Initiating a Swing Trade Intraday
by Teresa Lo
BRCM was one of Monday's picks, with a suggested intraday entry for the swing trade. Let's use this as a study case as to how traders can reduce initial risk by using an intraday timeframe to initiate a swing trade.
BRCM had only a small initial downside target because it was so close to the 20-day EMA below in the 39.35 area, so I thought it was better to try to catch it intraday. One of our real-time traders nailed this one and I think she used our usual technique. We also use a similar approach when a swing trade setup gaps open past the buy or sell trigger -- we zoom in using the 10- or 15-minute intraday chart. I've always preferred the 10-minute chart, and I'm happy to report that TrendVue Swing Charts now supports this timeframe.
The idea here is that most swing traders are going to use really obvious spots as triggers: the previous day's high or low. Of course, everyone else also knows this, including market makers and specialists who can see all the orders line up: sell orders at or just below the previous day's low; buy orders at or just above the previous day's high.
We want to avoid these points, since "stop running" is very nasty and expensive for those who don't know about this phenomenon. Nothing is worse than that sucked in feeling one gets after selling on break of the previous day's low and then watch it bounce right back up or buying on break of the previous day's high only to see the "breakout" fail. Using stop orders without a limit often produces terrible fills that add insult to injury.
We can almost argue that all swing trades should be initiated intraday with stop-limit orders to avoid potential whipsaw action. We use a stop-limit order to initiate a new trade. There are two parts to it. The "stop" part refers to what is called the "stop election price" where the order goes live. The "limit" part is the worst fill price that we will accept. At times, we will not be filled using this type of order to initiate a trade, but then again, I would rather not be filled if I can't get a decent price. We use a stop (with NO limit) order for our trailing stop loss.
Set Alarms
We start by setting alarms for the swing trade triggers. For short sale setups, we set the alarm at the previous day's low. For buy setups, we set the alarm at the previous day's high.
Once the alarm goes off, we have several methods to enter a swing trade intraday. Since BRCM was a short sale setup, we would be looking for sell setups.
Option 1: The Caboose
Using this method, we basically watch as the previous day's low gets broken and then try to hitch a ride after the smoke from the stop running clears.
In this diagram, we have marked the previous day's low with a red horizontal dotted line. All we really know about this point is that buyers showed up here before, and therefore, we want to know if they will buy again, after the sell stops have been taken out.
You can see that in the first ten minutes of trading, the previous day's low was breached on good volume. Quite often, if there is going to be a trend day, the stock will most likely collapse from this point, when the buyers that were there the day before fail to show up while sellers go out the exit door.
By initiating the short sale with a stop-limit order (SELL STOP WITH A LIMIT) at the low of this first ten minute bar, we hope avoid the potential stop run whipsaw while going short if the move down continues for a second bar.
The trailing stop loss order should be based on an intraday benchmark using the same timeframe as the one used for the entry. In the case of a short sale, we prefer to adjust our stop loss order (BUY STOP) using the upper 5-period weighted moving average band plus a penny or two. In TrendVue Swing Charts, click CHART > WEIGHTED MA BANDS to plot the 5-period weighted moving average bands. For short positions, use the pink dots that represent the upper band as trailing stop loss points.
After each bar is completed, we move the stop loss downward. My goal is to take profits after a couple of bars OR be in position to have my stop loss at better than breakeven if I want to hold the trade.
Option 2: The Pause
Quite often, an inside bar (higher low/lower high than the bar before, colored yellow) or an inside bar plus a tiny up bar (higher high/higher low than the bar before, colored green) will form after the previous day's low is taken out. Volume contracts big time as the participants pause to digest. Again, if the buyers fail to show up while sellers go out the exit door, this is a brief pause before another downside push.
In this diagram, we point to the inside bar that formed after the bar that took out the previous day's low. To set up for a short sale, we take the low of the yellow inside bar less a penny to calculate the short sale price and enter a sell stop with limit order. The stop election price should be no lower than the low of the day so far.
Variation: Where there is an inside bar/small up bar combination, the trader will move the sell stop up a tiny bit to just under the small up bar. The bottom line is that this has to be a bounce so small that it's just basically pausing after the previous day's low is taken out. If the trader is filled on the short sale, the initial stop loss will be placed at the high of the up bar.
The initial stop loss should be placed at the high of the inside bar, plus a penny. Again, my goal is to take profits after a couple of bars OR be in position to have my stop loss at better than breakeven if I want to hold the trade.
Option 3: Retracement to Overhead Resistance
The classic way to enter is to watch for the first bounce that forms under the previous day's low. The trader is looking for a small one-swing bullflag that does not exceed four bars.
We can see this three-bar bounce back to test the previous day's low on the 10-minute BRCM chart. Volume should decrease on the bounce with every new bar. Traders follow the bounce with a trailing stop-limit sell order placed a penny under the low of each green bar as it finishes forming. After trailing a four bar bounce, we cancel the sell stop if it has not been elected after the fifth bar of the bounce.
We can qualify "small bounce" by using a "fibo" ruler set to mark out a 25-40% retracement of the previous downswing. We call this the sweet spot. You can see how the top of the third bar of the bounce exceeded the 40% threshold, and therefore, we know that the bounce is a little too big to our liking. The bigger the bounce, the higher the probability that a new low will not be made.
This is the button on TrendVue Swing Charts.
The initial stop loss should be no higher than the highest point of the bounce indicated by the yellow arrow. This is because everyone else will place their stop loss just above it, and since this also happens to be the previous day's low as well, it's a doubly bad point to close out a trade. In the diagram above, you can see that the downswing got precisely one bar before it started to creep back up again.
As the price came back to the last swing high, which was also around the previous day's low, we could see a blast of volume as short positions covered at the same time some buyers emerged.
That's all for now. Remember, the rules for buy setups are simply the reverse of sell short, and these concepts also work well when there is a gap open that takes the price past the trigger point.
04.02.03 07:26 #