Swing Traders Risk/Reward Analysis
Trade Execution is a 3-Step Process
- Finding the pattern
- Defining buy/sell signals based on support/resistance levels, prior highs/lows, etc..
Patterns Do Not Trigger Execution, Price Action Does
- Are only "MODELS" in that they are based on past price behavior.
- While: they are "predictive" in that they can tell us if a stock is moving up or down or has the "potential" of a move, they cannot tell us if or when to execute a trade.
- Which explains why a lot of setups never get executed.
- a Support and resistance level, breaking of high/lows, etc… triggers the execution.
- So in essence, a PATTERN is only as good as the PRICE ACTION that follows it.
- They are basically 3 ENTRY Choices on most SETUPS
- Enter in congestion near a breakout or breakdown.
- When the breakout or breakdown occurs, wait for a pullback to Enter.
- Try to enter as a breakout or breakdown starts, and hope to get filled at a good price. (Sort of like trying to catch a cab in NYC on a rainy day.)
- Stocks' BREAKING OUT of short-term patterns such as Bull Flags Bullish Pennants or Ascending Wedges.
- When they BREAKOUT, they will typically tack on 80% of the gains on the day of the breakout.
- In fact, Bull Flags, Pennants...are not real "setups", they are more extensions from previous setups, the basic "more juice" being added to the mix type setup.
- They are short term in nature, and are typically the last stage of a stock's RALLY before a CORRECTION. Bull flags in particular are many times wave "4" of "5", once breakout occurs wave 5 is hit. We all know what happens after wave 5 right?
- Stocks BREAKING OUT of longer term patterns such as Bases, Triple Tops, Cup & Handles or Wave Patterns.
- When they BREAKOUT, that suggests the move is 20-100% or more away from my entry, and the potential gains are more spread out over time.