ENTRY STRATEGY lllllllll

Your swing trading entry strategy is the most important part of the trade. This is the one time when all of your trading capital is at risk. Once the stock goes in your favor you can then relax, manage your stops, and await a graceful exit.

This page explains the basic price pattern that is used to enter stocks. Once you become familiar with it, you can try out more advanced strategies based on the specific pattern that you are trading. More on that in the chart patterns section.

With your entry strategy, the first thing that you want be able to do is identify swing points. What's a swing point you ask? This is a pattern that consists of three candles. For entries on long positions, you look for a swing point low. For entries on short positions you look for a swing point high.

Swing Points

For a swing point low, the first candle makes a low, the second candle makes a lower low, and the third candle makes a higher low. This third candle tells us that the sellers have gotten weak and the stock will likely reverse.

For a swing point high, the first candle makes a high, the second candle makes a higher high, and the third candle makes a lower high. This third candle tells us that the buyers have gotten weak and the stock will likely reverse.

Here are pictures of the candles to help you better understand swing points:

For our long entry strategy, we are trying to find stocks that have pulled back into the Traders Action Zone that have made a swing point low.

Like this:

You can see on the chart above that this stock is in a nice uptrend with the 10 SMA above the 30 EMA. The stock has pulled back into the TAZ and made a nice swing point low (highlighted).

See how the pattern consists of a low, lower low, then a higher low? Great! Our entry strategy would be to enter this stock on the day of the third candle.

Now lets look at a stock on the short side. We are looking for a stock in a nice downtrend with the 10 SMA below the 30 EMA. Then we wait for a rally into the TAZ that forms a swing point high.

Like this:

See how the pattern consists of a high, higher high, then a lower high? We would look for an entry on the third candle.

Consecutive Price Patterns

Ok, now check this out. Look back up at the first chart where the stock pulls back into the TAZ. You will notice that the pullback consists of three consecutive down days with lower highs and lower lows.

That is what you want to look for in a pullback. You can buy the stock the first time it trades above the previous candles high. This will complete the swing point low.

On the second chart, you will see that the stock has three consecutive up days with higher highs and higher lows. The fourth candles still makes a higher high and a higher low. The fifth candle finally makes a lower high and a lower low - completing the swing point.

Pullbacks do not have to consist of exactly 3 consecutive up days (for short trades) or down days (for long trades.) Sometimes you will run your scans and find stocks that have more than that.

When you are looking for swing points to develop, you always want to look to the left of the chart to see if the stock is at a support or resistance area on the chart. That will improve the reliability of this entry strategy.

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The standard entry is described here in detail but it mainly consists of three candles:

A swing point high (some traders call it a "pivot" high) consists of a high, a higher high, and then a lower high.

A swing point low (or a "pivot" low) consists of a low, a lower low, and then a higher low.

This is much easier to understand by looking at a chart:

On the left side of the chart, you can see a swing point high. We would look to short this stock on the day of the third candle because it made a lower high and traded below the previous days low.

In the middle of the chart, you can see a swing point low. We would look to buy this stock on the day of the third candle because it made a higher low and traded above the previous days high.

It is important to understand that not all swing points will result in a reversal. But many do. There are many more swing points on this chart. Can you find them?

Ok, now let's look at an aggressive entry.

The Aggressive Entry

An aggressive entry is an entry in which you buy or short a stock before it makes a swing point low or a swing point high. You are buying (or shorting) in anticipation of a swing point low or a swing point high developing.

Let's look at a chart:

This is the same chart with another swing point low. Here you can see a low (1), a lower low (2) and then a higher low (3). Typically we would buy on the third candle (the higher low). But look at the second candle. It is a bullish engulfing candle and it traded over the previous days high.

In this scenario, an aggressive entry would be to buy this stock on the second candle (2) in anticipationof a swing point low developing.

Here is another example of an aggressive entry on the long side:

This stock has not made a swing point low yet. But, it does show a piercing candlestick pattern. So, you might want to buy this stock on the second candle in anticipation of a swing point low developing.

Which Entry Strategy is Better?

One isn't really better than the other. It just boils down to risk versus reward. A standard entry is less risky because the stock has moved in your desired direction. But, often times, waiting for swing point to develop messes up your risk to reward because your stop is further away.

An aggressive entry is usually riskier because the stock hasn't reversed yet. But, your risk to reward is better because your stop is usually closer. Look at the chart above. For all I know, this stock could jump 10% on the next trading day! Then I probably wouldn't be able to trade this stock because my stop would have to be so far away.

I usually opt for the aggressive entry if I can find a pattern suggesting a reversal on the hourly or 15 minute chart. And, if there is a hammer candlestick pattern, then I will buy on the day of the hammer instead of waiting to see if there is a higher low on the following day.

Why Are Identifying Swing Points Important?

They are important because they tell you when the balance of power has shifted when you are shorting rallies or buying pull backs. Think about it...

• Day One: A stock makes a high
• Day Two: A stock makes a higher high
• Day Three: A stock makes a higher high
• Day Four: A stock makes a higher high
• Day Five: A stock makes a lower high

[Note: It doesn't have to be exactly 5 days.]

What happened on the fifth day? The bulls were able to push the stock to new highs on day one through four but on the fifth day they failed to do this. This means that the buyers are getting weak and the balance of power is shifting (from buyers to sellers).

The above scenario formed a swing point high. The same thing happens when a stock forms a swing point low.

• Day One: A stock makes a low
• Day Two: A stock makes a lower low
• Day Three: A stock makes a lower low
• Day Four: A stock makes a lower low
• Day Five: A stock makes a higher low

What happened on day five? The bears were able to push the stock to new lows on day one through four but on the fifth day they failed to do this. The balance of power has shifted from sellers to buyers and a swing point low has developed.

I hope all of this isn't too confusing. Just remember this: swing trading is a game - nothing more, nothing less. Your opponents are other swing traders! Everyone is trying to get into a stock before the other traders do.

Get in too early and you will lose. Get in too late and you will lose.

It's challenging but this is what makes the game so fun to play!