Your swing trading entry strategy is the most important part of the trade. This is the one time when all of your trading capital is at risk. Once the stock goes in your favor you can then relax, manage your stops, and await a graceful exit.
This page explains the basic price pattern that is used to enter stocks and becoming familiar with it, you can try out more advanced strategies based on the specific pattern that you are trading.
With your entry strategy, the first thing that you want be able to do is identify swing points. What’s a swing point you ask? This is a pattern that consists of three candles.
Identifying reversals using swing points
For a swing point low:
- The first candle makes a low.
- The second candle makes a lower low.
- The third candle makes a higher low.
This third candle tells us that the sellers have gotten weak and the stock will likely reverse.
For our entry strategy, we are trying to find stocks that have pulled back and made a swing point low.
Let’s look at some example:
See how the pattern consists of a low (1), lower low (2), then a higher low (3)? This is a classic swing point low. Our entry strategy would be to enter this stock on the day of the third candle.
It is worth noting that swing points will result in a powerful reversal. However, a reversal will not happen without a swing point developing. Take the time to go though a few stock charts and look at the reversals that happened in the past so that you are able to quickly identify this crucial price pattern.
Consecutive price patterns
Ideally, we want to trade stocks that have consecutive down days prior to the swing point low developing. This is the best case scenario. Here is an example:
This is reversed on the short side. In this case, you want to look for consecutive up days prior to the swing point high developing.
When you are looking for swing points to develop, you always want to look to the left of the chart to see if the stock is at a support or resistance area on the chart. That will improve the reliability of this entry strategy.