My Most Profitable Swing Trading Patterns

    Trade Your Investments

    Some people trade based on patterns and others only invest based on fundamentals, but why not do both? Why not trade your investments based on technical patterns AND fundamentals. But, what exactly do I mean when I say "trade your investments"? This is a very simple concept and the best way to explain is to simply give a few examples.

    Example #1:

    Taking into account our circumstances at this moment (mid-late 2020), you decide to invest in Snapchat ($SNAP) because you assume that they will do well during a global shutdown. You assume people will have more time to spend on social media and specifically Snapchat. So, you buy 500 shares of $SNAP at $20 per share because you believe the stock price will rise within the next 12 months. You made your investment with shares but you also see on the daily chart a great breakout pattern setting up, and we will go over some great patterns later in this blog, so you decide that you will trade this short-term price movement. You have your 500 shares but now you decide to buy 10 option call contracts that expire a couple of months out, so you can take advantage of the short-term price movement. The stock breaks out and makes a quick move higher and you decide to take those profits all while holding your 500 shares as your longer-term investment. You were able to profit from short-term price action AND still hold onto your shares, this is one example of trading your investment.

    Example #2:

    Let's run off of my previous example, but instead of buying call options because of the breakout pattern on the chart, you decide to buy some put options as a short-term hedge. The hedge is because you think $SNAP is over-extended (over-valued) for the short term being. You can trade the short-term price drop and keep your long-term investment.There are also ways to sell options to capture premium while holding your initial investment. If you want to learn how to sell options for premium, go check out my other blog "An Options Trading Strategy for Progressive Passive Income". You can either decide to pocket the cash on your short-term trades or you can invest those profits back into that stock and buy more shares!There are several different ways you can trade your investments and deciding which one to execute is going to depend on your situation and risk tolerance. The whole point in trading your investments is to capitalize on the short-term price movements all while still capturing the macro price movement. Trading your investments can also create another stream of income.

    Trading Patterns

    The first thing I want to mention before we get into my favorite swing trading patterns is that all these patterns can be used at any time frame. I prefer using them on the 1-day chart, 4hr chart, 1hr chart, and 5min chart. When trading these patterns, it is important to remember that just because you understand the pattern, does not mean you will be profitable. You have to practice and experience how to enter these trades and I will do my best to explain how to "fight for price" so that you can get the best entries and exits! Another important factor when it comes to trading these setups is they must follow with large volume. The more people that see or notice this pattern, the bigger the breakout or breakdown will be. If volume fails to come in, the breakout or breakdown you are expecting will usually not play out.

    Trading the Triangle

    When it comes to trading a triangle pattern, there are several different types of triangles and they can either be bullish (upside move) or bearish (downside move) depending on the type of triangle and or the fundamentals behind the stock. Let's go over some of my favorite triangle patterns!Falling wedge (bullish) This pattern is one of my favorite patterns to trade because I have the best success rate with it. This works best when a stock is trending higher in the first place, but it can also work well when a stock is dropping leading up to this. If I am confident in the stock I might buy some shares at the bottom of the wedge and then buy the majority of them when the price breaks out of the wedge. Half of the time with these patterns you will get a pullback after the breakout, right back to the breakout point. This may be also a good point to enter the trade. You should look to take some profits when the price reaches the peak where the wedge started.figure 1.1

    Rising wedge (bearish)

    This wedge is the exact opposite of the falling wedge. You can short the stock when it breaks down out of the wedge. The rising wedge is the most popular bearish pattern and the one I see the most. These patterns do not have to be perfect looking, but the better they look, the more confident I am in the pattern. Take note that while the stock price is rising, the volume should be dropping, and at the time of the breakout, the volume needs to significantly increase.figure 1.2

    Pennant (symmetrical triangle)

    A pennant can either breakout to the upside or downside and if the stock is moving higher and forms this triangle, it will 70% of the time, breakout to the upside. If a stock is moving lower and forms this triangle, it will 70% of the time, break down. When I see this pattern I will usually trade the breakout to either side and I will wait for the confirmation and the volume to increase before I get in.figure 1.3

    Descending Triangle (bearish)

    This pattern is bearish, but can breakout to the upside about 30% of the time. The descending triangle forms a flat bottom, where the stock creates horizontal support when there are two or more points of contact. Just like the other patterns, this pattern works best as a follow-through, which means if the stock is trending lower and then stops to form this pattern, you will most likely see a continuation lower out of this triangle. But if the stock is trending higher, it is less likely to break down. figure 1.4

    Ascending Triangle (bullish)

    Firstly, when I trade this pattern I am profitable 90% of the time, so when I see it, I trade it! This is the opposite of figure 1.4. The ascending triangle creates a horizontal resistance, where there are more than two points of contact at the same level. I do not have exact statistics, but when it comes to my trades and experience, this trade goes higher 85% of the time. The important factor is volume, just like with all technical patterns. figure 1.5

    Trading the Channel

    When it comes to the channel, the easiest way to profit off of this pattern is by either buying the breakout of the descending channel or by trading the bottoms and tops of a range in a horizontal channel. There are several different channels and different ways you can trade them but I will mainly explain the trades I like best. 

    Descending Channel

    This pattern is very similar to the falling wedge but obviously different in the way that the channel does not get tighter as time passes. The deeper the channel falls, the bigger the breakout will be when it pops out of that channel. With this trade, you really need to wait for confirmation of the breakout and you cannot trade the bottoms and tops, if you try, you will lose money so I suggest waiting for the breakout. In figure 2.2 you can see that the green volume on the bottom is increasing during the breakout, this is important to make sure that the breakout continues and doesn't fail. figure 2.1

    figure 2.2
    Horizontal Channel

    When it comes to the horizontal channel, you can trade off the support and resistance and even trade the breakout or breakdown out of the channel. My favorite way of trading this setup is buying at support and selling 75% at resistance. I keep the 25% on (as a core) just in case the stock breaks out of the channel. That 25% I will hold the whole time and add the 75% back on only when we are at the support again, or if it breaks out of the channel. In figure 2.3 below, you will see when the stock breaks out of the channel, it moves significantly higher, but what this chart fails to show is that usually right after it breaks out, the stock will pull back and retest the top of the channel. If the top of the channel becomes support, that is confirmation of a bigger breakout. This is a big-money trade. figure 2.3

    The descending and horizontal channels are not the only channel patterns, there is also the ascending channel which is also very profitable, but not one of my favorite setups. It is the exact opposite of the descending channel, so it's a bearish technical pattern. 

    The Cup and Handle

    The cup and handle is a very useful continuation pattern that takes some time to set up, but when the setup is there, it can be very explosive to the upside. What I like about this pattern is that it gives you some time to reflect on how to take the trade the best way possible because you can see it set up over a longer period of time. If you see on the charts a large rounding bottom that kind of looks like a bowl, you could be looking at a possible cup and handle setup. figure 3.1

    figure 3.2

    Typically, if you measure from the bottom of the cup to the top, that should be the length of the breakout over the resistance. 

    Let's Talk Entries and Exits

    All of these beautiful technical patterns we have discussed are all very similar in the entries and exits. The trick is to remain robotic and take all emotions out of these trades. When it comes to your entries, you should enter on the breakout and if the stock pulls back and supports the breakout area shortly after, that is another entry point. I would like to enter some size on both opportunities if presented with it. If you are looking for a better risk/reward trade, you may want to wait for the pullback, but there is also a good chance that there is no pullback. You may be wondering what I mean when I talk about risk to reward. When I mention the risk to reward, this is just the ratio between your risk and your possible reward.

    • Ex: You buy a stock at $10 because it is breaking out of a descending channel, you decide your stop is $9.50 because that is what the chart is telling you. This means your stop is 50 cents. If you figure out your exit points and it happens to be $10.50, that means your reward is also 50 cents, this is a 1:1 R/R.

    So, if you buy a stock when it's pulling back to its breakout point, your risk becomes smaller because your stop loss is smaller. This creates a better risk/reward.When it comes to having a stop loss, it is a bit harder to say exactly where that should be because everyone's risk tolerance is different. But what I can suggest is that if your stock does pull back and does not hold the level at which the stock originally broke out, you might be in a bit of trouble. This could be a false breakout and you probably need to get out of the trade.For me, when I get into a trade, I have a specific plan with "if/then" statements. If the trade does not go as planned, I get out. Why would I stay in this trade if the stock is not doing as I thought? At that point, I would just be hoping or wishing it still goes in the direction I want it to and that is exactly how you lose money.How should you exit a profitable trade? This aspect of the trade is probably the hardest to handle because greed comes into play. Greed a very powerful and destructive emotion in the investing and trading world. If you can avoid greed the majority of the time, you will most likely be successful. If I could give you advice in one sentence about exiting a trade I would say that "no one lost money taking profits too early".Usually, if you measure the size of the base of the pattern you are trading, that is the length the breakout should be and that is where you should take profits (example figure 1.1, 1.2, & 3.1) but I rarely hold the trade that long. I like to piece out my shares or option contracts as we get past the 1:1 risk/reward and/or if the price starts to get too steep.

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