How I Swing Trade
Lesson 1: How to spot good stock setups
By the end of this read you’ll be thinking, “It can’t really be that easy!” but believe it or not it is.
Trading isn’t that complicated: Buy low, sell high, protect your capital.
And remember, a stock’s price can only move in 3 directions:
- UP also know as an uptrend, price increases (see Kirk above)
- DOWN also know as a downtrend, price decreases (see Bones above)
- SIDEWAYS also known as consolidation, prices stays the same, i.e. within a price range (see Spock above)
Okay that much is obvious, but how do you know which stocks to invest in? Well that’s the easiest part. Stock are all around you. Let’s take this scenario:
You’re driving in your F-150, sipping your Frappuccino, on your way to Target to get some new Tupperware with your Spotify “Daily Drive” playlist cranking out your Sony stereo while your girlfriend is on her iPhone swiping through Instagram spotting a post by her favorite YouTube celeb doing a makeup tutorial with their new MAC eyeshadow which she then orders off Amazon.
Did you see all the stocks there? Let’s look at it again…
You’re driving in your F-150 ($F), sipping your Frappuccino ($SBUX), on your way to Target ($TGT) to get some new Tupperware ($TUP) with your Spotify ($SPOT) “Daily Drive” playlist cranking out your Sony ($SNE) stereo while your girlfriend is on her iPhone ($AAPL) swiping through Instagram ($FB) spotting a post by her favorite YouTube ($GOOG) celeb doing a makeup tutorial with their new MAC ($EL) eyeshadow which she then orders off Amazon ($AMZN).
The easiest way to find stocks is to look at the products you and everyone around you use everyday. You just have to look for them.
Now that we know what stocks to watch, I’ll go over how I read the charts to find the best time to buy them. I’m gonna go over all of this kinda backwards, but bear with me, by the end you’ll see why. I’ll be starting with the more sure fire setups that have broken out which are good for beginners/safer trades. Then I’ll show you how to get in even earlier to increase your gains. Finally, I’ll go over how to eye a good setup in the making which is riskier but maximizes the potential reward.
- NOTE: the follow charts are from Stockcharts.com, for info on how to setup your charts like this, refer to my previous post on Chart Settings. For the sake of this lesson, I’ve stripped down the overlays and indicators to only the ones we’re learning about.
If you don’t already use Stockchart.com please CLICK HERE to use my referral
Buying the 5/20 Crossover
“Its better to have fun at the party than get there first”
For beginners this is the best place to start. It’s easy to spot and less risky than the other entry points (notice I say less risky, not risk-free, ALL trading is inherently risky). The basis for this entry is based on Moving Averages:
- SIMPLE MOVING AVERAGE (SMA) — Average of price from a set range of trading days (in this example the range is 20 trading days, which is 4 weeks aka 1 month)
- EXPONENTIAL MOVING AVERAGE (EMA) — Average of price from a set range of trading days where the more recent days are more heavily weighted in the calculation (in this example the range is 5 trading days aka 1 week)
BUY SIGNAL: The 5 EMA crosses above the 20 SMA
When the 5 EMA crosses above the 20 SMA this is a bullish movement and as you can see the price continues it’s bullish movement in an uptrend. This is why the 5/20 Crossover is a BUY SIGNAL.
See what happens when price drops? The 5 falls back below the 20. But notice what happens when the 5 crosses back above the 20 on Dec 27th, price takes off and begins to run again.
Price Closes Above the 20
The next buy signal allows you to get in a littler earlier than the 5/20 Crossover, but with that comes added risk (see Peloton chart below). This time we’ll be looking at the relationship between Price and the 20 SMA.
BUY SIGNAL: Price closes above the 20 SMA
We refer to this as “Price Breaking Out above the 20.”
Now this doesn’t always happen before the 5/20 Crossover, sometimes it’s on the same day depending how fast the stock moves or if there’s lots of activity in the After Hours or Premarket trading. But if you do see price closing above the 20, then there’s a good chance the 5/20 Crossover is coming soon.
BUT! I mentioned this entry signal is riskier than the 5/20 Crossover, and here we can see why:
While price closing above the 20 is a bullish move it’s not a guarantee of an uptrend. So it’s sometimes best to take a small position on this signal and then ADD to your position when the 5/20 Crossover confirms the trend.
Buying the Bottom Upturn
This last method is the riskiest but also potentially gets you in at the best price. For this signal, we’ll be looking at the MACD Histogram.
BUY SIGNAL: When the price is bottoming out but then the MACD Histogram begins to turn upward
As you can see, price was dropping but then found a new support line and began to move sideways then back upward. Ideally, we want 4 bars of sideways movement to confirm the bottom has truly found support, but depending how the stock has moved in the past we can determine if bounces back quickly or takes more time. When the MACD Histogram start to move back up toward the zero line we know that price might be moving back into an uptrend. I say might because it’s not always the case, as you can see below:
Now price is still trading within the box, but I’ll get more into that when I cover finding Support and Resistance in the next post.
One other thing to note, is that when the MACD Histogram crossover over from the negative zone into the positive zone that’s when the 5/20 Crossover happens. Take a look…
Final Notes
Pretty simple, right?! And now do you see why I decided to teach this backwards? I go from safest entries to the riskier ones. Now in practice, once you get good at finding these setups, you would ideally get in early when the MACD turns upward, add to the position when the price closes above the 20, and add some more when the 5/20 Crossover happens. This helps you build a solid position as the trade moves more in your favor.
Now usually you’ll see charts where the bars (or candles if you prefer that style) are only two colors: Red when the price is down. And Green or Black when the the price is up. You’ll notice that in all the above charts my bars are three colors: either RED, BLUE, or GREEN. This is what the Elder Impulse System does to help identify which way price is trending. If it’s Red, it’s probably still in a downtrend. Blue is a sort of limbo state where it’s uncertain. And Green is an uptrend. This is also helpful in deciding whether the setup is good or not, because for me personally, I’d rather know if the trend is up or down rather than if today’s price is up or down.
One additional indicator I use to help me decide whether to take the trade or not is called the TMO or True Momentum Oscillator which I wrote about before HERE. This just helps confirm the direction of the trade.
Gerald Peters and The Money Flow
Now this style of swing trading that I do I learned from Gerald Peters which he calls The Money Flow. I highly recommend following him on all the social media platforms @fullauto11 on both Instagram and Twitter as well as YouTube where he does LIVE Sunday morning lessons of trading The Money Flow system. He has a newsletter where he posts all of his trades which you can find at thepetersreport.com You should also purchase his eBook, “The Money Flow Trading System” which you get directly from him for $47 (info usually on page 8 of the newsletter) or you can purchase the older edition on Amazon for $25.
I’ve added some extra indicators to build upon the system, like the TMO and Elder Impulse bars, but for the most part it’s mainly the same.
Click here for Lesson 2 where I’ll cover finding Support and Resistance levels and using them to set Stop Losses and find your price Targets.
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