Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

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Hello, my name is Dr. Melvin Pasternak. Over the last several decades I have used technical and fundamental analysis to make short- and intermediate-term equity trades. And thanks to my persistent study of this topic along with a unique trading approach I have developed over the years, many of these trades have turned out to be highly profitable.

Throughout the years I have always strived to make education a top priority in my life. And through positions as both a college professor and a trading seminar instructor, I've had the good fortune of being able to teach technical and fundamental analysis to thousands of investors throughout my career.

I was born in 1944. I bought my first stock in 1962 -- IBM -- when college summer I worked as a runner on the floor of the New York Stock Exchange. I noticed it kept going up and up and I hated to see the ship leave port without me. My attitude has not changed much since.

In the late-1970s I became fascinated with what I call "classical" technical analysis -- support and resistance, price patterns such as triangles or rectangles -- and diligently studied the subject.

I subscribed to chart books by earth mail -- grateful to have them even if they were two weeks late. In the early 1980s I discovered financial television. Nightly I would watch FNN, the forerunner of CNBC, and would write down in long columns the advancing and declining issues, up and down volume, new highs and lows, and so forth.

At about this same time, armed with a thick pad of graph paper, I began hand-charting the S&P 500 daily. In those days, when I shared my hobby of technical analysis, I always brought along my own "Monster chart," my hand-created chart of the S&P. It would regularly grow to twenty feet long before it had to be delimbed so I could carry it in an attache case. But much like an octopus, its tentacles always seemed to grow right back.

God bless whoever created charting software! In the early 1990s I started using Metastock and integrated many of its funny-sounding tools -- stochastics, moving average convergence/divergence (MACD), the parabolic stop and reverse -- into price pattern analysis. At the same time I began teaching technical analysis courses at a leading discount broker and then at the college level. Since that time I have taught literally thousands of people both the basics and the more advanced, intricate details of technical analysis. In the process, I have helped make most of them better traders. Through this trading course, I sincerely hope to do the same for you.

 

Over the years, I have made thousands of trades and have large stacks of brokerage receipts in my basement to prove it. During my best year in the stock market I increased my account size by several hundred percent and turned a profit on over +80% of my picks. Through numerous market-related interviews on radio, TV and the newspaper, and during many years of writing the StreetAuthority Swing Trader newsletter, I suspect my guidance has helped make at least a few people wealthier.

Once I managed to hold a stock (General Electric Co.) for three years! But I hate to see profits erode, so I am by nature a short-term (or swing) trader. Very occasionally, when the opportunity presents itself, I will enter and exit a position on the same trading day. However, as readers of my weekly Double-Digit Trading newsletter know, most of my trades generally last from several days to a few months.

Academically, I hold both a Ph.D. and an MBA. I have given business writing seminars to a number major corporations -- including such well-known names as Shell and Chevron -- and I love to write myself. But my true passion lies with the stock market.

 

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Note from the Editor: If you want to learn more about Dr. Pasternak's newsletter, Double-Digit Trading, click here. And if you're interested in learing more about Carla Pasternak's newsletters, as mentioned in Dr. Pasternak's bio, click here to be directed to High-Yield Investing and High-Yield International.

 

The Basics

An underlying theme behind this trading course is that the better you are at technical and fundamental analysis, the more money you will make trading stocks.

Let's start with technical analysis and review the basics....

Technical analysis is the science and art of interpreting a stock chart. It is based on the belief that all of the market's hopes, fears and decisions are already expressed in this chart. Decode the chart's message and you can predict whether a stock will go up or down. Make a correct prediction and be

rewarded by making money.

Technical analysis is all about spotting a stock's trend and making sure that you are on the correct side of that trend. As a short-term trader, I try to identify and ride a given trend for a period of several days to several months. Just as important, I also attempt to identify changes in a trend as soon as they begin to take shape.

When it comes to my own trading, I regularly apply more than 30 essential tools of technical analysis. Most important are the often-overlooked basics -- trends and trendlines, support and resistance levels, and volume analysis.

I search for chart patterns -- rectangles, triangles, inverted heads and shoulders. I focus on "gaps," pay meticulous attention to the subtle messages of candlesticks, and integrate early warning indicators such as the MACD histogram or stochastics. As more and more technical tools start to give you the same message, the more likely your analysis is to be correct and the more likely you are to be rewarded with a profit.

Technical analysis is not perfect, though. Some market climates are very easy to make money in -- others are far trickier. Let me be upfront about this point at the outset: Technical analysis can only increase the probability that you will make correct trading decisions. It is not a perfect science, and I have yet to meet a perfect technician. The stock chart is an ever-evolving message -- one that needs continuous interpretation and reinterpretation.

That said, the more adept you can become in the application of technical analysis principles, the more money you will be able to make as a trader. On that note, let me introduce you to the concept of swing trading...

 

What Is Swing Trading?

Financial success in the stock market can be achieved in any time frame. It all goes back to following the trend of the time frame in which you are trading or investing. (I will more fully explain that important point in the next installment of this trading course.)

Warren Buffett's style of buying great companies and holding them for life may seem out of tune with a bear market; yet, who is to quarrel with his success? If you put $10,000 into Berkshire Hathaway (NYSE: BRK-A) in 1965, your investment would have grown from about $10 a share to more than $100,000 a share. And that result includes the crash of 1987 and the worst economic downturn since the Great Depression. Even Jesse Livermore, who is widely regarded as a master trader, argued that in a bull market you "buy right and sit tight."

For some, however, this one-decision approach to building stock market wealth is not their chosen path. They are short-term traders.

A scalper may enter the market for seconds, arbitraging the difference between the bid and ask price. His cousin is the day trader. But that description implies often undue longevity. Most day traders I know take a position for 15 minutes to one hour. They ai for many quick, small percentage gains. They may trade five, six, ten, or even upwards of twenty times a day. Some are wealthy, but most just end up making their brokerage firms rich.


spot an upside or downside trend reversal, to go long or short the stock, and to in turn ride this trend until it reverses. He or she will often suffer through several minor trend corrections along the way, but will always stay focused on capturing the overall "swing" of the stock.

In one of the next sections, I will present you with a brief example of this swing trading approach by taking a closer look at a chart of a real company that I've given a fictitious name, XYZ Corp. (XYZ). In doing so, I will identify several profitable swing trading opportunities in that historical chart and will explain how tremendous profits could have been made by applying technical analysis. But first, I'd like to examine what it takes to be a successful swing trader...

 

Can You Be a Big-Swing Trader?

Big-swing traders come in many shapes and sizes. But from talking to thousands of traders over the years, I believe these are some of their most important qualities.

1) They are fascinated by the market. They often rise early to find out what's happening in pre-market stock futures trading, and log onto their favorite financial website or tune in to a business channel on cable TV. At the office, they are irresistibly drawn to check quotes on their favorite stocks and to see how the market is doing.

2) They are fascinated by trading. Many see it as a game -- a chess match played between them and the market. When mastered, they know full well that this game can have very great financial rewards.

Most swing traders are aware of technical analysis. They examine the charts and may casually talk about MACD or a head-and-shoulders pattern. But many, I believe, still need to learn the fine points and sometimes even review the basics. As I have learned from reading my wife's work, fundamentals do matter--and matter greatly in trading. If you have a fundamental judgment on a stock, you then have a context in which to perceive the chart action.

Finally, 3) Swing traders -- along with other investors-- have learned the fallacy of applying buy-and-hold strategies in the wrong kinds of markets. (For proof, type this into your favorite Internet search engine: "stock returns over the last decade.") Big-swing traders believe in capturing profits. On the other hand, they have also learned patience. Losses should be cut short but profits let run until there is a clear technical signal to sell -- not merely "the stock has gone up +11% since I purchased it."

 

It's All In the Chart

The 10-month daily chart of a real, but renamed company, XYZ Corp. (XYZ) below provides a beautiful illustration of the enormous profits that one can earn through swing trading.

 

This chart is in candlestick form (an essential tool for swing traders), uses Bollinger bands, and presents the following indicators: rate of change, MACD, MACD histogram, price relative to the S&P 500, commodity channel index (CCI), full stochastics and RSI.

 

(Note: If you're a beginning trader and you're unfamiliar with these terms, don't be alarmed. I'm going to cover these and other important topics in greater depth in my upcoming trading lessons, so please stay with me here!)

 

During this 10-month historical time frame I counted four very profitable swing trades. For the sake of this example, I have labeled them ST (Swing Trade) A-D on the chart above. Depending on your specific entry and exit points, all four of these trades could have yielded gains of +50% to +100% in as few as 30 trading days!

Now I'd like to discuss ONE of these trades with you in detail to show you what a great swing trade setup looks like and how to spot profitable opportunities. I have labeled this swing trade "C" and it took place starting at the beginning of October.

At XYZ's October, you'll note a very significant candlestick -- it looks like a cross and its bottom part, or "shadow," is outside the Bollinger band. It is called a one-legged doji, and it is a very powerful signal. At the time, this candle indicated that supply and demand were coming into balance after a long downtrend. The bulls were now as powerful as the bears. This shift in supply and demand was then confirmed by the next candlestick, the white one, which clearly showed that the bulls were now in charge.

Now let's look at some of the other information on the chart. Cast your eyes down to price relative to $SPX (the S&P 500). Notice how after a long period of underperforming the S&P, the pattern changed to the positive. The S&P had already started to rally by then in late "Year 1," but XYZ was now stronger than a rising market!

The indicators below $SPX were all telling me the same story as well. Note the "Buy" to indicate a positive MACD crossover, CCI signal, and bounces from oversold levels in both the stochastics and RSI. All of these signals were unambiguous when I was examining this trade (not just in retrospect), and all were screaming, "I, XYZ, want to be bought."

But perhaps you were cautious in early October. Or maybe you were not following the stock closely. Although you might have missed out on XYZ's first leg up, you didn't completely miss the boat on this trade. As it turns out, the stock was still setting up for another great trading opportunity. In the beginning of November a signal showed up that was so powerful it implored to be taken. At that time XYZ broke through $4.63 -- a resistance level that had turned the stock back twice before.

Even more important, you could have recognized that an "inverted head and shoulders pattern that time, the measuring principle would have told you that the new target for XYZ was now well over $7. You could not let that plane leave the airport without you!

Let's say you bought at $4.65 and sold at the break of the trendline, another very clear signal that occurred in mid-November (I have labeled this on the chart). With the stock at $6.95 at that point, you would have managed to pocket a +49.5% return on this trade in just about 20 trading days!

I will not review all of the reasons why there was then a clear set-up to go short at point "D." But if you recognized the signals, then the profit potential on the way down was equally as great.

(SIDE NOTE: Notice that I have avoided choosing best-case entry and exit points. Why? Because I wanted to simulate a real-life example. It's rare to catch the extremes in any trading situation.)

The example above might seem pretty straightforward, but admittedly, hindsight is 20/20. Trading a real stock in real time will always prove much more of a challenge. In addition, you should know that there are a number of risk factors involved with swing trading. The stock market is full of mine fields for the unwary. There are currents and countercurrents. If you enter a trade at the wrong time, then you can get stopped out even if you are right on the overall direction. Unexpected events can turn trends on a dime. Your technical analysis can be partial or incorrect. The list goes on and on...

 

Where Do We Go From Here?

Please take out a pen and paper. Complete the following statement: An uptrend is a ______ of ______ peaks and ______  _______s.

If this concept is not already on the tip of your tongue, then it soon will be. In the next installment of this swing trading course I plan to start with the most basic and important concept of technical analysis -- the trend. I will show you how to spot the trend, lay out a clear, simple way to draw accurate trendlines, give you a very clear method of when to sell based on the trend, cover trend-following principles of moving averages to spot profitable trends, and much, much more.

The next installment of my in-depth swing-trading course introduces trendlines. Trust me, the trendline is a simple, but incredibly powerful tool. Most traders I've met do not use trendlines accurately or frequently enough.

From there, I will cover many more essential concepts for successful swing trading in the remaining installments of this course. You will learn about support and resistance, price pattern analysis, buying the breakout, what volume characteristics to look for, and much, much more. I'll also share with you my personal, detailed methodology for making successful swing trades. Best of all, this course is entirely free, so you have absolutely nothing to lose!

 

If you think you want to start following my weekly newsletter to get my individual stock picks, click here to be redirected to Double-Digit Trading.

Thanks again for reading my swing trading course, and good trading in the weeks ahead!

And, oh, I almost forgot, "an uptrend is a series of rising peaks and rising valleys."

 

Click Here For the Next Installment In Dr. Pasternak's Swing Trading Course: How Swing Traders Harness the Power of Trendlines.