The trading style of “swing trading”, in which equities are held from 2 days for as long as several weeks, has been popular with active traders for many years. In volatile markets, entering and exiting trades thoughtfully, using specific technical cup breakout patterns on high volume, can be an effective trading strategy.
Swing Trading with 15-Day, 15-Minute Candlestick Charts
The primary chart being used for swing trading stocks (and exchange-traded funds) is a fifteen-day, fifteen-minute candlestick chart, as show in Figure 1 [Canadian Natural Resources Ltd. (CNQ)]. This is an effective time interval to use because it does a good job of showing “cup” patterns in a visually easy-to-understand format. A cup pattern looks like the letter “U”, and is observed on this type of chart by looking for the top price that the stock has traded during the first few days on the chart’s price action. In this instance, the left side of the cup occurs on April 12th at 33.2, and the right side of the cup at the same price, on April 26th.
Entering swing trades can be done by waiting for the price to take out new highs above previous resistance, and by waiting until .35 (thirty-five cents or so) above the prior high has been reached. This helps filter out false breakouts, in which price tests and fails to break over prior highs. By waiting until price momentum has re-established itself by getting new buyers above prior resistance levels, a swing trade can be initiated that can potentially continue moving up without major draw downs or other problematic price-action behavior.
Once in a swing trade, a maximum stop loss of no more than $1.50 should be used, for instruments priced $20-$120. This allows for a modest pullback in an uptrend continuation, without unnecessarily risking capital on larger-size stop losses.
How to Use Volume to Confirm Swing Trading Entries
If a cup pattern is less certain, for example following choppy consolidations, then it’s often wise to wait until new 15-day highs in volume are established, in addition to new 15-day high price breakouts, before entering a new swing trade.
In Figure 2 [Range Resources Corp. (RRC)], a new 15-day high-volume signal is observed on May 26th, in which both price and volume take out new highs. By waiting for days in which highest-volume patterns are observed, it’s often a good time to enter new swing trades on new cup pattern price high breakouts, for swing trading entries.
Conversely, if volume is not in the process of taking out new 15-day highs at the time of the swing trading entry, the trader should be more cautious and consider delaying the trade entry, or trading smaller size, as a countermeasure against a potential false breakout signal. Using price and volume together to confirm swing trading entries (and to manage exits, following low-volume days), can help potentially improve entry and exit timing.
Managing Exits: Technical Traps to Look For
We’ve mentioned that using a 1.5-point maximum hard stop is a good rule of thumb for swing trades. Other reasons for exiting (or scaling out of) swing trades include:
a) New 2-day low breakdown, for open long positions: If you’re in a swing trade long, the loss of the prior day’s and current days’ low is a good reason to exit a trade.
b) Consolidation of at least 2-3 days without significant new highs: if buyers and sellers are battling it out and a consolidation occurs, it’s often wise to tighten up a trailing stop and exit the trade early, to avoid tying up trading capital in non-performing swing trade positions.
c) Lighter volume: if volume starts to get at least 20-30% less day-over-day in an open swing trade, and there’s no favorable price action improvement to the upside (for longs), then the lighter volume should serve as a warning signal to have the trader tighten in a trailing stop to exit the trade.
By combining volume with cups on 15-day charts, astute swing traders can easily spot volatile breakouts and retracements, to help navigate swing trading successfully.
Ken Calhoun is a trading professional who has traded millions of dollars of equities since the 1990s, and is the producer of multiple award-winning trading courses and video-based training systems for active traders. He is a UCLA alumnus and is the founder of DaytradingUniversity.com, a popular online educational site for active traders.