A Trading Plan for New Swing Traders
If you are new to the markets, trading can be overwhelming.
Today we discuss a simple swing trading plan for beginners. The primary goal is to track the big money, so you can make swing trades with conviction.
Step number one is to understand who controls the price action of a stock. Institutions need to determine that there is a reason to buy or sell.
In professional trader terminology, this is called accumulation or distribution.
“Big money” moves the market. Sometimes it can be one large fund or it can be multiple players with the same idea. Either way, tracking their activity is simple. I say simple as opposed to fundamental analysis (Reading financial statements and interpreting cash flows). I am not implying trading is easy, I said tracking what they do is easy!
Generally speaking, big players want to accumulate a position for a longer term move. It takes weeks or months to build these big positions. Luckily for us there is a chart that lets us know exactly what they are doing and when it’s obvious for us to consider a new swing trade.
A monthly candlestick chart tells us if the big money is supporting higher prices or dumping new shares on the market creating lower prices. A candlestick chart is genius in its simplicity yet powerful if you have the discipline to take its reading as absolute.
A candlestick chart shows us the relationship between the high, low, open and close of a symbol during a specified period. In today’s lesson we will be looking at a monthly chart. In other words the high price, low price, first trade of the month and the last (open and close).
This tells us what the big money did over a longer time period. The big money is in the bigger charts and our job is locate opportunities when buyers or sellers a doing something obvious and then hop on their back.
Below we see two extreme examples of buying and selling pressure over a month.
A candle that is green is one that closed above the open. In other words the last trade of the moth was higher than the first trade of the month. When you see a large candle that is mostly green that tells us buyers were in charge for that period.
The opposite is true for a candle that is mostly red. The last trade was below the firs trade for that period. In this case the monthly time frame.
A Simple Swing Trading Plan
Most short-term traders make the mistake of reading the net change from the previous close. This is wrong for most trades because you want to know the buying or selling pressure now, in the most current window. You want to know the change from the open. You want to focus on red or green
That may sound confusing but here is why. The last price of a candle could be trading higher than the last price (of the previous candle) but it could be a giant red candle! This would tell us massive selling pressure is taking place right now. We want to be a buyer when the monthly candle is green, the more green the better.
Do not look for an entry unless this is the case. If you do you are buying against the big money.
How can we make this idea better? What if we can confirm the big money has been buying for longer than simply this month?! The longer the buying the bigger the commitment.
Here is what that looks like on the charts:
In this scenario, not only is this month strong (green) but the high from this month is higher than last month and the low is higher as well (indicating big money is supporting the stock).
Look for these two simple but powerful setups before you look for an entry signal and you will be stacking the odds in your favor.