different brokers. Majority of Brokers charge some fees
for their services through the bid-ask spread and in many
cases, it is not a large percentage. However, some broker-
ages have some other fees and commissions and they
might be hidden from the trader. When one is considering
the extra costs, he or she should check if it is worthwhile.
The Procedt1re
Opening a foreign exchange account is not hard but traders
should have a few things to get started. The trader will
have to provide some identification information such as
name, phone number, country of origin et cetera. Besides,
the trader will be required to state his or her trade inten-
tions and their level of knowledge and experience in the
trade. The steps of opening an account may vary depending
on the brokerage firm but normally it involves:
• Accessing the website of the broker and study the
accounts available. The accounts include small ones
where the trader can trade with minimum capital
such as mini accounts or the sophisticated accounts
designed for experienced traders such as standard
trading account.
• Completing an application form,
• Getting registered (user name and password) to ac-
cess the account.

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• Log in to the client portal and arrange for a transfer

of money from the bank to the f orex account. These
deposits can be done through credit or debit card,
checks, or electronic transfers.
• Once the funds are transferred, the trader is ready to
start trading. Before trading, the trader may review
the recommendations made by the brokers or extra
services offered such as simulator programs.

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Chapter4
Market Rhythms
The markets are never still. They are dynamic, ever chan-
ging, ever evolving and always challenging a trader to the
utmost. While on a superficial level it may seem almost
impossible to discern order beneath the chaos of the mar-
ket, breaking down the mechanics of the market helps us
understand its rhythms and its flow. That's simply a fancy
way of saying, let's break a complex structure down to its
basics.
We've already seen how a market is comprised of buyers
and sellers, all operating on various time frames. These
buyers and sellers interact with one another and produce
a price for an instrument which flashes on your screen. If
there are more sellers than buyers, the price decreases and
if there are more buyers than sellers, the price increases.
This combined activity of the buyers and sellers is called
the Order Flow and understanding this is the key to your
success in the markets.

Order Flow
Those of you who have read other books on this subject
might not have encountered what you're about to read pre-
viously. Most trading advice usually skips straight to the
trading strategies without paying any heed to when to

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implement said strategies. The market environment, more

than anything else, determines your strategy. Always keep
this in mind.
The market environment is determined completely by the
underlying order flow. How many sellers versus buyers are
there? How strong is the dominant side (that is, how much
stronger are the buyers compared to the sellers)? What is
the probability that the tide is changing and the dominant
side is on the wane? The answer to these questions lies on
the price chart. We can also use indicators to help us figure
out the answer to these questions.
The underlying order flow produces two states of price ac-
tion in the markets. These are
1. Trends
2. Ranges
We'll look at these in more detail now.
Trends
A trend is a state of price action where the price is moving
in a given direction quite clearly. This movement could be
up or down, it doesn't matter, as long as it is moving quite
clearly in a direction.
Determining this is quite simple really. Looking left to right
on your chart, is the right-hand side at a higher or lower
level than the left-hand side? Is there a general direction in

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which the market has been moving? If the answer to either

of those questions is ''yes'' then you have a trending envir-
onment.
Take care to avoid the trap of getting too technical with
this. The irony is, when you're first starting out, you're in
the best position to evaluate whether a market is trending
or not because you don't have enough knowledge to go on.
Hence, you'll end up using your gut feeling and this is usu-
ally right.
Once you know a bit more, you know just enough to make
mistakes and this is when you'll see most traders over com-
plicate the process. Let's look at the chart below to under-
stand this better.
The chart above is of the EUR/USO currency pair on the
daily time frame. Never mind what that is at the moment,
just focus on the price chart. Now this is a candlestick chart,
which we'll look at in details later. For now, all you need to
know is that each individual bar or candle, represent one
day's worth of price movements.
Our task with this chart is really simple: Is this trending or
not? Go ahead and try to determine this before proceeding.
All the information you need has been given to you in the
previous paragraphs.
Your task is perhaps made easier by the huge arrow point-
ing downwards, but if you answered ''yes'' to the question

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above, you're correct! At first glance, it's easy to see how this
instrument peaks near the left side of the chart and then
starts sliding downwards and then begins a free fall at the
right-hand side. This is what all newbie traders and experi-
enced traders alike will recognize.
However, the group in between them, the traders who
know just enough to trip themselves up, will probably say
this is moving sideways. The position of the first price bar
on the left is roughly the same (on a vertical scale) as the
final price bar on the right. Hence, it must not be trending
right? Wrong! This is an example of how one can over com-
plicate things.
Just keep it simple and if all else fails, go with your gut.
If even your gut fails you or if you don't trust it enough,
stepping aside and saying ''I don't know'' is a perfectly valid
answer. There's no rule in the markets that says you need to
participate all the time.
Ranges
The second form of price action activity cause by order
flow is called a range. As you've probably guessed by now,
a range is a non-trending or sideways market. Determining
this is just as simple as determining a trend. You look left
to right and if there doesn't seem to be a major commit-
ment to any particular direction from the market, we're in a
range.

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The chart below illustrates this point.

Now even in this chart, if we get really technical with it, the
first price bar is at a lower point than the final one on the
right. However, this is not a trending environment by any
means. Yes, the price fluctuates. Moving left to right, we see
it go up a bit, go back down, then go up quite a bit and then
promptly fall back down before going back up again.
The overall product of this up/down/up action is a side-
ways movement. Notice how you can draw a straight line
across the points when the price reaches towards the bot-
tom of the chart. This is ref erred to as the bottom of the
range. In this particular range, the top isn't clearly marked
but you could roughly draw a straight line right about
where the arrow has been placed on the chart.
So now that we've seen what the definitions are of a trend
and a range, let's look at the underlying cause of such the
price movement.

How Order Flow Produces a Landscape

When reading a price chart like the ones above, it is easy
to focus only on the bars or candles in them and forget
that these bars are the result of something, not the cause
of anything. Put simply, these bars are the result of buyer
and seller interactions which make up the underlying order
flow.

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Many traders approach the markets the other way round

and fail to take note of this fact. Looking solely at the price
bars without acknowledging the underlying order flow is
much like a doctor treating a symptom instead of the
underlying disease. That's an unfortunate analogy but let's
stick with it for now.
Let's now look at the nature of order flow that results in a
trend or a range.
Trending Landscapes
In any instrument, at any time when the markets are open,
there are buyers interacting with sellers. These parties mu-
tually agree to exchange the instrument with one another
for a given price and it is this price we see on stock tickers
and price charts.
If there happens to be a larger number of buyers than
sellers, the demand exceeding supply, the price goes up.
The degree by which the price goes up is determined by
the degree by which buyers exceed the sellers. Put simply,
the steeper the price rise, the greater the number of buyers
compared to the sellers.
Similarly, when the number of sellers exceeds the number
of buyers, supply exceeding demand, the price falls. The
degree by which price falls is determined by the degree
by which the sellers exceed the buyers. Please note: We as
traders are not concerned with why the numbers exceed

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one another. All we know is that they do and we're here to

take advantage of it. Remember the point previously made
about speculation versus investment.
At the start of trends, we often see huge with trend (be it up
or down, also called bullish or bearish respectively) partici-
pation. One can understand this behavior psychologically.
The price usually breaks into a trend after a sideways move-
ment. Traders as a bunch aren't huge fans of prolonged
ranges and as soon as the price shows an inclination to
break out, everyone rushes in with relief that, finally, the
market is headed somewhere. This often results in a steep
movement in the with trend direction (again, this could be
bullish or bearish).
Nothing is ever unchallenged though. The counter-trend
players will soon show up and test the strength of the with
trend players. If the with trend push is strong, the counter-
trend players are easily overcome and this usually shows up
as a very small counter-trend or sideways movement on the
chart. In the overall scheme of things, this usually looks like
a blip.
As the trend progresses over time though, the number of
counter-trend players start increasing and the trend pro-
gress becomes slower. The testing periods or sideways
movements become longer in duration and sometimes
even go sharply against the trend. If a sharp counter-trend
movement is observed on the chart, it's a clear indication of

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the growing strength of the counter-trend players and that

we might be seeing the end of the trend.
Eventually, the strength of the counter-trend players
equals that of the with trend players and we enter a ranging
___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N ___ N __

landscape.
Ranging Landscapes
A range is produced when the underlying order flow in the
instrument is roughly equal. In other words, no side is par-
ticularly able to sustain its domination. We might see the
price hurry in a particular direction but is swiftly pushed
the other way by the opposing side.
We often encounter ranges at the end of trends and before
the start of new trends. This effectively means, a range
functions as a redistribution. Please note, however, that it
is not necessary for the trend to reverse. In other words, if
we've been in a bull trend (uptrend) for a while and we're in
a prolonged range now, it doesn't automatically mean that
we'll see a bear trend (downtrend) once the price breaks out
of the range.
It could just be taking a breather before continuing up-
wards. From an order flow perspective, in such a scenario,
the buyers are absorbing all the seller's orders and are pre-
paring for a push higher. In a trend reversal scenario, the
sellers are absorbing the buyer's orders and are preparing
for a push down.

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The price often prints clean boundaries in a range but we

should not expect straight lines. A better approach would
be to draw a line through the most number of points where
price reaches. Even better is to treat these areas as zones.
Following from all this, we can then conclude the follow-
ing: Trends are the result of imbalanced order flow and
ranges are the result of balanced order flow. The degree of
imbalance determines the strength of the trend. Take care
to avoid the trap of thinking of ''balanced'' order flow as
being completely evenly distributed between both sides of
the market. This is getting too granular with it and over-
complicates things.
Take a look at the chart below and walk through it left
to right while determining what the underlying order flow
characteristics are. In particular, take note of the areas
marked in the boxes labeled 1, A, Band C.
Notice how the size of the boxes keeps increasing as we
move left to right. What does this tell you? Does a small box
signify greater with trend or counter-trend strength? Will
the box be bigger if there's more counter-trend strength or
less?
In the chart above, blue represents buyers and red rep-
resents sellers. Again, we'll cover this in the chapters on
candlesticks, but this is enough to help you understand this

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price chart. For now, it is time to look at the next key ingre-
dient of the chart landscape, support and resistance.

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Chapter 5
Understanding Chart Patterns
We've talked a little bit about charts in the previous section.
But we haven't yet looked at some patterns that traders
seek before making their trades. Studying these patterns
can help you get an idea of where to enter and exit a trade.
This chapter will discuss the patterns that you can find in a
chart.

Trading patterns
History tends to repeat itself. We've heard this mantra so
many times and we see it play it out in our lives. For ex-
ample, politically, our countries follow patterns over and
over again. We fight the same wars over and over again,
make the same mistakes and repeat the same arguments
with other countries. In our families, it's not too difficult
seeing children growing into adults who are just like their
parents, repeating their parents' and grandparents' mis-
takes and successes in a pattern. Trading is no different and
movement of stocks from 100 years ago can still be relevant
today. With over 100 years of data from trades, certain pat-
terns have emerged that have become universal indicators
for trading. Just like how we all follow the same route home
every day, and never deviate, it's unlikely that trades will
start a pattern and then shift in an unexpected direction.

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For this reason, it's a good idea to study some of the vari-
ous chart patterns to find good entry and exit points. These
·-----------·
basic patterns include the head and shoulders, the cup and
handle, triangles, and crosses.
Head and Shoulders
It's rare to see a pattern and know exactly what it means for
the market. However, the head and shoulders pattern is one
of such patterns. It's a rare one, but it usually results in a
trend reversal. This means that when you see the head and
shoulders pattern over the course of six months, the price
is going to reverse. For example, if a stock has been trading
steadily at $200 per share, seeing a head and shoulders can
indicate that the stock value is going to start a new upward
trend, or that it's going to start a new downward trend.
The head and shoulders pattern looks like a large mountain
with two smaller mountains on either side. The point at
which the two lowest points converge is the neckline.
In this example of head and shoulders top, we can see that
before March, the stock was cruising somewhere between
$50 and $100, probably in an upwards trend. But then
we see the head and shoulders indication, with some large
swings up and down again. We can see that it peaked once
at $120 before reversing, then peaked again at $180 before
reversing. Then there is a final peak that doesn't reach the
highest point. In May, we can see that the stock is now tak-
ing the plunge downwards. We can make a neckline of the

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lowest points in the head and shoulders. This neckline is at

$80. If the value drops below the neckline, it means that the
pattern will play out. In this pattern, the head and shoul-
ders indicate that a new trend will be a bearish (downturn)
in prices. This example is very dramatic, but head and
shoulders can occur at any price, even between a couple of
dollars.
Notice how the pattern emerges over the course of several
months. Many traders believe that the longer it takes to
emerge, the more likely that the market will turn to follow
its pattern indication. In this case, with three months of
head and shoulders pattern, the stock value is very likely to
drop into a downward trend.
Head and shoulders can also show the reverse, called head
and shoulders bottom. It marks the beginning of a new up-
ward trend. Here is an example.
In this example, we can see a reverse head and shoulders.
Before March, the trend of the stock was in a downward
position, coming from $7 5. In March the first shoulder
formed. This is the first dip down to $30 before rebound-
ing up to $80. Then it drops again forming the head at
$20. It rebounds once more to $80 again, before taking its
final, smaller dip. After this, the trend turns to an upward
trend. The price has to move past the neckline. In this case,
the neckline is sitting pretty at $80. When the price moves

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above that, it completes the pattern and marks the start of a

new upward trend.
For a swing trader, a head and shoulders pattern can be
a boom looking at the head and shoulders bottom pattern
(the second chart), a swing trader could follow the pattern
and enter the market right after the last shoulder. A good
entry price would be $60, the stop-loss at $50, and then the
trader can consider how much risk they want to take on
before exiting using their risk/reward ratio. If you wanted
to, you could try swing trading in the upward or downward
trend of the head and shoulders, but this comes with more
risk. Before seeing the pattern emerge, it would be hard
to know when the reversals will come, so stick with your
entry and exit plans.
Remember that these example charts are fairly extreme,
and prices don't often move this much. For a swing trader,
you're more likely to see the head and shoulders in smaller
dollar amounts. However, keeping an eye out for it could
provide you with decent returns.
Cup and Handle
Most of us are aware of the shape of a tea cup. It has a slow,
progressive ''U'' shape that extends to the handle, which
drops downward. This is the image you're looking for in a
cup and handle pattern: a downward ''U'' shaped trend that
comes back up, before following the handle into a slight
downturn. A cup and handle pattern usually indicates that

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the market prices are going to increase. This means that

finding the cup and handle can present you with buying
opportunities. Here is an example of the cup and handle
pattern.
In the cup and handle example above, we can see the shape
of the ''U'', the handle that comes off the right side, and then
the lift-off into an upwards trend. Before May, we can see
that the stock price was already at an upwards trend before
it started dropping down. By June, the prices were at $50
per share. Then the prices increased to $80 per share in Au-
gust. This was the end of the cup. The handle started right
after with a slight decrease in price to $70 before increasing
again and continuing the trend line.
As a swing trader, you can trade within the cup, by the
handle, or right after the handle. This chart's line is pretty
solid, but in reality, it's full of little swings up and down.
You could choose to trade in those smaller swings for a few
dollars of gain. Or you could trade at the bottom of what
you perceive to be the cup and exit somewhere higher. This
is a larger swing that would take several weeks instead of
----------------------------------------------------------------------------------------------------------------------
a couple of days. Your decision to trade has to be based on
yotlr risk tolerance. Wherever you choose to trade, it's a
good idea to place your stop-loss at the bottom of the cup
or below the handle. That way you're protected if the cup or
handle descends to a level you weren't expecting.

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When looking for a cup and handle pattern, make sure

that you are giving it enough of a timeline. A lot of traders
suggest that more time in the cup means that the indica-
tions of a bullish market afterwards are correct. So, with
more time, comes more certainty. In the example above we
can see that the cup and handle formation took roughly
6 months to develop and end. Because the cup and han-
dle pattern isn't always precise, it's important to check for
other indicators of a market change beyond the pattern.
Triangles
Triangle patterns can help you see how a pattern will con-
tinue and won't have any major reversals. The ascending
triangle can show that the current upwards trend will con-
tinue, despite some fluctuations. Here is an example:
We can see from this example that the stock was already
in an upwards trend. Then, there's some volatility. From
March 7 - March 1 7, we can see some peaks and valleys.
However, notice that the valleys remain on the trend line,
and the peaks don't exceed resistance until it finally breaks
out on March 15. This is an ascending triangle. It shows
that the trend will continue its past pattern and remain in
an upwards direction.
Depending on if you want to swing trade within the tri-
angle, or trade once the triangle is over, you can make some
considerable profit. Seeing the ascending triangle is a clear
indication of which way the market will go. If you are op-

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tions trading, this is the perfect time to buy call options and
then sell them at a higher premium. If you're trading the
stock itself, you can enter into the trade one or two days
after the break-out point, where the triangle ends and the
stock rises above the current prices. You want to wait a few
days to counteract any reversals back into the triangle. You
can also enter right after the first valley. It's up to you. You
can place a stop-loss just under the first valley point if you
plan on trading in the swings of the triangle.
While the ascending triangle shows a continuous upward
trend, the descending triangle shows the opposite. It shows
how the current downwards trend will continue, despite
some fluctuations. Here is an example:
In this example we can see that the downward trend started
before March. And while there are some signs of it trying to
get back up there, the price is still dropping. Notice how the
peaks on March 4th, March 7th and March 9th are all lower
than the previous peaks. Also notice how the lows are con-
sistently at the same level. The moment that the stock price
breaks out of the support line, then you'll know the down-
ward trend will continue for this stock.
For trading, this stock is a good option for swing trading as
all of the swings can provide you with some profit if you
time them right. This could also be an opportunity for put
options, which will net you a small profit. Remember that
if you choose to enter the market after the break out, you

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should wait a couple of days before placing your trades.

This will give the trend enough time to solidify and give
you enough time to make sure the trend won't give one
•
more upswing.
Death Cross
While the golden crosses name indicates good things to
come, the death cross is obviously more negative, but it
deals with the same indicators that the golden cross does.
The 200-day moving average and 50-day moving averages
are what you are looking for in regards of the death cross.
In a death cross, you'll see the 50-day moving average cross
the 200-day moving average in a downwards direction.
Here's an example from Yahoo Finance and S&P SOO'schart
from 2018-2019:
In this image, you can see the blue line, which indicates
that 50-day moving average, crossing the orange line, the
200-day moving average. The 50-day moving average is
crossing at a sharp downward angle. Where the two lines
connect is the death cross. This indicates a turn in the mar-
ket towards a bearish outcome. It means that there will be
a significant downtrend. And, as you can see in the chart,
that's exactly what happened. S&P SOO's stock dropped a
whopping 300 points in the course of a couple of months.
Because this indicator is so clear, it's a good idea to choose
your swing trades carefully. Wait a bit before purchasing or

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selling stock to see if the trend will reverse, but then get on
with your trading.
To bring this section to a close, knowing these trading
patterns can help you pick opportune times to buy into
or sell a trade. There are many more trading patterns out
there, so keep learning about the different kinds. Now that
you know some of the basic trading patterns, it's time to
practice. Search for historic charts that demonstrate these
trading patterns. In this book, there's a picture of Google's
charts from 2016, in that chart there is a golden cross, but
there are also some other indicators that show the changes
in the market. See if you can find those other indicators. To
see an example chart that shows the cup and handle pat-
tern, search for the chart of Wynn Resorts, Limited, with
the tag WYNN from 2003 to 2014. You'll be able to see a
very dramatic example of a cup and handle pattern. For
an example of a death cross pattern, check out Facebook's
stock prices (FB) in 2018. Look at the whole year and you
can see multiple crosses of the 200-day and 50-day moving
averages. Once you've familiarized yourself with what the
patterns look like, think about how would you have traded
in those charts? Also, keep your eyes open on charts that
may interest you now and look for any current patterns you
see emerging. Take the time to analyze what you're seeing
and what choices you would make from the indications.

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Chapter 6
Making a Trading plan
Imagine wanting to design your own dream house. You're
excited by all of the possibilities, so you go to the store and
start picking stuff out. You don't think you need a plan be-
cause it's all in your heart and mind so you pick out some
lumber that could be useful, some furnishings that might
be interesting and of course, pick out the curtains. As you
start building your house, you realize that the wood you
bought is wrong, and because of the timing, your furnish-
ings and curtains won't work. You go back to the store and
try again and again. You see pictures of houses you like and
keep adding their features to your house. Much later, your
house is finally built. It's a mix of a variety of features, and
it's holding itself up. It's a house that you can probably sleep
in, but it also cost you a lot of money, wasted materials, and
time. Trading without having a plan is a lot like building a
house without a plan. You can definitely make it work but
it will cost you a lot of money, waste your trades, and your
time.
Throughout this book, we've kept harping on the import-
ance of having strategies and plans. That's because this is a
critical skill in trading. Trading isn't about following your
gut decisions. Once you start doing that, then you've gotten

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into random gambling instead of trading with as much pre-

• •
c1s1onas you can.
A trading plan is vitally important, and each trader should
have one. It's strongly recommended that you write your
trading plan down. It can be digital or physical, but having
a centralized area where you can write down your trading
plan, strategies and goals can help you stay on track. This
can also be the area where you review your trades and keep
notes for future trades. Then, before and after every trade,
review your plan, add notes, and analyze your progress. To
create your trading plan, start by analyzing your situation,
finding your objectives and then make a trading plan.

Analyze your situation

Your trading plan should start with you understanding
your situation. This goes hand in hand with the money
management aspect of risk management. Understanding
your situation means that you know exactly where you are
financially, how much it costs to have an account for trad-
ing, and how much each trade will cost you. This means
knowing which brokerage accounts you will trade out of,
how much you can afford to keep in your account, how
many trades you can afford in a week. All of this goes into
analyzing your situation.
To find out this information, you'll have to do some re-
search. You're already doing a great job by reading this

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book. But there's always more research to do. Look at the

different trading firms you want to have an account in.
What are their benefits or drawbacks? Do they have any in-
centives that might help you down the road? Make sure you
know their commission costs for trades, since this comes
out of your profits. Check to see if they can accommodate
options trading if that's the route you're going for.
Then look into your financials and be entirely honest with
yotlrself. How much debt do you have? Are you willing to do
minimum payments on your debts and put money towards
investments? Or would you rather pay more of your debt
and only use a small amount for trading? It's your choice,
but the point is that you need to take a good long look
at your finances before getting into trading and investing.
Remember, while you'll gain some from trading, you'll also
likely lose some. Therefore, if you're not in the right finan-
cial situation, then wait before you begin trading capital.
Once you've understood and analyzed your situation, it's
time to set out your objectives for trading.

Find your objectives

Why do you want to swing trade? This is the first question
you should ask yourself when making your trading plan. It
can be the first thing you write down wherever you keep
your plan. This way, every time you see it and you review
the plan, you're reminded of why you're doing this. Don't

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just leave this question unanswered. This question is the

basis of all of your trades and can be the motivation to con-
tinue trading, even after a loss. Once you've analyzed your
motivations, it's time to look at your goals for trading. Is
your goal to save up for something, to make an income, to
experiment with trading, or to have extra funds for your
daily life? Knowing your overall goal can help you to then
determine how much you want to make in a year of trading.
Then make smaller goals moving down from the year.
All of your goals should be SMARTgoals. These goals are:
. Specific
• Measurable
. Attainable
. Realistic
• Time-bound

Specific goals are ones where you know the endpoint. A

goal, for example, might be, ''I want to have extra money
in my account so that I can enjoy my hobby of competitive
polo''. Or it can be something like ''I want to buy a house''.
While these goals are good, they're not specific enough.
Try to consider things like timeline, who is helping with
the goal, amount needed, and how it will be achieved.
To remake the first example goal, you might say: ''I want
to swing trade to make $200 extra dollars to spend each
month so that I can buy a horse for competitive polo by the

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end of the year''. That is a specific goal. Now you need to de-
termine how you will measure success towards your goal.
Measurable goals are ones that you can easily evaluate. It's
basically proof that you are meeting your goal. Your meas-
ure may be seeing money in your bank account but that's
pretty vague. List a specific amount you want to see each
week in your account, or state what percentage you would
like to make in trades. You can also see each successful trade
as a measure of reaching your goal. So long as you have a
clear set of numbers to assess, then you have a measurable
goal because they can easily be seen and recorded. Then
you'll know whether you are on track with your goal. If
you're not on track, then you may need to reevaluate your
process or the timeline for the goal.
Attainable goals are reachable based on how much time
you have available, how much effort you put in, and the
resources available to you. If your goal is to make one mil-
lion dollars in a year by swing trading, you have to analyze
whether or not that is attainable. Do you have the neces-
sary funds and time to dedicate to that much trading? Do
you have the knowledge that you'll need in order to make
that much? Having attainable goals means that they fit into
what you are capable of doing right now. If you don't have
the funds, time, energy, or experience to put towards the
goal, then your goal needs to be more attainable based on
your current life skills and style.

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Realistic goals are ones that you are actually capable of

achieving. This goes hand in hand with attainable goals.
Realistic goals are ones that you are capable of achieving
and are relevant to you. If you know there might be a lack
in an aspect of your goal, then a realistic goal includes the
steps you need to take to fix it. For example, if your goal is to
successfully trade by writing options, but you don't know
the first thing about writing options, then this goal is not
realistic. Instead, it's better to start with the goal of learning
how to write options. Realistic goals need to be ones that
you can honestly reach, not ones that are sky-high. Other-
wise, you're just setting yourself up for disappointment.
Time-bound goals are ones that have a very specific dead-
line, or multiple deadlines. If you don't have a deadline for
your goal, then you may not actually work towards it. It's
like writing a paper for school. If your teacher says you can
turn it in whenever, it's very likely it will never be turned in.
But if you have a specific time that paper needs to be turned
in, then you'll work hard to get it finished in time. You want
to do the same with your goals. Make time goals, or specific
deadlines you would like to meet to ensure that you are ac-
tually progressing. How you measure the time is up to you.
A lot of people use physical graphs they can chart to show
that they're meeting their timing goals. This way, it's some-
thing you have to do on paper, and something you can keep
in a convenient place like your bathroom mirror, or fridge.

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Having a physical time tracker can be really lovely because

you can see your success right there in front of you. You can
also add it into your trading plan so that at the end of the
goal, when you've reached it, you can go back and review
your progress. Either way, having some time-bound goals
will make reaching your goals easier and give you a sense of
satisfaction when you make it before your deadlines.
All of these steps are what make good goals, great. However,
sometimes the goal doesn't work out and it needs to be re-
evaluated. Reevaluating your goal is not a negative thing,
it just means that you need to clarify it, find out what
to change, and adapt your goal into a smarter one. When
you've made your goals as clear as possible, then you're put
on a road to successfully completing your goals.
Once you have chosen your goals for swing trading, it's
time to get down to brass tacks and create your investment
plan.

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Chapter 7
Fundamental Analysis
Fundamental analysis is a process by which you study
the fundamentals behind a financial asset. On the Forex
markets, you will be looking at the state of the economy,
GDP growth, and political factors that impact the overall
picture and stability of the country. If these items are look-
ing good, that means the currency for that country will
gain strength. But since currencies are traded in pairs on
Forex, that means you also have to compare fundamentals
between countries. If Europe looks strong but Japan is look-
ing even better, then the Japanese Yen would strengthen as
compared to the Euro.
When it comes to stocks and options, the fundamentals in-
clude profit margins, price to earnings ratios, cash flow and
other indicators that give a picture of the overall health and
prospects of the company. You'll be wanting to take a look at
quarterly earnings, and reviewing earnings calls for com-
panies that you are invested in. Fundamental analysis also
means looking for stocks that are currently undervalued.
The price of undervalued stocks is likely to increase at some
point in the future, so spotting an undervalued stock could
be useful for the swing trader.

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Since swing traders have different time horizons as com-

pared to buy and hold investors, short-term results like
earnings calls are going to take on a larger role, as compared
to looking at trends in revenue and profits over the course
of years. A good earnings call can send prices soaring, while
failing to meet expectations can send stocks into a rapid de-
cline. When there are events like this as a swing trader you
have to be ready to seize upon them as quickly as possible.
It's also important to keep your eye on company news of a
more general nature. If a product fails or ends up creating
legal trouble for a company that can be an opportunity to
short the stock or invest in put options. Alternatively, the
release of a new product that exceeds expectations can be
an opportunity to go long on the stock.

Financial Reports to Read and Where

to Get the Information
The SEC requires that all publicly traded companies make
audited financial statements available. This includes a pro-
spectus and an important report filed annually which is
called the 1OK. In these documents you'll find audited rec-
ords that include items such as cash flow, balance sheets,
and other financial data. They also include important in-
formation about the management team and competition
the company is facing in its sector. The company must also
give shareholders an overview of its future plans and in-
formation about attempts to enter new markets. You can

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visit company websites to get these reports, or do an online

search using the company name with ''lOK'' or ''prospec-
tus''. Summaries of financial information are also available
on many stock websites free of charge. For example, you
can get income statements, balance sheets and cash flow on
Yahoo Finance for any company that is listed on the stock
exchanges.
There is also another important report that may be released
from time to time, called an 8K. These contain information
similar to that found in a 1OK, but they are only filed when
important short term information has to be disclosed to in-
vestors. At times, the information contained in an 8K can
have a major impact on share price.

Financial Statements in More Detail

There are three general types of financial statements, in
case you aren't fully aware. These include the following:
Income statement: An income statement will include in-
formation such as revenue, gross profit, and operating ex-
penses. These reports can help you determine the overall
health of the company, and you can look for trends in rev-
enues and profits over the past few years. Be sure to look for
net income as a percentage of revenue. As a swing trader,
while you are going to want to have an understanding of
the overall health of the company, you are going to be more

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interested in looking at quarterly statements and keeping

up with earnings calls and other announcements.
Balance sheet: A balance sheet shows current assets and
liabilities for the company. Current liabilities are of particu-
lar note on a balance sheet. You want to look at a balance
sheet thinking about the financial health of the company.
Is it carrying a large amount of debt? Is the amount of debt
increasing, and could that prevent the company from being
profitable or paying dividends at current levels? These fac-
tors may make a company less appealing to investors.
When a company is younger and in an aggressive growth
phase, investors may be more tolerant.
Cash Flow: Cash flow is a summary of items such as net
income, changes to inventory, depreciation, changes to li-
abilities and financing opportunities among others. Cash
flow can give you a good overview of recent company per-
formance and is another way to gauge the health of the
company. Pay special attention to changes in inventory. Ask
yourself if it looks like the company is able to move its
product.
When examining quarterly data, you'll want to compare
quarterly results to the same quarter a year earlier. In many
cases, company performance will depend on time of year,
so the best way to see trends in the company's performance
is to make an apples to apples comparison, rather than just

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looking at how revenue and net income changed from last

quarter to the most recent quarter.

Earnings Calls
On a quarterly basis, one of the most important events for a
swing trader is the earnings call of the companies that the
trader is interested in. Earnings calls can lead to dramatic
swings in stock price, depending on whether it's a good
earnings call or a bad earnings call. In the crazy world of
Wall Street, an earnings call largely depends on what people
are expecting out of it, rather than any absolute measure of
performance. For example, if investors expect earnings to
increase 25°/o, and the company reports that it only grew
earnings by 10°/o, even though any rational person would
view that as a positive, Wall Street is probably going to react
negatively. Of course, if the report shows a decline it's going
to be that much worse. The thing about this for the swing
trader is we don't know how strongly the market will react.
If share price is $200, it might drop to $180, or it might
drop to $1 70. Nobody knows ahead of time, but you should
be ready to enter into your trades accordingly.
Things work just as well the other way around. If analysts
were expecting a company to see a 10°/o increase, but they
report an 18°/o or 25°/o increase in year over year profits in-
stead, this will send the stock soaring. Again, nobody is sure
how high it will go. You will have to have a preset value of
profit you are willing to accept on a trade, and place a limit

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order ahead of time. Then you have to live with the results.
If your limit order is at $220 a share, you can be happy with
your $20 a share gain, even if the stock keeps rising. A dis-
ciplined trader that doesn't get greedy is far more likely to
succeed over the long-term.
While it's impossible to know ahead of time how an earn-
ings call is going to go, you can gain some familiarity with
a company and how the market reacts to it by going over
previous earnings calls. Do so by not only reviewing the
content of the calls, but by looking to see how strongly the
market reacted to them.
Keep in mind that a bad earnings report isn't just an op-
portunity to short stock or invest in put options. When the
stock drops, it's also an opportunity to get in at relatively
low price point. Don't set perfection as a goal for your
trades. The only thing you should worry about is getting in
on the stock when prices are relatively low as compared to
the previous price level. If it continues going lower, beating
yourself up over missing the opportunity is a waste of en-
ergy. Instead, focus on waiting - for the stock to go back up
so you can profit at a future date.
If the earnings report turns out to be a good one, you might
want to be ready to enter into your position immediately.
Then you can ride the wave of rising share prices. It's not
necessary to invest before an earnings call and it could even
be a bad decision to do so, because you won't know for sure

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which way things are going to go. In any case, earnings re-
ports are an important part of your fundamental analysis
to see how the company is performing.

Price to earnings ratio

An important metric that matches share price and earnings
per share is the price to earnings ratio. Investors and traders
are on the lookout for price to earnings ratios that are ex-
cessively high, and also for price to earnings ratios that are
low in comparison to similar companies in the same sector.
If the price to earnings ratio is excessive when compared to
other companies in the same sector, that could mean the
stock is overvalued, and might head into a downturn at
some point. Conversely, an undervalued stock as indicated
by a relatively low price to earnings ratio is a stock that is
available at a ''discount'', because it's undervalued. At some
point - the thinking goes - the stock is going to rise in price
up to its true value.
You shouldn't just take the price to earnings ratio at face
value. If you notice one that is out of line with the rest of
the industry, you should do some research to find out if
there is some external reason behind the difference. That
may require a detailed check of news about the company on
financial websites, as well as reading press releases and 8K
reports issued by the company.

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An interesting and recent example is Ford Motor Company.

At nearly 14, the price to earnings ratio of Ford is nearly
twice that of other auto companies. Compared to GM, it's
actually more than twice as big. At the time of writing,
it alone stands out in the automobile sector, where all the
other companies are in a similar range. It's extremely un-
likely that Ford represents the standard of the sector and all
the rest of the companies are undervalued.
That could mean one of two things - Ford is in for a cor-
rection at some point in the future, or Ford has recently
made some moves or announcements that make it deserve
the high ratio. The first step you should take is to look over
financial reports and compare profit margins between the
different auto companies. You'll also want to look for any
news you can find about Ford in recent months.
It could be something as simple as a stock split. When a
company splits its shares, the amount of money invested
in the company stays the same but the number of shares
changes. Splits can work in both directions. Companies can
use splits to inflate or deflate price to earnings or earnings
per share ratios.
In general, if the price to earnings ratio appears excessively
high or low, this can indicate that the stock is in for a cor-
rection in the coming months. If it's excessively high this
is an overvalued stock, and the price of the stock might be
set to drop in the coming weeks. We would expect it to drop

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until it reaches a more appropriate level for its sector. On

the other hand if its low and the company fundamentals
look good, that can be a sign that the company is poised for
gains. So the price to earnings ratio can indicate that an in-
dividual stock is set to undergo a ''correction''.
But keep in mind that there is no ''right'' or ''wrong'' price
to earnings ratio. As we explained above, you will have to
look at companies in the same sector to get an idea of how
a given company compares to it's competitors. Obviously
you don't want to compare a bank to an auto company or
to a social media company. Also make sure you are really
comparing the same measurement. A good one to look at is
TTM. This means trailing twelve months. You will also see
past-looking and forward-looking price to earnings ratios. I
prefer to avoid forward looking and stick to the TTM value.
To get a feel of how different they are from sector to sector,
since we've already looked at automobile companies, let's
compare that to some other industries.
Let's look at a younger and growing sector, social media
companies. Looking at Twitter, we find that the PIE (TTM)
ratio is 20.61. This is actually considered a pretty average
price to earnings ratio. Looking at Facebook, the price to
earnings ratio is a bit higher, checking in at 28.58. That's al-
most 42°/o higher than Twitter, but given the more success-
ful financials that Facebook has, it's probably justified.

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Now let's look at a newer company, such as SNAP. In this

case, there isn't any price to earnings ratio given. That
means SNAP is not profitable. Since it's a young and grow-
ing company, that's not really relevant, at least not yet.
Investors are going to want to see results at some point -
but for now they are relatively patient. Tesla is another ex-
ample of a relatively young company that is poised for rapid
growth - it has yet to have positive earnings.
Searching for some more social media companies, we find
one that is way out of whack. YELP is sometimes con-
sidered a social media company, and its PIE ratio is 49.89.
This is much higher than what we've seen so far. YELP is a
popular website to be sure, but it doesn't seem to have any
fundamentals to justify a price to earnings ratio that high.
That could mean it's in for a price correction in the coming
months.
We can also find examples on the other extreme. Weibo
Corporation has a PIE ratio of 15, which is comparably low.
You can also look at closely related companies that are simi-
lar, but not necessarily in the same exact sector. Microsoft
is a technology company and they own Linked-In, so that
seems like a good candidate. Their PIE ratio is 30- about the
same as Facebook.
With these values in mind, Weibo might be a hidden op-
portunity. Before deciding, however, you'd want to look at

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the company financials and read what analysts are saying

about it. Something a swing trader should always keep in
mind is that looking at a single metric should not drive
yotlr decision making. You need to find confirmation else-
where.
The point of looking at price to earnings ratio is that it's a
starting point for further research.
Social media is a new and growing sector. It's interesting to
look at another more slowly moving sector such as bank-
ing. Here is what we find:

• Wells Fargo: 10.24

• Bank of America: 10.4

• Citigroup: 9 .81

• JP Morgan Chase: 11. 7 2

Notice how they are all clustered around the same value. If
you are looking at stocks in the banking sector, any stock
that had a price to earnings ratio that fell outside of the
range 9-11 would be very suspect, possibly representing an
opportunity to look at for a future price swing.

Open Interest, Volume, Short interest

and Put to Call Ratios
Looking at options, open interest, volume and short inter-
est are some of the factors to consider. These can also help

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you determine where traders expect prices to go. There

aren't absolute numbers that can be used as a guideline,
everything is relative.
Open interest tells you the number of options contracts for
a given strike price and expiration date. Options traders
seek out a minimum of 100, because this indicates enough
liquidity that you can quickly get out of a trade. When you
find strike prices with higher levels of open interest, these
are probably price levels where expert traders are expecting
the stock to go in the near future. You will want to compare
open interest numbers for calls and puts on the stock. Calls
are bets that the stock is going to rise in price, while puts are
bets that the stock is going to decline in price.
Volume tells you the number of trades that happened on
the most recent trading day. This also gives you an indica-
tion of the level of interest in the strike price - where people
thing the stock price may be heading.
You can also take a look at short interest, and also the put
to call ratio for options related to a stock. Short interest tells
you how many investors are shorting the stock. If this num-
ber is high, that indicates that the investing community is
expecting a stock price to decline in the near future.
This information is also communicated by the put to call
ratio for options related to the stock. Investors who think
that a stock price is going to decline are going to invest in

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put options. If the put to call ratio is excessive, then that can
reflect an expectation of coming price declines in the stock.
You can compare the value you find for a given company to
similar companies in the same sector. It's also good to check
the put to call ratios for SPY, which tracks the S & P 500,
for a rough comparison. That will give you an indication
of what investors are expecting for the market as a whole.
Note that options all have different strike prices, so you
will want to check the put to call ratios for different strike
•
prices.

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Chapter 8
Technical Analysis and
Fundamental Analysis
Technical Analysis
In forex trading, technical analysis refers to the framework
used by most trades to study the movement of prices, es-
pecially for short term traders. The theory behind technical
analysis is that one can predict the current trading con-
ditions and possible future price movements form analyz-
ing the past price movements. Theoretically speaking, the
main support of technical analysis is that the prices absorb
all the information in the market. If therefore the prices
reflect all the information that has affected the trade, then
one can use price action to trade. History tends to repeat
itself, and technical analysis follows the saying. Technical
analysts study the charts and history in order to identify
the patterns that are similar, and traders use the informa-
tion with the belief that the currencies will act the same as
the past.
Technical analysis involves studying the past price actions
in an effort to identify similarities and drawing conclu-
sions on the possible future movements. The nature of the
forex market is that it operates 24 hours a day. Therefore,

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there is a lot of information and data that one can use to

analyze the future price movements. The information used
during technical analysis is statistical and the data being
analyzed can be visualized and quantified using graphs and
charts. The traders and analysts use indicators, technical
studies, and other tools of analysis to gather the informa-
tion. Summarily, technical analysis follows two things 1)
identifying the trends, and 2) identifying resistance/ sup-
port through the analysis of timeframes on the price chart.
The forex market can only move in three directions namely
up, down or sideways. The prices typically follow a zigzag
trend, and consequently, the price action can only have two
states; the range and the trend. The range is when the price
zigzag moves sideways while the trend is when the zigzag
goes high (bull trend/ uptrend, or when it goes down (bear
rend/ downtrend)
The importance of technical analysis
The main importance of technical analysis is that a trader
can determine the where and when of entering or exiting
the market and more so the latter. Some people say that one
cannot get any value from analyzing the historical prices.
Such traders follow the random walk theory whereby all
markets are efficient, and they respond to changes in a
random manner. Therefore, one cannot predict the future.
Great investors including Warren Buffett heavily dispute
the random walk theory and state that it is almost impos-

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sible for markets to be fully efficient. Inefficiencies are the

opportunity makers that help the traders to capitalize on
the movement of prices in the forex trade. Analyzing price
action using technical analysis tools helps one to make
more inf armed decisions while trading.
The financial markets such as foreign exchange are not
easy to analyze. These markets are influenced heavily by
a wide selection of factors such as the monetary policies
made by the central banks, governmental fiscal policies and
other internal factors determined by the consumers and
producers. Analyzing all the different factors and identify-
ing how the influence the assets in the market can be a
tough task. It is equally important that we note the ease
at which a trader can make errors when analyzing a large
number of factors. This particularly affects the inexperi-
enced traders and those who have limited focus and time.
The technical analysis helps the trader to focus on just one
piece of crucial data which is the price movement. The ana-
lysis then offers traders; A way of judging the charts, identi-
fying potential trade setups and managing them.
Although traders use the technical analysis indicators,
there is no magical combination that can guarantee a
trader full time wins. Some of the secrets identified by
traders and analysts as keys to successful trading include
good risk management programs, the ability to stay ra-
tional, and high-level discipline. Every trader can predict

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right and win, but it will not always be the case. If a trader
does not have a good risk management strategy, he/she will
not stay profitable in the long term even if they conduct a
thorough technical analysis.
Fundamental Analysis
In the foreign exchange, fundamental analysis refers to the
act of trading in the market based on the analysis of the
global aspects that determine the demand and supply of
currencies. A sizeable number of traders use both the fun-
damental and the technical analysis together to determent
the when and where to trade. However, the traders tend to
favor one over the other based on their individual invest-
ment plans and goals. To be precise, fundamental analysis
studies aspects such as political forces, economic forces,
and socials forces that may affect the asset. Many traders
find ease in predicting the movement of prices while using
supply and demand as an indicator. In simpler terms, the
trader using fundamental analysis has to identify the econ-
omies that are blossoming and those that are stuck. As
such, the trader has to know the whys and how an aspect
will impact the trade, for instance, unemployment rates.
The rates of unemployment affect the economy and the
monetary policies implemented by the government and
central banks, therefore, affecting the levels of demand and
supply of the nation's currency worldwide.

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Traders that use fundamental analysis pay attention to the

overall state of a nation's economy and identify factors
such as interest rates GDP, international trade, manufactur-
ing, and international trade among others. The impact of
these factors on the currency affects the price of the cur-
rency on the forex trade. The bottom line of fundamental
analysis in the forex trade and also other markets is that an
asset can have a price that differs from its actual value. Con-
sequently, markets may misprice, underprice or overprice
an asset in the short term. Fundamental analysts claim that
despite misquote of the currency, an asset will still go back
to its actual price indicating its true value. Then we can say
that the bottom line of traders who use fundamental ana-
lysis to gauge assets are looking for trading opportunities
through analyzing the value of the asset, the current price
and the possibility of change.
The main difference between fundamental analysis and
technical analysis is that fundamental analysis pays atten-
tion to all other factors of affecting the trade apart from the
price while the technical analysis focuses on the price only.
As such, the technical analysis is very handy for short term
traders such as those in day trading while the fundamental
analysis is beneficial for the long term traders such as those
in the swing trading. The analysis of fundamental foreign
exchange factors answers the long term questions.
Fundamental analysis tools

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Fundamental analysis is done via different tool, and the

most used ones include the financial news media, the
economic calendar, and historical fundamental data. The
financial news media gives news podcasts that update the
traders of any major geopolitical and economic develop-
ments. That might affect the market directly or indirectly.
The economic calendar helps the trader to assess the date
and time schedules of the release of data, either major or
minor, that might affect the currencies.
Historical fundamental data is useful to the trader because
it is enabling them to determine the trends in indicators.
The traders can also analyze how a currency reacts to cer-
tain economic information release. This can be done by
analyzing the behavior of the currency in the wake of previ-
ous similar releases and decisions.
There also other sources that one may use to base his/her
opinion and they include the central banks, weather, and
seasonality.
Central banks are probably one of the most charged sources
of fundamental trading. This is because, they have a long
list of actions they can take in finance, for instance, chan-
ging the interest rates (raising them or lowering them),
maintaining the rates, making suggestions about the pos-
sible changes, the introduction of new policies, revaluation
of the currency among others. The fundamental analysis

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of central banks usually involves thorough poring through

speeches and statements made by central banks and at-
tempt to predict their next moves.
One might wonder how the weather affects the forex ex-
change yet they seem unrelated in all ways. There are types
of weather that can affect currencies in different countries.
For example, in the winter season, a snow stomp in a coun-
try may drive the costs of natural gas up because it will be
on high demand for heating homes. Also, there are certain
weather situations that affect the value of good for example
droughts, hurricanes, floods, and tornados. Some of these
weather events are unpredictable to a large extent, but it
would not hurt for one to check the weather channels and
identify the weather unfolding.
Seasonality might be related to weather, but in this case,
it is about some factors unrelated to weather. Seasonal-
ity means a period of time or rather time series. In trade,
there are seasons that are good for selling while others are
good for holding assets. For instance, in December, many
investors sell off their securities if they have been declining
throughout the year so that they can claim capital losses on
tax. Sometimes, it is beneficial for a trader to exit a position
before the selloff at the end of the year begins. Other sea-
sons include the beginning of the year (January effect), and
the end of the month (Month-end rebalancing.)
Fundamental analysis indicators

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There are many indicators used in fundamental analysis,

and they vary according to the nation. Currency traders use
the indicators to assess the current and fut11re state of the
economy in the country. Some of the indicators include;
Gross Domestic Product, trade balance, Currency account,
employment data, inflation, and retail sales. Some of these
indicators may help the trader to idealize what the future
release will look like. Again, some of the indicators lead
others in signaling the upturn or downturn of the econ-
omy. They include durable goods orders numbers, Producer
Price Index, and purchasing manager surveys.
Some of the geopolitical events that can affect the forex
market include elections, war, change of powers and nat-
ural disasters.
Fundamental analysis: Trading on the news
Some traders using the fundamental analysis follow data
releases and economic news to initiate (enter) or liquidate
(exit) the short term trades. They base their decision on the
results of the release. It may sound easy to trade on fun-
damental news, but a trader should be aware that in most
cases, the market does not react as expected. A number of
times, the market will go to the opposite direction of what
the traders anticipated.
When trading on the news, the traders use volatility strat-
egies that involve the sale and purchase of options. The

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options are helpful in retaining a neutral position hence

appreciating regardless of the direction that the market
moves.
Traders also take advantage of the news related volatility
when they trade with fundamentals by establishing a short
and a long position in one pair and then close each side
when the news is released.
Many professional traders avoid holding a large position
just before a significant economic release. This is because
the volatility associated with news release could initiate
stop positions on any side.
Trade fundamental analysis allows a trader to have a
deeper understanding of the ways in which the market re-
acts to events. Combining the technical analysis and the
fundament information gives the trader an edge over the
traders that are using one method.
Approaches to fundamental analysis
Keep in mind that Foreign exchange prices are influenced
by the microeconomic and the macroeconomic data, geo-
political events, and the linkages. As seen earlier, the factors
include GDP, Employment statistics, trade balances, and
interest rates among others.

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Chapter 9
Strategy
Test before you play - This is a great advantage that you as a
swing trader have in your favor as it means you have time
on your side. So leverage that and test before you commit
to a trade. You might hear on a forum of some miracle
indicator or fool-proof method to beat the market but al-
ways try it out on the demo first. Demos are a perfect place
for experimentation as losses cost you nothing. Hence they
are perfect for trying out new tactics or adjusting your
strategy. Always test before you trade as even the best
looking metrics can turn out to be rubbish when used out
of context. Remember some of the greatest and successful
swing traders use a combination of ten or even twenty met-
rics when evaluating a trade. But even they admit it can
be confusing so always test a new tactic before you trade.
Using a demo account will enable you to try out new things
without risking losing your money. After all most trading
mistakes come about due to over exuberance which leads
to overtrading or through fear where profits are cut short.
Another flaw is in a beginner steadfastly adhering to a dir-
ectional bias, which can also be detrimental if you haven't
practiced - and learned about trends and reversals -on a
demo accounts before hand.

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Backward/Forward testing - Another great use for a demo

account is for backward or forwards testing. The idea here
is that once you have a tactic or change in strategy in mind,
you can either backtest against historical data or forward
test your trading plan using forecasting. While backtesting
is very useful as you are working on objective data, it does
tend to lack emotional excitement. On the other hand, for-
ward testing is about projections, and this enables you to
put your battle-plan into action in real-time. As a beginner
however you should always stick to backward testing till
• •
you gain experience.
Drawdowns - There will be days where the market is work-
ing against you or psychologically you are just not up for
the fight. However, these are the days when experimenting
with new tactics on the demo account can pay dividends.
You might discover a new metric that turns your trading
average around or more likely see how you would be better
adjusting your position size until things turn around.
Drawbacks to Demo Accounts
Now we have just spent the last few paragraphs telling you
how great demo simulations are, but unfortunately, there
are some downsides. Therefore before you go rushing out to
get hold of a demo account on which to learn swing trading,
you need to read this. Demo accounts for swing trading do
have certain important limitations:

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Execution - Demo accounts do not always relate to real-

world conditions. This is because demo accounts are vir-
tual, so they relate to the data at hand, so they usually fill a
market order at a price offered. However, in the real world
there is not always a buyer conveniently there to meet your
asking price so, in a live market, there is some amount
of slippage. This slippage means that some orders are not
being filled immediately at the price that you wanted. Of
course with falling stock, this means there are more sellers
than buyers, which will make matching a deal more diffi-
cult. This makes setting loss-orders that meet actual levels
of risk very challenging.
Unlimited capital - One of the strange things about online
demos is that they provide you by default with vast capital
to play with. Now there is a good reason for this. The reason
they give you almost unlimited virtual funds is that gains
are accelerated and losses can be easily recuperated if you
have sufficient funds. This is what is called the risk to ruin
ratio; should you bet $10 and lose the bet you will need on
your next bet to cover that loss as well as get the expected
gain and with limited funds this soon becomes unfeasible.
Dubious Data -Many brokers host dubious demos where
you basically can do no wrong. These types of vanity sites
are
deliberately enticing you to trade with them based on a
false premise - that you are good.

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Deposits - Although you should always be practicing using

virtual money some brokers will require an initial deposit
or your credit card details to use their demo accounts. If
that is the case, then you should walk away.
Leverage - Many beginners get caught up in the initial win-
ning streak on demos and seem to enjoy the irrational be-
havior of the system as they enjoy ever-increasing success.
While this can instill confidence and result in substantial
virtual profits, it does not transport well to a live-trading
environment where it will almost certainly lead to signifi-
cant losses.
Unfulfilled Orders - In demo accounts, everything is a vir-
tual reality so if you trade at a price the order will be ful-
filled. But in the real world things are more complex, and
often there are no buyers for the stock you want to sell -
at least at that price. Therefore trades in a demo always
go through as executed. However, when live trading, orders
will often go unfulfilled.
Trading tools - All those charts and research that you got
in your demo account will suddenly come at an additional
cost when you switch to live trading.
Market movements - Demo simulators are just that; simu-
lations of the market so they do not always have real-time
data, so your demo account server may not take into ac-

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count up to the minute changes. These can include updates

on out of hour's price movements.
Psychological effects
Emotions -The three emotions behind trading are Fear,
Hope, and Greed that you may experience when you live
trade. The fear of losing your capital is understandable so
only trade what you can afford to lose. Greed, on the other
hand, can make you ride a wave for too long. But it is hoped
that is the deadliest of all. Demo accounts cannot replicate
this toxic environment.
Risk Management- Complacency is another major sin, if you
do not take your trades seriously, you may overlook poten-
tial unclaimed profits or overlook potential trends. How-
ever with a practice account and diligent practice these
flaws can be overcome. It is a simple fact that beginner
traders will be more risk tolerant trading on virtual money
than they would with real cash. This maverick behavior
also seems to appear when they shift to live trading.
Overtrading - The thrill of trading the seemingly endless
possibility to earn free money can cause many beginners
working on a demo account to overtrade. However, this can
be a very bad habit as this behavior can develop into a ten-
dency to overtrade on the live market. You need to know
quantity doesn't always trump quality.

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Opening a Demo Account

When you decide that swing trading is for you then look
online to find a broker and open an account. Of course, bear
in mind everything that we have told you about finding
a suitable broker that matches your needs should be rela-
tively straightforward. It probably is best, but that is up to
individuals to go for a broker with a good online demo sys-
tem. The advantage of having a good demo system is that
you can play about and test out all those tactics and metrics
before you go too far into real-life trading.
Testing Stop-Loss
A ''stop-loss'' is a fixed price order that you make against
a given trade that will trigger an automatic sell when the
price hits that level. This mechanism can protect you in the
event of a sudden fall in price perhaps through overnight
market activity.
However, a stop-loss can also be used to lock-in profits in
that scenario you would sell and take the profit when the
price reached a desirable high level. Some traders adjust
stock-loss or profit-take levels every day. They may even
adjust what they call a ''trailing stop'' on their current posi-
tions. They do this by setting an order to trigger at, 10°/o
or 15°/o below the price they paid for the stock. Of course,
this requires that you continually evaluate what 10 or 15
percent is relative to your current stock value. This means
that you will have to regularly check your stock position

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and calculate the new stop-loss position. Once you calcu-

late the new stop-loss level, you will need to make an order
to trigger at that level. This prevents losses. However, it can
work the other way and lock-in profits. For example, if you
bought a stock at $10 then set a stop loss at $15 and the
stock goes to $20; that is a lot of unclaimed profit should
the stock plummet. But here is the thing, once the price hits
$15 it would be sold giving you $ 5 profit per share.
However, be warned as it can have unintentional results;
for example, a stop-loss applied to some stocks may well
back bounce quickly. Indeed a lot of investors have found
themselves in the position where they have been ''stopped
out'' of stock overnight. Only to see it bouncing right back
up the very next day and reach a tremendous high. Of
course, the opposite is also true that should yo11r stock
stop-loss order trigger after a 15°/o slide, and the stock
keeps on tumbling, then it will save you a lot of money. But
you will need to know the risks as well as the rewards when
applying for stop-loss orders.
There are two types of order that a trader can initiate; a
market order and a limit order. A market order will strive to
buy the requested amount of stock at the best market price.
A limit order, on the other hand, will only buy an available
stock at a designated price.
Therefore we can use these orders to fulfill different tasks
such as if we issue a ''limit order'' which has the same

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mechanics as a stop-loss order but is used on the upside.

For example, you may want to buy Facebook stock, but cur-
rently, it is too expensive, so you are waiting for it to drop
in price. In this scenario, you could place a limit order that
tells the market that you're willing to buy stock but at only
this price. Moreover, you can also use limit orders when
transacting a sale. For example let us say that shares in a
company are currently trending downwards and trading at
$290, but $300 is your break-even price. It would be good
to have an order that triggers a sale at $290 to limit your
losses.
Now many people will say why sell at less than you bought
for? And many professional traders do set a limit order
and then steadfastly refuse to budge from it. However, if
you contemplate the risk, you will see that if you refuse to
sell at $290, the stock could backslide to $280 or continue
to plunge into deeper losses. But there is also the thing it
might rebound to $300 before it breaks out and hits $500.
On the buying side, if you refuse to any pay more than $10
for a stock you are not convinced about as it is currently
trading low, then you too can be caught out. For you could
miss the opportunity to ride the wave when it goes up to
$11 and then rises to $12 and then $14 and then $15, by
that time you might feel $10 was in hindsight a very good
•
price.

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Summary
In this chapter, I shared with you the complexity of swing
trading - or indeed any type of trading; it is not as easy
as may seem. Protecting your capital is paramount, but
there can be opportunity risks where you don't take the
right trade at the right time. This is where diligent research
comes into play and puts you on the right side of the deal.
Do not gamble always go with the market flow. Always se-
cure your potential losses and lock-in unclaimed profits in
volatile markets. On the other hand don't be too conser-
vative as opportunity-loss can be equally psychologically
devastating.

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Chapter 10
Candles and Candlestick Charts
Anytime you visit the market on a trading platform, you
will notice that the main screen always features a specific
graph that is designed with small bars that look like candle-
sticks.
These bars are actually called candlesticks, and the graph it-
self is known as a candlestick chart and it is used to identify
the direction of the market based on factors the emotions
of the active market traders. If you are going to get involved
with trading, it is crucial that you understand what candles
and candlestick charts are and how you can read them as
these are going to let you know where your best entry and
exit points are in the market.

What is the Candlestick Chart?

Candlestick charts were developed back in the 1 700s when
a Japanese trader named Homma discovered that markets
were influenced by the emotions of traders as strongly as,
if not more than, the supply and demand ratio surrounding
the stocks themselves. The candlestick chart was designed
to reflect the emotion of traders by visually representing
the size of the price moves using different colors. Despite
the fact that it is well-known that traders should always

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seek to trade without the influence of their emotions, many

if not all traders are still trading emotionally.
The truth is we cannot completely escape our emotions; we
just need to do our best to avoid being influenced by them.
For this reason, the market itself is still largely impacted
and influenced by the emotions of the traders actively trad-
ing in the marketplace.
The theory behind the candlestick chart is that if you can
identify and understand what emotions traders are trading
with each day, you can predict where the market is likely
going to go. You will be able to quickly determine whether it
is bearish (on the downtrend, or about to be) or bullish (on
the uptrend, or about to be) and use this to help you decide
when and where to place your entry and exit points.
Although the candlestick chart cannot give you a thorough
long-term idea of where the market is going, it can help you
identify where the short-term prices are likely going to go
and help you make your decisions accordingly. As a swing
trader, these short-term fluctuations are largely where your
profitability sits, so the candlestick chart is incredibly im-
portant to your success as a swing trader.

What is On A Candlestick Chart?

The candlestick chart has small bars that are shaped like
candlesticks that are represented in di:fferent colors. These
candlesticks show up on a graph in various patterns show-

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ing whether the market is moving up or down and how in-

tensely it is doing so.
On the candlestick itself, you will see three elements which
represent four pieces of information. These elements in-
clude the ''wick'' type line at the top, the candlestick body
which is called the ''real body," and the ''wick'' type line at
the bottom of the real body as well. The way that you read
the candlestick will depend on the color of the candlestick
itself, as a black candlestick represents a condition where
the close price was lower than the open price, whereas an
empty or white candlestick means that the close price was
higher than the open price.
With that being said, if you are reading a black candlestick
the tip of the top wick represents the high price and the bot-
tom of the low wick represents the low price. The top edge
of the real body represents the open price and the low edge
of the real body represents the close price. If you are reading
an empty or white candlestick, the tip of the top wick still
represents the high price and the bottom of the low wick
still represents the high price.
However, the top edge of the real body will represent the
close price and the bottom edge of the real body will repre-
sent the open price on these candlesticks.
Some traders will alter the colors of their candlesticks in
their trading platforms, often making red candlesticks rep-

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resent a down candle and green candlesticks represent an

up candle. This is a great way to visually see when the mar-
ket is going down with the color red, or when it is going up
with the color green.
Understand that candlestick charts and bar charts are two
completely different charts, even though they may appear
similar to a new trader. Bar charts will show the same in-
formation, however, the way that the bars are read will be
different and they tend to not provide as much detailed in-
formation as candlestick charts do.
For that reason, I suggest using candlestick charts over
bar charts on your trading platform so that you can get
a stronger sense for what you are doing with your trades.
With the candlesticks, you will be able to make much
more educated and specific entry and exit moves with your
trades which can help further maximize your profitability
from each trade you enter.

How Do You Read the Chart?

When you open up a candlestick chart you are going to see
several candlesticks across your screen all moving together
in a wavy pattern.
This represents the various directions of the market over a
set period of time, based on the parameters that you have
given your trading platf arm. When you read the chart, you

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first want to pinpoint patterns in the chart that let you

know where the market has been moving in your favor.
Then, you want to read the candlesticks involved in that
part of the pattern for the specific information that they
can offer you regarding the high and low prices and the
open and close prices.
How exactly you will act based on that information will
depend on what you are looking to do with your trade.
Each trading technique will follow a different pattern and
will favor a different market type, so you need to be ready
to pay close attention to what strategy you are using, what
pattern it requires, and what type of market you need to in-
dicate when to move.
This way, you can make the best choices with your trades
and you are able to feel confident that your trades are likely
to work in your favor and earn you as many profits as pos-
sible.
With that being said, not every pattern or trade is guaran-
teed so you should be cautious with your trades and con-
tinue to engage in other forms of tech analysis to ensure
that you are more likely to make a strong trade each time.

How Do I Identify a Bullish Market with Candlesticks?

A bullish market is indicated by what traders call a ''bullish
engulfing pattern'' which means that you are looking for
a chart with candlesticks that have a long green or black

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real body engulfing a small red or white real body. Despite

a small drop in the price due to the red or white real body,
the long green, or black real bodies indicate that the market
is bullish and that the price could continue to increase be-
yond that point.
If you are looking to enter a new trade deal or buy new
stocks, this is the best time as this is where you are going to
see the most price increases.
When it comes to swing trading with options, you want to
look for a bullish market either when you are selling a put
option or buying a call option. This way, you can feel con-
fident that the market is moving in favor of your ability to
earn greater profits from your stocks.

How Do I Identify a Bearish Market with Candlesticks?

A bearish market is indicated by what traders call a ''bear-
ish evening star'' which means that the last candle in the
pattern opens below the previous day's small real body.
The direction of the market at the time of closing does not
matter when it comes to identifying a bearish market, but
you should see that the last candle of the day closes at or
near the bottom of the candle before it. This means that the
buyers are stalling and that the sellers are starting to take
control, meaning that more selling could occur.
Another indication of a bearish market that is shared
through candlesticks is called a ''bearish harami'' and it is

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shown by a small red real body that is completely within

the previous day's larger green real body. If you see this, the
indication is that the trend is pausing and it could be head-
ing downward. Alternatively, if it is immediately followed
by another up day, it could indicate that the market was
taking a pause and that the stock will continue to be on the
uptrend for a while longer.
With swing trading, bearish markets are best for selling call
options or buying put options, as they are going to give you
the greatest opportunity to earn a profit from your sales.

What Are Swing Traders Looking For?

There are plenty of trends that you can find in candlesticks,
however, swing traders are trading with a specific strat-
egy which means that they are looking for specific trends.
Since you are not trading quickly with single day trends or
waiting for trends to get deep to earn massive profits over
a longer period of time, you need to be aware of where the
specific swings are in the market.
The two specific patterns you are looking for are called
''swing highs'' and ''swing lows." Although other trends
might help you identify good trade opportunities, these are
the two areas where you are going to be able to get in on
a swing trade and earn your profits fairly rapidly and with
great success.

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Swing Highs
Swing high is a term that refers to the peak of a market
where the stock price hits its peak price point before swing-
ing back into a bearish market. Swing highs occur when the
market has been bullish for any given period of time and it
is about to correct itself. You will see that every single type
of stock swings back and forth on a fairly consistent basis,
however, some swings will be much deeper and longer than
others.
As a swing trader, you want to fallow the swings that occur
over a few days and up to a couple of weeks as this is where
your best profits will lie.
On a candlestick chart, a swing high looks like a small arch
at the top of a trend, and it is generally reflected by just
three candlesticks: the bullish candlestick, the peak candle-
stick, and the bearish candlestick. In addition to looking at
those three candles themselves to identify a swing high,
you also need to look at the surrounding candles to see
what forms of candles are accumulating and what they are
suggesting about the market itself.
In many cases, swing highs will happen only to have the
market immediately move back into a bullish direction,
further increasing the price. Naturally, if you are waiting
for a bearish market, you do not want to get involved in a

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trade that is following this trend as it will be unlikely to

move in your favor.
You also want to look at where the swing high occurred on
the graph as this will give you more information as to what
is likely to happen next, too. A swing high that has hap-
pened after multiple smaller swing highs in the recent past
yet still lingers at the middle of the graph is likely to con-
tinue moving in an upward direction.
However, if the swing high happens toward the top of the
graph, this indicates that the market has reached a peak
point and it is about to become a bearish market as a way to
correct itself.
In swing trading with options, you want to assume your
position when a swing high is in effect by entering the
market at the peak point through either selling call options
or buying put options. This way, you can capitalize on the
bearish market swing. Ideally, your position should be a
short position that will not last any longer than a few more
candlesticks on the chart so that you can maximize your
earnings and leverage your position.
To help you get started with trading on swing highs, I
encourage you to use this information to begin identify-
ing swing highs on your candlestick chart and getting a
stronger feel for what these trends look like on screen. Once
you grow used to identifying them on the screen, you can

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begin identifying at which point you would likely enter a

swing high and at which point you would exit.
Then, you can start following active trends and paying at-
tention to new swing highs when they are in action so that
you can get a feel for what it would look like to actively be
preparing to enter and exit the market.
By engaging in these practice trades, you provide yourself
with a great opportunity to get a strong understanding of
what you would need to be doing in action in order to make
a profit from your trades. Practice trades not only help you
get a strong gauge on the market but they also help you
develop your confidence and skill by showing you how suc-
cessful trades are done and giving you something to reflect
on to improve your technique.
You will find that the more you engage in practice trades,
the more confident you will feel in your real trades when
you are ready to start actually putting your money forward
into trade deals.

Swing Lows
Swing lows are the opposite of swing highs in that they are
representing the lowest point of any given market. Swing
lows take place in bearish markets and indicate that the
market may be moving in favor of a bullish direction, how-
ever, much like with swing highs, you need to pay attention

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to the overall trend to get a strong feel for what is actually

•
going on.
When you are looking for swing lows, you are looking for
three candlesticks at the bottom of any given chart that is
indicated by one single bearish candlestick that follows ei-
ther a bullish or a bearish candlestick. In swing trading, you
are looking for a bearish bar that falls lower than a bullish
bar toward the bottom of the graph which indicates that
the stock has hit a low point but that the market is starting
to turn in the opposite direction. If you were getting in on
a trade, you would want to engage in selling call options or
buying put options at this point, as the market would be on
its way to becoming a bullish market.
With that being said, you do need to pay attention as mul-
tiple swing lows can occur several times over without the
market ever fully swinging back in the opposite direction.
Just like with swing highs, you need to see what patterns
are existing around the swing low that you are looking for
to ensure that the market is actually going to move in favor
of what you are looking for. If there are multiple swing lows
and the candlesticks are not yet reaching toward the bot-
tom of the graph, chances are there will be more swing lows
taking place before the market fully reverses and corrects
itself.

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Conclusion
Congratulations on making it this far! You deserve some
applause because this is a very dense book and its true value
is apparent only upon repeated reading. The main cause for
this is new traders entering the markets with the wrong
expectations.
Not only do you have to master your strategy, you must,
crucially, master yourself. You need to know yourself inside
and out if you are to succeed in this endeavor. You need to
put in a lot of work examining your beliefs about money,
success and what it is you want in life. Remember, if there's
a block in any of this, you will not be successful in trading
no matter how good your technical skill is.
Take the time to practice first then get on a demo platform
and only when you consistently make money on demo, go
live. Many traders get impatient with this process and push
forward as fast as possible. The specter of time is one of the
biggest reasons for this. Most people reason that they need
to become successful traders in the shortest time possible
or they want to be like that other trader who became a mil-
lionaire within a year and so on.
Letting go of time limits is one of the first things you need
to do. Simply accept it will take however long it has to take
and you will eventually get there. Think of it this way. If
 SWING TRADING: A BEGINNER'SRULESAND BEST STRATEGYG ...

you need to get to another town for an important engage-

ment, will you worry about how long it takes to get there?
Beyond the initial planning phase, probably not. You'll sim-
ply travel to the place and during your journey, you simply
deal with whatever comes. You don't sit there wishing you
get there a day earlier or an hour earlier etc. You might wish
for it but it isn't your overriding concern. You just accept
that you arrive whenever it is you arrive.
Treat trading in the same manner and stick to the path pre-
scribed in this book. As your skill progresses, you will find
suitable tasks to take on to enhance and satisfy your new
skill level. Above all else, maintain a balanced, calm mind-
set and let it guide you forward.