Swing Trading Using Japanese Candlesticks

Swing Trading Using Japanese Candlesticks

Swing trading can be a very profitable method of trading. It is a style that capitalizes on the concept that price does not usually move too far in one direc­tion before pausing or pulling back. Swing traders can make substantial gains during those short-term moves. They then exit before price turns against them robbing them of their profits. This type of trade is generally held from two to six days. Some swing trades may be held longer, but usually not for more than a couple of weeks.

This method of trading has become increasingly popular over the past few years. It is not as demanding as day trading, and yet not as passive as a buy- and-hold strategy. The savvy swing trader has the ability to adapt quickly to changing market environments. Swing trading can be quite profitable in up or down trends.

Swings within a Trend

Intermethate-term trends generally last from several weeks to a few months. Within the trend, there may be several shorter-term price swings. A typical swing may consist of a distance the equivalent of about four to five average size bars for that particular stock. Every stock is different. The swings may vary dramatically from one stock to another.

You can enhance your swing trading skills by paying attention to overall market conditions. In a choppy or bearish market, the swings up may be shorter. In a bullish market, the moves up may be more significant as the broad market rallies. Additionally, if a stock is in a strong sector, price swings may last longer, and the dips to support may be shallower.

Sometimes stocks will trend upward making very recognizable price swings. Other times the swings are not as orderly. It takes practice to learn to trade the swings with precision. However, those who acquire the skill are usually re­warded with a steady stream of good trading opportunities.

Bearish reversal candlestick patterns often form at the end of an uptrend. But they also are quite common at the end of the shorter-term swings within the trend. These reversal patterns can be very helpful in assisting with exiting long positions on swing trades. Conversely, bullish reversal patterns can be used to fine-tune an exit on a short position.

Trading the Swings

After a swing up, the decline that follows is often referred to as a pullback, or a dip, to support. Pullbacks are very common occurrences caused primarily by profit taking by swing traders. When price swings up, it moves away from the short-term Moving Averages. The 10-period and 20-period Moving Averages are popular short-term indicators. Price then turns down, often finding support at one of those short-term Moving Averages, but sometimes declining farther.

The pullbacks are often on low or declining volume. This is an indication of profit taking by short-term traders versus a more aggressive sell-off by a large number of traders and investors. These swings, followed by pullbacks, may give the appearance of a stair-step like motion in the trend.

The inverse can often be seen on swings to the downside when a stock is falling. However, it is not unusual to see downside declines of more magnitude than upside swings. Panic sets in and traders rush to eliminate pain. A wise trader once observed that, “The bull walks up the stairway, but the bear jumps out the window.”

A challenge with holding through a pullback in a trend is that you cannot be certain how deep the decline will be. If price does not stop falling at the near- term support levels, a trader could watch much, or all, of the profits from the swing up disappear. Therefore, many swing traders attempt to sell the high of the swing and buy on the dips near a support level. Because of the short-term nature of this type of trade, traders can gain an edge by learning the warning signals that so often occur at the end of a price swing. Learning how to set price targets, and using protective sell stops, can also help traders avoid giving back profits.