Chapter 6

Sample Swing Charting Setups

This chapter showcases some very helpful charts. They're all about swing trading setups. These setups are actual historical trades and all of them can be back-tested.

Keep in mind that some of the swing levels hit in pre-market, and therefore they were skipped. You can't see pre-market data on a daily candlestick chart. This is one more reason why it's critical that you stay on top of your swing levels every day and are watching to see if levels hit in pre-market. I assure you that this is one of the top 10 reasons why non-formally trained traders misuse this system.

In Part 4, I provide more charts to help mold a solid understanding of how this system works. In Part 3, however, you only need to focus on the basics: (1) the 5 percent rule and (2) the 10-day hold rule. Basically, you need to focus on swing setups exclusively.

You may notice that several of the chart examples date back to 2012. Their age makes absolutely no difference. The rules and procedures that applied then apply just as much to this day. I purposefully chose older chart setups in order to prove that point.

Looking over Figure 6.1, you can see that the 151.97 daily level (resistance) held for 10 days, making it your first-tier swing, and you can see that you have several higher resistances all within 5 percent of it. Note that the current price on September 12, 2012, opens just under the 151.97 first-tier swing level. This price is the first of several swing levels above it, but 151.97 is your first-tier swing on this day.

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Figure 6.1 Daily Levels

Depending on your capital buying power and your degree of experience, it may or may not be wise for you to start off at tier #1 (151.97). For now you just need to grasp the process. For convenience we'll assume you can trade all swing levels, including the risky first tier.

In this example you have three other resistance levels within $7.50 (or within 5%) of the #1—$151.97 (08/27/12) level. They are:

  1. #2: 154.44 (3/15/12)
  2. #3: 157.56 (3/26/12)
  3. #4: 159.01 (4/03/12)

Note that all the swing levels (daily levels) are more than $1 apart. I chose this particular setup because it's fairly easy to see all of them in one area. Such is not always the case. You can have swing levels that are months apart. A great example is the #5 swing level way back in 2011. All that matters is they're real daily levels and fit my criteria for trading.

Note also that they're in numerical order. In this case the numbers are ascending because the price is heading upward to resistance.

You have four total swing levels that can be traded, and gain the full profit target of $2.00 on any one level. If you happen to accumulate all four levels, then you have a 400-share position and a chance to profit $800 when the average price pulls back $2.

The 5 Percent Bubble

At this point you might want to know: “What about the levels outside or above the final swing tier in this 5 percent range?”

That is a good question. The answer is you can trade them as well. But what if you don't have the capital to absorb them? That's quite a quandary!

Later I show you several examples of what to do when the price runs past the 5 percent tier. For now, you should focus on two things. The first thing you read in Chapter 5, and I just implied it again, is you will not be trading the first tier in any swing trade setup until you master the system. Second, while you're still learning the system, but you know the price can easily break through all levels, you need not assume the price will retrace for your $2 profit, not before the next swing tier outside the 5 percent bubble. And that's an example of how hard it is to explain, only here on paper, which levels work best for the individual trader.

Another hard lesson to teach on paper: be prepared to be holding your swing position while in the red, which could be a day or could be a couple weeks. Being initially in the red is a normal process of day trading this system. Again, a classic error in the average amateur trading mindset is they think every trade should immediately go into the green shortly after their first entry. That couldn't be further from reality.

For the sake of helping you learn the basics, I've listed those price levels outside the 5 percent bubble (5% range). I would show #5 in red because that's the red-zone tier—outside of 5 percent range.

I'm showing the red zone to prove the point that you'll always have higher levels to trade outside of 5 percent. If you didn't, this system would be bogus. On all swing trade levels, you certainly do run the risk of running far past the 5 percent. In this case you have several swing price levels past 159.01.

Keep this in mind: the 5 percent swing range is after the price is already way overbought. Therefore, it's highly unlikely that the price will run past the 5 percent range before it reverses back for your $1.50 to $2.00 profit. And even if that happens, I have rules and strategies to adjust your swing trade so it ultimately results in a profit.

Stay tuned. And hang in there. I know this is rough, like doing a 500-piece jigsaw puzzle in your head without any pieces in your hands. I warned you about the map not being the road.

The red tier is the first swing level outside the 5 percent bubble:

  1. #8: 164.75 (4/19/12)
  2. #7: 163.50 (5/03/12)
  3. #6: 161.89 (4/13/12)
  4. #5: 160.12 (7/19/11)

When you take in both of the charts (in Figures 6.1 and 6.2), the first thing to notice is that each is a daily chart of the stock CRM. This is SalesForce.com before the split. Each is the same time frame and price levels, except one shows the daily levels (Figure 6.1) and the other shows the entry points for swing trades (Figure 6.2).

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Figure 6.2 Entry Points for Swing Trades

Beginning with Figure 6.2, focus on the area that reads “current price on 09/12/12, opened at 151.09.” I determined my swing setups on that date. Leading up to that day, I had acquired several previous daily levels. All of them are listed on both charts. I found all those levels according to the guidelines I've previously shown you.

As soon as I knew all my daily levels, I could do some simple math. My first entry was off #1, the 151.97 daily level that formed back on 08/27/12. I noted that this price level hadn't been broken in less than 10 days. I also noticed that I had three other daily levels all within 5 percent of my 151.97 price level, and I had a few more just outside my 5 percent range. That made this a multi-tier swing trade, meaning I had more than one swing level within 5 percent.

Most swing setups will in fact have multi-tier possibilities. But typically, the only time you'll have one single tier is when the swing level is the all-time high, no tiers after that.

Even though I've instructed you to not trade a first-tier swing price level, it's critical that you know where it is and whether it's still in play, meaning not yet reversed for a $2 profit.

Once I establish my first-tier swing level, I average into each and every level above it. But that's if and only if I'm prepared to enter at every single swing level within the 5 percent bubble, and even outside if it hits.

When it comes to the people I'm training hands-on, funding and experience are the key factors here. I initially have the low-funded trainees only trade the final tier, and I do the same with the trainees who are struggling with mastery. The reading of this manual is a limited, very one-dimensional encounter with my training technique. Just make sure you know this:

Swing Trade Setups

I'm finished doling out cautionary advice for the moment. Now I'll show you this setup. On September 12, 2012, I placed a first 100-share short trade at 152.97. It closed at 152.71, slightly in the green (26 cents). It was not more than 50 percent of my profit target of $2.00, so I held overnight (recall the 50% profit-taking rule that I discussed in Chapter 5).

On September 13, 2012, the price ran toward the next higher daily levels, before retracing to my $2.00 profit target price of 150.97. When it hit the next daily level of 154.44 and $1.00 past that level, I entered my second 100-share swing trade at 155.44. Once again the price ran against me and closed in the red, so I held 200 shares overnight.

On September 14, 2012, the price reached an intra-day high of 161.90 during the first hour of trading. So I was able to grab my third and fourth swing trade off the 157.56 and 159.01 daily levels, $1.00 past. Note that these two levels were both within the 5 percent range. But the price reached the 160.12 daily level and went $1.00 past that level, so I entered my fifth 100-share swing trade at 161.12. This level placed my entry outside of the 5 percent range, meaning I would have to cut my profit limit in half. Instead of a $2.00 gain (from the average price), I would now look to exit all 500 shares at a $1.00 average profit.

This constitutes an addition to the 50 percent profit rule: if a swing runs past the 5 percent range, then you only take 50 percent of your profit, as I did in this case when I took $1.00.

My average on all five trades (500 shares) was $157.62. So the thing for me to do was to hold this until it went down to 156.62, or else short for another 100 shares if it continued up to the next daily level on May 13, 2012, at 161.89, entering the sixth position at 162.89.

Because this price run was extremely overbought, and my swing entry levels were each real price levels drawn from the daily chart, the price ultimately ran back down. It took five trading sessions to swing this trade into the green. A couple of days after my last entry, on September 18, 2012, I exited all 500 shares when it hit 156.62; that was a $500 profit.

You need 80K in buying capital to make that happen. That's 500 shares times the average cost of 157.62. If you had only 25K, then you would have only been able to hold 200 shares overnight, with little or no margin. You would have waited for the highest price in the 5 percent range to hit. You would have entered 100 shares at $160.01 on September 12, 2012, off the #4 swing level of 159.01 on April 2, 2012. You would have held it for a few hours that day to gain a $2.00 profit, or a $200 share profit when it hit at $158.01.

This is a great example of how having limited capital isn't so bad. You simply wait for the strongest swing levels to hit—get in last minute on multi-tier swings. Just keep in mind that if this is your strategy, you need to be aware that if all the previous swing levels (in this case lower resistance levels) hit and then reversed for $2 profit, then your 159.01 fourth-tier swing would have become first tier. Beware! This will make more sense later.

Figures 6.3 and 6.4 show setups for IBM. Again I have a multi-tier setup, or short position. But in these examples I show different options for which levels to enter, depending on what you have for trading capital. These setups are more involved. They're a great example of how certain older swing levels can get trumped by newly forming ones.

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Figure 6.3 IBM Setup

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Figure 6.4 IBM 400-Share Swing Setup

Notice in Figure 6.4 that the day I entered the first swing short was on September 11, 2012, and the opening price that day was 200.55.

Notice the five daily resistance levels:

  1. #1: 202.00 (8/17/12)
  2. #2: 207.52 (3/16/12)*—drops off
  3. #3: 207.99 (5/03/12)*
  4. #4: 208.93 (5/1/12)*
  5. #5: 210.69 (9/13/12)

You might ask: “Once you have your levels to swing trade, which ones should you trade first?” The four levels are within 5 percent of each other, from #1 to #5 (202.00–210.69). That means they all can be traded. But what if this was your trade? You might not be able to afford all the levels. If you could afford to purchase all four, then you'd start with the first at 202.00.

Figure 6.4 represents how I traded a 400-share swing setup. You should study it with the assumption that you can afford up to 400 shares of this $200 stock. After this example I show other options for when you have limited capital, like trading with 50K.

I placed my first swing short on September 11, 2012, when the price hit 203.00. It never retraced for a $2.00 profit, so I held overnight. The next entry wasn't for about two weeks, when it broke the 207.99 daily level (new level) on October 1, 2012. That was when I entered my second swing short at 208.99. Yes, you read that right: I said two weeks!

Let this be a reminder that some first-tier swings can take weeks before pullback. This is one more reason why if you're trading with limited capital, you should not touch a first-tier swing entry. You run the risk of your minimal funding being tied up for days, if not weeks.

Now back to the trade setup. On the same day (10/1/12), it happened to also break the next two levels. So I entered at 209.93 and 211.69.

All I needed to do now was take my average price on 400 shares and sell when it retraced $2.00 on the average price. So I waited for $206.40 to hit and it did a week later, on October 10, 2012.

In summary, this trade from start to finish took about one month to make an $800 profit. This is fine when you have enough capital to trade other stocks while waiting this one out.

Figure 6.5 exemplifies how to swing trade when you have limited capital.

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Figure 6.5 Swing Trade with Limited Capital

This chart shows my first trade was off the 207.99 daily level (second-tier swing price level), and not the 202.00 first-tier swing level.

“Why is this?” you might ask. Because in the Figure 6.4 example, all four levels were within 5 percent, so I went with the first level at 202.00 because I had enough capital to average into all four.

But never forget that without high funds or much experience, you want to start your entry with the second, third, fourth, or final level—in accordance with what you have. If you can only afford 100 shares, then you wait for the 210.69 level to hit. Or if you have enough for 300 shares, then you trade as Figure 6.5 suggests. Either way, you make a profit.

Figures 6.6 and 6.7 show setups for BIDU. Again I have a multi-tier setup within a 5 percent bubble. This time it's a long trade. This setup also shows how I traded off the pre-market levels (recall the entry swing rule).

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Figure 6.6 BIDU Setup

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Figure 6.7 BIDU Long Entries

Notice the current day is October 8, 2012, and the price opened at 113.08. At that point I had three daily levels that could be swing traded. Note the huge gap-down overnight. I was waiting for the #1 daily level to swing trade, but it never broke until the gap-down, so the price finally hit in pre-market.

Below are the three daily price levels that I had at the time of the gap-down. But at no point was the entry prior to the gap-down.

  1. 110.06
  2. 107.50
  3. 106.60

Note that 107.50 and 106.60 are less than $1.00 apart. This is allowed when the price of the stock is so close to the minimum of $100, but I never allow less than 75 cents apart.

On the next day, October 9, 2012, the price opened at 109.04, but the price hit a low of 108.82 in pre-market. According to the entry swing rules, I needed to enter my first swing trade as an intra-day trade, off the pre-market level. In this case, the pre-market low was 108.82, so I entered first long swing entry trade at 108.32 (50 cents past 108.32), and this was soon after the bell rang.

Note that I entered the initial time it hit 108.32 on October 9, 2012. The price continued to drop on the same day, so I entered 50 cents past the next two swing levels (107.50 and 106.60).

In Figure 6.7, I blew up the area showing the profit. You'll notice that I had to hold all 300 shares overnight. The price on October 10, 2012, retraced $1.50, on average. I profited $450 on this trade.

Figure 6.8 is a snapshot of the log sheet in my swing trading room. This is how I log my swing trades. You should use the same layout and information when you practice.

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Figure 6.8 Log Sheet

You've seen the basic framework of my swing trading strategy. You have a better understanding of the rules and procedures for both my intra-day and swing trading methodologies. Now you're ready to tackle the fusion of both: Fusion Trading.

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