Technical Analysis for Swing Trading

Swing trading is a perfect match for option trading, because the time periods involved are short (2-10 days), and this means that the effects of time decay on an option contract are minimised. As with any trading technicque, it is possible to over analyse, and this leads to bad trading or no trading! Here are the details that you need to know about technical analysis for swing trading, in a step by step format. Stick to these methods, and it won't be long before you are swing trading like a pro, and making oodles of money when doing it with options!

Trend analysis

Your first step is to analyse the trends of both the market in general, and the particular stock that you are interested in. Eyeball the chart so that you can get a feel for what is going on, and then use some objective indicators so that you can be sure of what is happening. Click on this link to find out how.

TOP TIP: You can analyse up to 10 stocks per day by INO's Trend Analysis.
Enter your symbol, and they give you the trend, with a measure from 1-100 of its strength. Or, go to INO's Portfolio Page. Enter up to 10 stocks here, and get a daily email with trends. Wanting to find more stocks? INO's 'Top 50 Trending Stocks'
is free for 10 days, and then $8.95 per month. I use it, and regularly find excellent leads.)

Pivot Point

(variously called Swing Point or Trader's Action Zone (TAZ))

When the stock is trading in a positive trend (i.e. the 10 ma is ABOVE the 30 ema), the stock will oscillate within a band above the 10 ma as it climbs. When it pulls back from a high, and crosses the 10 ma and enters the area between the two lines, it is approaching a pivot point, or has entered a “Trader's Action Zone” (TAZ). It is in this place that you look for potential trades, because it is from here that it turns up into a new oscillation. This move up can last for 3-10 days before pulling back again.

When the stock is trading in a negative trend (i.e. the 10 ma is BELOW the 30 ema), the stock will oscillate within a band below the 10 ma as it drops. In this case, look for pull backs into the space between the 10 ma and the 30 ema, to find setups for short trades or for buying puts.


Once your stock price has entered the TAZ or has approached a pivot point, Candlesticks are the easiest indicators to use for setting up trades. In their simplest form, you look for low or bottom points (within positive trend) and high or peak points within negative trend.

For a low or bottom point , look for a candle that makes a low, a second candle that makes a lower low, and a third candle that makes a higher low. This third candle tells us that the buyers are starting to get the edge and the stock will likely reverse into an upward oscillation.

For a high or peak point, the first candle makes a high, the second candle makes a higher high, and the third candle makes a lower high. This third candle tells us that the buyers have gotten weak and the stock will likely reverse into a downward oscillation.

Here are pictures of the candles to help you better understand swing points:

Swing points

There are other candlestick patterns that are helpful, such as dojis, hammers and shooting stars.  I have put up a few pages on candlesticks and common candlestick patterns, some with video presentations. My advice: learn the essential patterns but don't get bogged down in memorising myriads of patterns. Keep it simple!

Support and Resistance Lines

You do need to check that your stock is not running into major resistance (on its way up) or support (on its way down). If either of these is coming up, you need to check that your stock will have enough space to run in order to give you some profits.

The problem with support and resistance is that there are lots of complicated patterns and models to learn (cups, heads and shoulders, wedges, Elliot waves, Fibonacci etc. etc.), and in the end it is largely subjective anyway - you start to see what you want to see, or you end up in analysis paralysis, and make no trades. Again, Keep it simple!

The best thing you can do is to go to Stock Consultants. You can enter up to 10 stock symbols every day for free, and you get this great page full of information. Amongst all the info, you will see the potential for upside or downside trades, and target prices. However, the stuff you will be looking for is near the bottom - for both up trends and down trends, there will be a list of key support and resistance levels, and the type and strength of those areas. You really only need to be concerned with “type triple” (which means it has hit that area three or more times), or strength 8 and above. Best of all, it is FREE!

Set up an Entry, Profit Target and Stop-loss

This can get a little tricky, and it gets worse if you get greedy or expect too much.

  • Entry - as soon as you have determined a swing starting to move (from your candlestick patterns), buy at market or a little under. If it is a genuine swing, it will move fast, so don't set your entry too low otherwise you will not be able to get into the trade.
  • Stop Loss - IMMEDIATELY set a stop loss, so that your trade is protected
  • Profit Target - look for a realistic profit target, and don't get greedy or over hopeful. Some profit is better than making lots of losses waiting for the Big One.

My favourite way to set a primary profit target is to impose Bollinger bands on my stock chart. If your stock is in an uptrend, and has just started a swing out of the TAZ, then the swing usually continues up until the price touches the upper band. Similarly, if the stock is in a downtrend, look for the stock to swing out of the TAZ down to the lower Bollinger band. If the stock is in a strong uptrend or downtrend, the price will sometimes ride the Bollinger band for even further profits! However, set your primary exit for the first touch of the band.

Another way is to impose Fibonacci lines on your chart, and look for an exit when the stock hits the 50% retracement, or one of the other retracements.

One swing trading website recommends setting a standard 7% profit target, and a 4% stop loss. I am cautious about setting such rigid targets, because the market is too dynamic.

You can set up a trailing stop, which can be done easily with most online broker software. As the stock moves up, so will your option price, and you can set the trailing to stop to lag 4-5% from the high, so that when the stock dips down, you can take your profit before it goes any further.

NOTE: It is always best to take some good profit early rather than try to squeeze every drop of profit out and run the risk of your stock pulling back and killing your investment. It sometimes happens that the stock will continue riding the trend wave, but don't kick yourself if you got out early. Be happy with the profit you have taken and move on to the next trade.

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