Swing Trading Tips: Top Strategies for Technical Analysis

Updated August 5, 2020
posted on 06-07-2019

We sure have come a long way since our first trading lesson!

I'd like to thank you for giving me the opportunity to teach you a bit more about my swing trading methodologies and the technical analysis I use to practice it. After I recap Lessons 1 through 4, I will provide you with a final lesson that should prove to be the most comprehensive and valuable yet -- The 11 Commandments Of Swing Trading.

A Look Back at Our Previous Trading Lessons

In my first lesson --Start Swing Trading Today -- I introduced you to the relationship between swing trading and technical analysis.

In Lesson #2 -- How Swing Traders Harness the Power of Trendlines -- I showed you that although there are many, many tools in the technician's toolbox, the simple trendline is still one of the most powerful.

In Lesson #3 -- Swing Trading Support & Resistance Secrets -- I showed you how you can use support and resistance to earn substantial profits. 

In Lesson #4 -- How to Use Candlesticks for Successful Swing Trading -- I explored another aspect of technical analysis by showing you how I use candlesticks in short-term trading. 

The 11 Commandments of Swing Trading

In today's final lesson, my goal is to provide you with an in-depth look at my trading strategy, tactics, principles and attitudes. By studying and incorporating them into your existing market framework, they should also help you execute your own winning swing trades.

1. Always align your trade with the overall direction of the market.

The overall direction of the market is best measured by the S&P 500.  Whenever I am discussing trades and trends, I begin with the market's primary and intermediate trends as measured by the S&P 500.

These trends provide the context in which every trader must make short-term trading decisions. If you focus only on the short term, even if your trade is successful for a limited time period, the larger trends are apt to reassert themselves. At best, your profit potential will be limited. As such, you need to identify the longer-term trends to make sure you go with the flow and not against it.

Over the years, I've observed that "surprises" such as news announcements, analyst upgrades/ downgrades and earnings hits/misses almost always occur in the direction of the larger trends. Traders should always be cognizant of where the S&P stands in relation to its longer-period moving averages, such as the 40-, 30- and 10-week. Below I've presented you with a historical chart of the S&P 500.

Note how except for very brief periods of time, the long-term trend (as measured by the 30- and 40-week moving averages) and the intermediate trend (as measured by the 10-week moving average) remains a downward one.

2. Long Strength and Short Weakness

Once you know the overall trend, do not fight the tape. Look for long trades during periods of bullishness. Find appropriate short trades during periods of bearishness

Let's assume for a moment that the bear is on the prowl. The 40- and 10-week moving averages are both sloping downward and the S&P is beneath both. In this scenario, you should always look for stocks to go short, NOT to go long.


When possible incorporate Price Relative to the S&P 500 ($SPX) into your chart analysis. This indicator will tell you how the individual stock is performing in relation to the overall market. During bear markets you should seek out stocks whose relative strength line is trending downward in relation to the S&P. Do the opposite during bull markets.

3. Trade in Harmony

Sure, we've all heard the cliché- "the trend is your friend." But which trend are people referring to? Use moving averages to be in tune with both the short- and intermediate-term trends, even through as a swing trader you are only trading for the short term.

Many short-term traders focus their technical analysis exclusively on the short-term chart. However, this type of technical analysis will always end up being partial or limited because these traders can't see the big picture.

On the other hand, you should not focus exclusively on the primary trend when swing trading. Even in a bear market, there are periods where the intermediate trend turns positive and stocks soar. These bear market rallies can be enormously profitable. Fueled by short-covering, the S&P 500 and other major averages can climb 20% or more in a period of just several weeks. Meanwhile, volatile stocks with high "betas" can move much, much more than this.

Even though you are a short-term trader, it is vital to know when the intermediate-term trend is changing and a countertrend rally is taking hold.

4. Avoid the Short-Term Chart 

Be sure to synthesize the messages that the weekly, daily and even hourly charts are telling you.

Use your telescope as well as your microscope when you look at charts. Too small a look-back period -- using the microscope only -- can be deceptive and costly.

My first step when analyzing a stock is to look at a two-year weekly chart. I examine the shares in relation to a long-term moving average and determine the overall trend. This weekly chart is ideal for examining the big picture.

Next, I focus on the 6-month daily chart. Here, I can see finer details that the weekly chart obscures. I use much shorter-term moving averages to ascertain the stock's short-term trend.

Finally, I often hone in on the hourly chart to discern the prevailing trend over the last couple of weeks. Again, moving averages are extremely helpful here.

My final step is to synthesize all of this analysis. Is the stock telling me a clear, relatively unambiguous story? Are the shares breaking out from resistance or breaking down from support with confirmation from volume and other indicators such as RSI? Is this story sufficiently similar in all three time frames? Have I interpreted the story early enough so that I can go short or long with solid profit potential and minimal risk?

Not all stocks communicate clearly. In fact, some remain in extended periods of sideways consolidation. A symmetrical triangle formation, for instance, is almost impossible to predict and trade. Similarly, an MACD that gives signal after signal in a short period of time is a totally unreliable indicator.

5. Enter the Trade Near the Beginning 

It's never too late to hop on the elevator. If the market is headed from the 95th floor down to the 78th, you can still profitability go short on floor 83. But the quicker you recognize a trend has begun, the more profitable your trade will be and the less risk you will assume.

The earlier you pick up on the change in trend, the less risk you will take and the greater your profits will be. The most important step here is to pay close attention to the overall market averages. When they are overbought or oversold, they are usually prone to reversal.

Researchers and analysts have developed a variety of indicators to detect when the broad market is prone to a reversal. Some of these include the McClellan Oscillator, the Arms Index, the Volatility Index and the Put/Call Ratio. When the market tests a major zone of support and resistance it is very useful to look at new highs and new lows and the advance/decline line.

Most "industrial," or non-resource (papers, metals, oil, gold) stocks are highly correlated with the direction of the overall market. Therefore, when the market turns they are likely to turn as well. Candlesticks and momentum indicators such as RSI and stochastics are what I describe as early warning lights. They often anticipate or lead a turn in the stock.

By contrast, trendlines and moving average crossovers are lagging indicators that merely confirm the message of the early warning signals. Depending on your willingness to take risk, you can trade on either a leading or a lagging indicator. When both types of signals have been given, you generally can enter the trade with a high probability of success.

6. Apply the Rule of “Multiple Indicators.” 

Highly profitable trades usually occur when all available technical tools give the same message. Candlesticks, volume, moving averages, and indicators such as stochastics and MACD occasionally all align to communicate the same message -- the stock is about to sharply rise or fall.

On a leading swing trading website, I found the following advice under the heading of 20 Golden Rules for Traders:

"Buy at support, sell at resistance."  Take another look at one of the charts above. Do you really want to buy at support, see it decisively broken, and take a bath?

Unfortunately, I've found that most swing trading information is long on gimmicks, but short on useful, well-thought-out information. Remember: There is no magic bullet for profitable trading the market. As I noted in my first trading lesson, technical analysis can only increase the probability of your making a correct swing trading decision. Nothing is 100% accurate, and there is no such thing as "free money."

Great trading opportunities, however, do have signatures. For starters, many indicators all give the same message within a short period of time, such as two or three days. Below I have reproduced the XYZ Corp. (XYZ) chart from the first trading lesson.

You should now have learned enough about technical analysis to better appreciate this opportunity. The October $2.20 low occurred as the market turned violently upward. The bottom candle was a long-legged doji and occurred at a very oversold level.

The next large, white candle dramatically confirmed the trend had reversed. Volume picked up on the rally and declined on the pullback. CCI, RSI and stochastics all gave buy signals. In five trading days, the downtrend line was broken. Even buying later in the trend, on the break of the downtrend line at about $4.25, yielded a spectacular return if you held on to the peak above $7.

This is what I mean by applying the rule of "multiple indicators." This trade was not signaled by applying any one tool. Instead, many, many tools confirmed the same underlying message.

7. Track a Consistent Group of Stocks.

As a swing trader, it is easy to flit from hot stock to hot stock. Although it's okay to follow the action, you should also have a core group of stocks that you track daily and learn the personality of.

One of the first things I do when I check the market in the morning is focus on the financial news. I go to a variety of websites to look up analyst upgrades and downgrades, earnings reports and guidance, what is happening in the overseas markets and with the price of oil, gold and the U.S. dollar. I also look eagerly to see which stocks are active in pre-market trading and usually add several of these to my regular tracking screen. I LOVE volatile, heavily-traded stocks.

In addition to these, however, I always follow a core group of regulars. I try to pick these from a large variety of sectors -- not just the volatile ones. Several times a week, I look at their charts and make mental notes about breakout levels, prices at which they would make good trades, and so forth. Intraday, I watch how they behave and try to get a feel for their personality.

I call this "keeping your eye on the ball." By tracking a comfortable number of stocks in a portfolio package, regularly checking the charts, following the news and analyzing company fundamentals, you will find yourself in a much better position to make winning trading decisions.

8. Enter a Trade with a Clear Plan 

The four key elements of which are a target, a limit, a stop loss and an add-on point.

And when you sell, you should immediately determine a re-entry level.

Swing trading can lead to impulse buying. Sometimes your impulses can turn out to be profitable, but other times they may not be. Remember: without a clear plan you are merely gambling, not trading.

Capital preservation is key in trading. Therefore, it's always vital to establish a stop-loss for each trade. The best time to set one is right before you make the trade. If you are not watching the market intraday, then you should set this stop-loss with your broker. If you are watching at all times, then I suggest you keep it as a mental stop, but execute it ruthlessly.

As a general rule, the maximum loss I want to take on any trade is 8% of the capital invested. If there is no technical analysis basis for limiting the stop-loss to this amount -- usually a support level or nearby trendline -- then perhaps the market is informing you that your trade is late.

For most of my trades, I use market orders and normally trade very liquid issues. And if I am watching the market, my order size is not large enough for it to be worth my while to fight over a few pennies in either direction. On the other hand, if I am not watching the market and want to enter a trade based on overnight analysis, then a limit order is vital. Of course, if the market gaps, then I don't want to pay too much and be behind the eight-ball from the start.

You'll often come across times when a trade is going beautifully. You are watching the trade closely and have a very good instinct for the trading action. You can almost feel the next price, you are that attuned to the shares. In those circumstances, why not add to your position? If you originally bought 1,000 shares, then you might want to add between 200 and 500 more. When you add on, don't pyramid, though. Remember: a sudden decline in the stock can quickly turn a healthy profit into a loss.

As a last general rule, I think it's always a good idea to determine an appropriate re-entry point each time you close a trade (particularly when that trade was for a healthy profit). Are you selling because the stock is in a strong uptrend, but you are concerned it will pull back? If so, then where is there sufficient support to allow you to get back in comfortably? Or if the market continues higher, at what price would it be worthwhile to re-enter your original position?

9. Put the Odds in Your Favor 

Don't risk a dollar to try to make a dime. On good trades, your chart analysis should always show more upside possibility than downside risk.

When you enter a trade you should always have a target price in mind. Do not pluck this target out of the ai though. It should be based on your technical analysis, using tools such as the measuring principle.

I always strive to select trades whose target allows me strong profits if I'm correct, but where my potential losses are fairly limited. In general, I look for opportunities where there are 1.6 to 1 odds.

Sometimes market conditions make this difficult. For example, toward the end of a large move in the overall market, a large part of the gain or decline in a stock may have already taken place. If possible, however, I seek to find set-ups where I can meaningfully set a stop loss of 8% in order to capture a profit of 16%. When I cannot find those opportunities, I then look for potential 12% gains while risking just 8%.

Finding trades with 1.6 to 1 odds greatly increases your chance of making money. For example, take the chart of XYZ above. If you bought on the break of the downtrend line at $4.25 and then noted the completion of the inverted head and shoulders formation (at about $4.65), you could have set a target of $7.10 based on the measuring principle. Your upside potential at that point would have been approximately 53%.

On the other hand, you could have set a stop at $4.00, just under the highs of the consolidation immediately before the breakout. In that case your maximum loss would be about 5%. If you can find trades where you have at least 1.6:1 odds, then you will greatly increase your chance of swing trading success.

A final word on targets. A swing trader should always assess and reassess the chart. In many cases, you may need to take profits before your target is hit. On the other hand, if your analysis leads you to conclude that your target will be exceeded, then you may want to raise that target. The key to trading success, as many successful traders have proclaimed, is to cut losses short and let profits run. Unfortunately, many untrained swing traders instead let losses run and cut profits short.

10. Integrate Fundamentals into Your Technical Analysis

Day traders in positions for 15 minutes to an hour have little need for fundamentals. Swing traders, on the other hand, may often hold positions for several days to several weeks. As such, they can greatly benefit from a better understanding of each company's fundamental, inherent value. Look at measures such as the PEG ratio to help determine value.

In my hometown I have organized a group of avid traders called "Market Nuts." It is a free club that meets once a month and is designed for active traders -- people who are nuts about the market. Most of the people who attend have taken one of my seminars, and many are dedicated technicians.

During our regular meetings, I will occasionally talk about a stock's Price-to-Sales (P/S) or Price/Earnings-to-Growth Ratio (PEG). The reaction I get from some of these club members is almost always the same -- "That's strange of you to mention! I thought you were a technician."

If confronted, I will often acknowledge that I "lied" in order to get the seminar instructor job. In actuality, I consider myself a "techno-fundamentalist" -- someone who integrates both technical and fundamental analysis.

Normally, technicians and fundamentalists are like the boys and girls at a sixth-grade dance: they seldom speak to one another. Yet both forms of analysis can help one make more effective stock market decisions. After all, you'd be hard-pressed to find a technical analyst who isn't in awe of legendary value investor Warren Buffett's incredible track record of success.

If both forms of analysis are good, then why on earth would anyone believe that a combination of both isn't better? After all, when used correctly they do not contradict each other. Rather, they are supplemental. In my analyses, you get both.

11. Great Trading Is Psychological and Technical

Always keep a positive mental attitude about your trading. Do not let bad trades affect you longer than necessary. Learn from your mistakes; poise yourself to make your next trade.

Countless times I have heard traders beat themselves up over a bad trade they've made. The name of their game is usually "woulda, coulda, shoulda." I would have bought XYZ at the bottom, but I had a doctor's appointment that morning. I should have sold. Why didn't I sell? I could have been out right at the top, if only I had read the candlesticks correctly. When am I going to learn?

Making a trading mistake can be painful. Not only does it often result in a loss of trading capital, but it also hurts one's self-esteem. When this happens to me, I literally think of it as a form of "grief." The most productive response I can have is to experience the feelings of disappointment or hurt and then move on. After all, I need to get mentally prepared to make my next trade.

One of the sports statistics I find most relevant to swing trading is baseball legend Ted Williams' record-setting batting average. In 1941, he hit .406. 1941! .406! Think about it. While Ruth's home run record has been bettered several times, Williams' record has not yet been beat.

The feat is nearly 70 years old. He hit "only" .406. Put another way, he made an out .594, or almost a full 60% of the time. The lesson to learn here is that no one is perfect. Everyone makes mistakes. As I said in my first lesson, technical analysis can only increase the probability that you will make correct decisions.

Having said that, I always try to treat bad trades as a learning experience. Was there something I didn't see on the chart that I should have? Did I enter the trade too late? Set my stop too close? The winning trader is rsi persistence: the commitment to getting better and better through time.

Apply the Information from Today's Lesson

There you have it -- the 11 Commandments of Swing Trading. I suggest you print this and put it somewhere near your trading area. Every once in a while you might want to check this information to evaluate whether you are violating any of these principles. The market is a hard taskmaster. Violate the principles of effective swing trading and you will have your knuckles rapped with the painful loss of trading capital.

That brings us to the end of this five-part trading course. I sincerely hope that your return on investment (ROI) (in terms of the time spent reading these reports) has more than been repaid by the benefits you've gained in technical analysis knowledge and the ability to make better trades. Thank you for taking the time to review my five-part trading course, and best of success in the markets!

P.S. If you missed one of Dr. Pasternak's lessons, we strongly encourage you to go back and take a look:

1) Start Swing Trading Today

2) How Swing Traders Harness the Power of Swinglines

3) Swing Trading Support & Resistance Secrets

4) How to Use Candlesticks for Successful Swing Trading