Swing Trade Setups Part 3: Support and trend-lines

 [ This is the 3rd article in a series, describing how I trade.  You can start with Part 1 here ]

I love drawing support and trend-lines.  With enough practice, they become very easy to do and you will develop a 6th sense of whether you are making the right choices with your trend and support analysis.

One point I will emphasize though…do not try to “fit” a trend or support line into a chart to make your trade setup “work”.  Make sure you aren’t trying to convince yourself that a trade looks worth taking.  There are so many trading opportunities every day, why try to fit a square peg in a round hole to convince yourself to take a swing trade.  Hell, if you are going to do that, just buy the damn stock and throw your analysis out the window.  In that case, you were just using them as a crutch…a reason to get in.

I speak from experience though, don’t get me wrong.  I’ve done this.  Many, many times.  And I usually learned the hard way that it was the wrong thing to do.  You are only cheating yourself out of money.  Don’t trade for ego.  So do yourself a favor: Draw proper lines and don’t take the trade if they don’t aren’t screaming at you to get in!

Ok, I’m off my soapbox.

Support and Trendlines

By support lines, I mean horizontal lines on a chart.  By trend-lines, I am referring to angled lines on a chart that follow a upward or downward trend.

So with our friend AAPL, here is the first chart with support and trend-lines that I have drawn:

The two blue lines are areas that I consider to be strong support areas.  They match up with very strong, long-term trends.  This chart is more of a close-up (6 months of price data) of a two-year chart.  These two blue lines, the horizontal and up-sloping line, are from the 2 year chart, which I will show you later.  In any case, look at the two circled areas in green.  Here we have recent price history where the lines were touched.  The circle on the left was a touch, and then the price moved higher.  The one on the right is where we are today, right when I took this trade.  Look at the long shadow, the long wick that came down and hit where the two blue lines converged and then moved back up, closing higher than the open.  There was some strong buying pressure at that right-hand circle.

I have a second horizontal support line that I drew in green.  You can see that shortly after the bounce off the support where the left-hand circle occurred, the price was in a trading range, with small candles for almost a month.  Then the big move up occurred.  That was the Phase 1 move up in the green arrow from before, remember?  This green line therefore become an area of support if the prices ever come back down (which we know they do) later.

For AAPL, let’s zoom out to the 2 year chart so you can see the bigger picture:

Look at that upward sloping trend-line now!  This is a significant, powerful trend-line.  AAPL has been moving up along this line for 2 years.  It was touched twice before on the left, and has now come back to touch it again where we are today (and where I took this trade).

The price where I took this trade is at a wonderful point.  We have 2 different support and trend lines, intersecting at the exact same point.  Odds are much higher for a bounce when that occurs!

Now let’s look at ON and see what we can see as far as potential trendlines…

Do you see similarities with AAPL?  You’re damn right!  Two significant lines, both intersecting where we are today.  Look at how the upward sloping trend-line was touched 4 times.  The horizontal line was touched 3 times.  Each time these lines were touched, buyers stepped in and bid the prices higher.  Beautiful!

If the point we were somewhere along that recent downtrend (remember the RED arrows from Step 1), I would not take the trade, hoping for a reversal.  The price at that point for both AAPL and ON were in no-man’s-land.  It’s too risky.  Make sure your potential swing trade is at a point where there is significant support and a higher than average chance of reversing higher!

Next up: Using Candlestick Patterns

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Swing Trade Setups Part 4: Candlesticks

The Greedy Goblin

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