Setup prices

A setup price is a predetermined price where you are looking to enter a position. Make sure that setup prices get broken significantly before you enter your position. For example if I am looking at a buy above $50, I would wait for the stock to break that price by approximately 5 cents. This varies though, and depends a lot on the stock I am trading. The important thing is that there are trades being made ABOVE the setup price in order for the setup to be valid.

Also make sure, that the stock actually trades above the setup price. This can be problem with low volume stocks where the inside market (best bid and ask) changes without any trades taking place.

Types of charts:

The most common way to display charts is the line chart followed by the bar chart. In the bar chart the vertical line marks the high and low, the left horizontal line marks the opening price and the right horizontal line marks the closing price. If you selected a 5 min chart, that means that each bar reflects the price movement of only 5 minutes. In a daily chart each bar/ candle displays one entire days movement.

The type of chart used most by active traders is the candlestick chart. This type of chart has been in use for over 100 years and has its origin in Japan. It is also referred to as a Japanese candlestick chart. The color of the candlestick itself tells us if there was an up - or downtrend in that particular timeframe and makes reading them very easy. There are also numerous indicator based on the shape of the candlestick itself. I will talk about the most common ones later.

The following candlesticks are open candlesticks, meaning that their opening price was lower than the closing price and therefore reflect an overall uptrend in the timeframe you selected. The color used here for an open candlestick is green; sometimes people will use white instead.

If the opening price was higher than the closing price you get a closed candlestick that reflects a downtrend. The colors used are usually black or red.

The vertical line on the top of the candlestick is always the high, no matter what color the candlestick has. The line on the bottom always marks the low. These lines are also called shadows (upper/lower) or tail. There might be no shadows at all if the opening price marks the high and the closing price the low or vice versa. The colored part is always referred to as "the body" of the candlestick.

Development of trends:

There are 3 trends a stock can move in:

a) Uptrend b) Sideways trend c) Downward trend a) An uptrend is a series of price advances followed by price declines that don't violate the prior low (higher highs and higher lows). In an uptrend the prior low serves as support and the last high serves as resistance. The best trade during an uptrend is of course a long trade.

At some point after a rise in price the stock will be "tired" and has to "relax" a little to gain strength to make a move again. This is when a sideways trend (consolidation) develops.

b) In a sideways trend highs and lows are approximately on the same level. The highs mark resistance and the lows serve as support.

After a long sideways trend stocks often reverse the prior direction and fall in to a downtrend (in case the prior trend was up).

c) A downtrend is a series of price declines followed by price advances that don't violate the prior highs (lower highs and lower lows). The prior high serves as resistance to the upside and the prior low serves as support to the downside.

On the next page you will see a chart displaying all the trends.

Sideways Trend


Sideways Trend


Trend lines and trend channels:

Trend lines and trend channels are a very important part in technical analysis since they define the trend itself and show you important areas of support and resistance. I use them mostly for the longer-term analysis based on daily charts.

In an uptrend a line is drawn below the "major" lows of the trend. The uptrending line shows you relevant support. The opposite is done in a downtrend; you draw a line above the "major" highs of the trend. As with many things in technical analysis it is much easier to see what I am talking about by looking at an example:

Trend channels occur in stable trends when you can draw a second (parallel) trend line in addition to the one we talked about before. This time we will also draw a line above the highs of the up trend and vice versa for down trends. By drawing this line we have established a trend channel that not only shows us support, but also shows the most likely range the stock will be trading in, thus us very nice entry points at support (referring to the core swing trading buy setup) and profit targets at resistance.

Moving averages:

Moving averages are probably the most widely followed and therefore most significant indicators. And yet, they are very simple to use.

Moving averages have multiple functions. They serve as important areas of support and resistance and give trade signals if a stocks' price is crossing above or below them. If a stock trades above the moving average line it serves as support to the downside, if it trades below it will serve as resistance to the upside. An example would be the 200MA, which is often used by fund managers. A stock that is trading above its 200 day moving average is generally a good long position, as long as it holds that moving average.

A break below the 200MA would signal a sell or short entry.

A crossover of 2 moving averages itself is often used for entry / exit signals, i.e. a fast moving average (10MA) crossing over (from below) a slower moving average (200MA) is used as a buy signal. Furthermore they smooth the often very volatile price movements and therefore make it easier to see the direction of the trend in the chosen period of time.

A moving average tells you the average price over the chosen time period and length. For example the 200 day moving average shows you the average price of the last 200day and a 5 min 200MA will show you the average price of the last 200 5 min periods. It is usually calculated on the value of the closing prices.

I use various moving averages in my trading: 5MA, 10MA, 20MA, 50MA, 100MA and 200MA. The 200MA will react much slower to changes in price than the 10MA. When I talk about different setups I will tell you which MA is the most relevant for that particular setup. In general the 20 and 200MA's are the most important and can be used in any timeframe.

The following picture shows a chart with various moving averages:

The following picture shows a chart with various moving averages:

There are different types of moving averages:

- Simple moving average (SMA): does not weight the prices

- Exponential moving averages (EMA): gives more weight to the recent prices

- Weighted moving averages (WMA): uses a system that gives more weight to recent prices

The moving averages that are most widely used are simple moving averages. All of the MA's I refer to are simple moving averages.


I use volume in conjunction with all of my setups to confirm my entry as well as to find exit points. For example after entering a breakout setup long I want to see a volume increase and a lot of trades on the ask side. Trades on the ask side indicate that there are active buyers in the stock and the stock is likely to continue higher. For shorts I want to see trades on the bid side of the market. Stalling or even declining volume after my entry indicates that the stock will be rather trendless and therefore I don't expect much from the trade and might raise my stop rather fast or exit sooner with profits. Dramatically increasing volume/ activity very often signals the end of the move as the mass of people is getting involved; therefore I use these points to take profits. The chapter on tape reading describes the use of volume as an indicator in more detail.


Note: all the examples are written for long setups; just apply the opposite for shorts.

The breakout setup is one of the core setups used in trading. Breakouts occur all the time on every timeframe, i.e. breakouts to new 52 week highs, daily highs or above trend lines. It is a trend following setup that is confirming the prior direction.

The type of breakout I will be talking about is the breakout out of a consolidation, also referred to as a core breakout. I am always looking to trade a breakout in the direction of the prior trend. Meaning, I want to trade a stock long that is consolidating after an uptrend. I will enter the trade once the high of the consolidation is broken.

The Basic Breakout Setup



The Core Breakout Buy Setup


j | Consolidation


The stock should consolidate for a significant amount of time i.e. after an up trend that lasted 1 hour I would like to see a consolidation of at least 15 minutes before the stock resumes its up trend. This is just a rough figure and depends on many factors such as the strength of the trend. A better guidance are moving averages. The most important thing to consider before entering a breakout trade is where the initial stop is. I will set my stop just below important moving averages or the low of the consolidation.

Therefore it is true that the tighter the consolidation is, the smaller the initial stop will be. For this setup I like to work with 3 min charts in conjunction with the 15MA for my stop or the 5 min chart using a 20MA for my stop. Note: A very long consolidation in an up trend is often a negative sign, especially when moving averages are not able to "push" and leads to a trend reversal.

What you will often notice is that a stock is moving sideways and gets pushed higher as rising moving averages near. This often creates a very powerful move and is my favorite setup. The ideal breakout also occurs on multiple time frames i.e. a stock is consolidating at the intraday high, which also happens to be the prior day's high. If a breakout occurs here that will bring in momentum from both the intraday breakout and the breakout on the daily chart. Recently I have been only playing breakouts to new daily highs only, since pure intraday breakouts have not provided enough consistency.

Make sure the stock you are about to enter has no immediate resistance to the upside. I would look at least at the daily chart and look for resistance in form of old highs or moving averages. Here is an example of a "nice " breakout that occurred on a 15 minute chart:

Consolidation after Breakout and entry point iH a strong uptrend ^^ ^"^fj




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1530 0930 1000 1030 1100 1130 1200 1230 1300 1330 1400 1430 1500 1530 0930 1000 © 2002 Quote .com, Inc. jrsday 01 -04 Fric

The pivot setup:

The pivot setup is a reversal setup that I am looking to trade long (buy). It is taking place on a 15 minute chart. Once in a while I will also trade it based on the daily chart. I am looking for a stock that is in a strong intraday down trend that extends over a few 15 minute candlesticks. After this sell off I will be looking for a consolidation marked by one or more candlesticks with a tight range. Preferably there will be a doji candlestick (see candlestick indicators) forming, which is a reversal indicator itself.

My buy entry criteria is met once the high of the current candlestick goes over the high of the previous candlestick. The initial stop is set below the low of the previous candlestick, which is ideally the intraday low. The more narrow the range of the candlestick prior to the entry candlestick is, the smaller my stop! I will only trade this setup if the stop is small enough for my risk tolerance.

Sometimes the chart can be a little irritating. Make sure that the stock has actually fallen a significant amount to justify an entry and there is enough potential. My criteria is that the stock had at least a $2 sell off, unless it is a low priced stock. Remember, a $2 sell off leaves you with $2 room to the upside whereas a $0,5 sell off only gives you that amount. In case the stock is not reversing it might also be shorted (see continuation pattern).

Selling Is clearly drying up after a huge drop.

Entry candlestick 231/4

Note: Recently the pivot pattern has worked best after pullbacks (price decrease) in stocks that were in an overall uptrend and up for the day itself. This scenario is less risky as well.

Continuation patterns:

Continuation patterns are trend-confirming setups. They can occur in virtually every timeframe. I was especially successful using this setup based on 15-minute charts. Continuation patterns allow you to find an entry in stocks that are already in a trend and moving. I find the pattern equally interesting for both longs and shorts. My example here describes a long setup. Again, vice versa is true for shorts. The pattern consists of three candlestick bars:

1. A wide range bar (a candlestick with a relative large range in which the lows are near or at the open and the highs near or at the close of that particular time period).

2. A narrow range bar (a candlestick with a small range). The candlestick has to be in the upper half of the first candlestick and the high can only be slightly higher than the high of the first candlestick. Ideally, the range is in the upper half (or higher) of the first bar and builds a doji candle, which serves as an additional continuation indictor in this example.

3. A breakout bar that breaks above the highs of bar 1 and 2 and signals the entry.

I enter the trade once the price of the third bar breaks the high of bars 1 and 2. My stop is placed below the low of the second bar. Once the third bar is completed, I quickly move my stop below the low of that bar.


The high of the first candlestick ■ — ,



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is higher than the high of the second candlestick and is therefore used for the entry-








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Stop below the low of bar 2

1030 1100 1130 1200 1230 130

J 2002, Inc.

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J 2002, Inc.

Stochastic and moving average crossover reversals:

Stochastic and moving average crossover reversals are ideal for very short term trades when they are based on a 1 min chart. With these setups I try to take advantage of short term overbought and oversold conditions. Such conditions occur frequently at the market open when individual stocks receive strong movements to the upside as well as the downside. Basically on the open, the reversals can be played in both directions. I strongly advise you though to look at the overall market strength, i.e. if stocks in general are making higher highs in the first half hour or so I would only look to go long after pullbacks. To make it even more general - I only trade reversals in the direction of the stocks overall trend, i.e. a stock that is trending up can only be played long after sudden pullbacks. Personally, I like this type of trading the most after the open, since I am watching other things at the open. I scan intraday for stocks that had sudden sell offs or gains. I see traders using this strategy very efficiently when they are only watching a basket of stocks, meaning they are watching the same stocks every day; sometimes this is only one stock. This has the advantage that you get more familiar with the way your stocks move and it will be much easier for you to trade them.

Stochastic reversals

The stochastic oscillator is a momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods.

For the stochastics, I use the standard settings 14,1 and 3. You can imagine the stochastics like a rubber band that when stretched has to bounce back. The more stretched (oversold/ overbought) it is, the stronger the reversal will be and the more precise.

I am looking for situations where the stochastic indicator has been below the 20 band (trigger line) for an extended period of time (a few minutes on a 1 min chart would be extended). Readings at zero or just above are the best, because they indicate a very oversold condition. If the stochastics then reverse and cross over the 20 band (sometimes even the 10 band) that signals that the stock seems to have found a bottom and is likely to reverse. The bigger the sell off was before the reversal, the more potential to the upside there is. Please experiment for yourself with the trigger lines and settings. For shorts, I look for situations where the stock has been close to or at the 100 band for an extended period of time. A cross below the 80 band will be my sell trigger.

The following example is for longs:

CIEN dropped from about $13.80 to about $13.05 in less than 15 minutes. What is of most importance is that this drop happened in one move and not in a stairstepping pattern. The stochastics were holding near the zero band for an extended period of time. The reversal above the 20 band gave an entry signal. I would have taken at least partial profits near the prior highs that serve as resistance. The stop for those setups always has to be very small since they are more scalp oriented. I would use a stop just below the low of the pullback or a stop based on my entry price, i.e. 15 cents below my entry.

Please see the example on the next page.

Moving average crossovers

I use moving average crossovers in pretty much the same situations as the stochastic reversals with the exception, that MA crossovers work better for me in slower trends. I use the 1 min chart in conjunction with the 5MA and the 10MA. If the 5MA is crossing over the 10MA from below, that is a long entry signal; vice versa for shorts. Again, for longs, the stock should be in an overall up trend and the pullback has to be significant.

The following example shows a stock that is very popular as a basket stock since it usually provides very nice swings during the day. It had a strong day on the day before this example, and I was expecting it to continue higher. After the open it pulled back about 40 cents. The market was pretty strong so a recovery in the stock was to be expected. I was looking for stabilization and a crossover of the 5MA above the 10MA. The crossover happened just below $18 and my stop was below the intraday low at $17.81. Partial profits should have been taken near the previous days high at about $18.43. After breaking the previous days high the stock gained initial momentum.

Note: I strongly urge you to experiment with the settings described in this chapter. You might want to try trading the moving average reversals of a 3 min chart for example or use other settings/timeframes for the stochastic reversals. Not every setting works well in every market.

Basic swingtrading setups: Buy setup

The basic buy setup is a pullback into support within an uptrend. It is very important, that the pullback is significant. Ideally, there will be at least three consecutive days of lower highs and lower lows. The support can have many forms. I like to focus on moving averages as well as trend lines and sometimes Fibbonacci retracements. This setup is taking place on a daily chart. The example I used earlier for the hammer candlestick is a very good example here too. The stock has pulled back significantly into support and had a reversal signal in the form of a hammer candlestick .The entry is above the high of the hammer candle and the stop is placed below it. Generally, the entry signal is given, once the price moves above the high of a previous day after a significant pullback. I like charts that form a doji candle even more since they usually have a more narrow range and therefore give me a smaller stop. The most important aspect for me in swing trades is the stop. It can often be rather large and I am very selective in only choosing the ones with extremely small stops. Instead of placing my stop below the previous days low, I will often use the current intraday low for my stop and I will combine the swing trading setup with day trading criteria.

Please see the next page for examples.

The basic buy setup:

Initial stop

Short Setup:

The short setup is the exact opposite. We are looking for a recovery into resistance within a downtrend.

Flags and pennants:

Flags and pennants are continuation patterns. They usually represent only brief pauses in a dynamic market. They are typically seen right after a big, quick move. The market then often takes off again in the same direction. (Volume usually drops off during the pause with an increase on the breakout.)

Lower tops and lower bottoms characterize bullish flags, with the pattern slanting against the trend. However, unlike wedges, their trend lines run parallel. Once the high of the upper trend line gets broken, I will enter a long position. My initial stop is at the lower trend line. I quickly raise my stop to the last low once it is established after the breakout.

Bearish flags make higher highs and higher lows. "Bear" flags also have a tendency to slope against the trend. Their trend lines run parallel as well.

Note: Pennants look very much like symmetrical triangles. But pennants are typically smaller in size (volatility), duration, and their trend lines don't run parallel.. Since they are so similar, I will not describe them separately.

Please see the next page for an example.


Symmetrical triangles

Symmetrical triangles mark a period of indecision - a period where supply and demand are equal and the future price movement is unclear. Sellers stop breakout attempts and breakdown attempts are stopped by buyers. To get a triangle every high and low has to be closer together than the previous one - the range gets more and more narrow. In order to see the triangle you have to draw a line above the highs and below the lows of the triangle. During the development of a triangle, the volume usually drops off. Eventually, this indecision is met with a resolve in the prior direction and usually explodes out of this formation (often on heavy volume.) Research has shown that symmetrical triangles overwhelmingly resolve themselves in the direction of the trend.


-Initial stop

Symmetrical triangle in an uptrend (bullish)

-Initial stop

Symmetrical triangle in a downtrend (bearish)

Note: Another formation you might have heard about is a wedge. They are very similar to the triangles; this is why I won't explain them in detail.

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