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Focus trading strategies on the trend-range axis but build timing on the swing-momentum cycle that underlies itCHART POLARITY Interpreting the endless variety of patterns, indicators, bands, and lines can seem overwhelming. Fortunately, the market simplifies this process through its native polarity. Price action shifts movement between two polar states or flattens it toward a neutral middle. This underlying axis characterizes almost all market phases, conditions, and indicators. For example, prices can only rise or fall with directionless periods in between. This signals the existence of bull, bear, or sideways markets. BULL-BEAR Effective swing trading begins with identification of the current market phase. But strategies require more detailed information before trade execution. Start with the following questions: How quickly are conditions changing? Do they represent broad or narrow events? How will volatility affect the trading environment? The answers may mark the difference between a simple price correction and a market crash. Bull markets represent periods in which strong buying pressure characterizes price movement. Bear markets represent periods in which strong selling pressure characterizes price movement. These graphic images have no correlation to a specific time frame but commonly represent action on daily charts. The most popular view establishes the 200-day moving average as the interface between bull and bear markets within individual equities. Swing traders can apply this concept to any time frame by establishing an appropriate bull-bear axis. Fibonacci retracement provides a more powerful tool for this purpose than standard moving averages. First establish the major uptrend or downtrend that guides the trade setup. Then draw a Fib grid over the extremes. During relative uptrends, avoid short sales when price remains at least 38% above the low. Through relative downtrends, avoid long entry when price remains at least 38% below the relative high. Alternatively, look at a violation of any 62% retracement as a shift through the bull-bear axis. This simple concept may confuse at first glance. Trends and bull-bear sentiment actually represent separate forces. An uptrend can exist within a bear environment and vice versa. In fact, early phases of new trends often travel in a hostile atmosphere and without recognition by the crowd. Trend relativity also allows strong contrary movement in smaller time frames than the major bull-bear interface. Use this polarity to prepare pullback entry strategies. Identify the current sentiment and active trend within the market of interest. Watch for countertrend pullbacks when both forces line up. Follow price until it reaches a strong S/R level and then execute a position as it realigns with the primary force. The active trend should reassert itself quickly and carry price back in the other direction. TREND-RANGE Trend-range polarity underlies all swing trade preparation. Align execution properly with this primary axis or profits will vanish. Trends rarely move in a straight line. As price surges forward, it pauses frequently to test, retrace, and rest. This countertrend pull shakes out profit takers, losers, and disbelievers. It lowers volatility and allows new participants to jump on board in hopes of a new price surge. Fresh positions require excellent timing in these conditions. Early execution subjects the swing trader to whipsaws while late entries miss the move and face increased risk. Ranges also carry a high probability for trend relativity errors. Participants trap themselves into narrow price movement while fixated on a broader trending market. Although the range limits losses, tied-up capital misses other opportunities. Focus trading strategies on the trend-range axis but build timing on the swing-momentum cycle that underlies it. Positive feedback (directional movement) tends to surge in waves. These momentum thrusts carry all the rewards that swing traders seek. Negative feedback (nondirectional movement) sets the stage by providing the conditions needed to generate profitable entry points. Coordinate these two impulses to execute with perfect timing. Enter positions when the range nears primary S/R and then watch for momentum in the next lower time frame to carry the trade to a profit. As the position starts to run, align an exit to momentum in the same time frame as the entry to maximize the gain. Identify trend-range through pattern recognition and indicator support. Trends print as sharpramping price bars. They force price rate of change (ROC) and directional movement indicators (ADX) to rise sharply. Ranges appear as pullbacks, price constriction, or sideways action. Look for volume and rate of change to drop off as ranges develop. They force moving averages to flatline according to their period length. Oscillators such as Stochastics swing back and forth quickly through small shifts in range direction. Watch the indicator jump to one extreme and stay there when the trend takes over. Use repeating chart patterns to uncover important swing points. Classic triangle, flag, and pennant formations locate trade setups with clearly defined entry and risk levels. Constricting price bars, lowering volatility, and range placement signal the end of one swing and beginning of a new impulse. Align long or short positions in harmony with the expected movement but watch out for a better trade in the opposite direction should pattern failure emerge. EXPANSION-CONTRACTION Price bars demonstrate orderly expansion-contraction polarity as the swing-momentum cycle evolves. Bars tend to expand rapidly into a climax through rallies and selloffs. Then congestion sets in and volatility drops as bar range contracts along with price rate of change. This negative feedback characterizes progress until tight congestion signals an impending price movement that again releases into expanding bars. Pattern readers have a trading advantage here because these entry points capture the eye’s attention. Conversely, many math indicators hit neutral zones in this environment and show nothing of interest. Swing traders must pay special attention to these overlooked neutral conditions. Quiet balance points trigger the most powerful and profitable opportunities throughout the markets. Empty zones have little sponsorship or interest. They draw their initial power in a state of low volatility and resolve it through directional movement and high volatility. They signal high-reward, low-risk entry levels that allow swing traders to step in front of the crowd. Because narrow range bars char acterize this opportunity, adverse movement after entry permits a fast stop loss exit with little slippage. Expansion-contraction ties closely into reward planning. Odds increase greatly that the next few bars will contract when expansion bars thrust into known S/R. For this reason, the appearance of wide range bars often signals the need for caution. Look at the chart landscape again, identify all obstacles, and reexamine the intended holding period. The odds favor a pullback that will draw down profit substantially before ejecting into another move. For most trades, plan to exit when price expands into S/R. This strategy tracks the old wisdom that advises us to ‘‘enter in mild times but exit in wild times.” Also consider closing the position when the market prints a wide range bar that departs substantially from the routine price action but does not occur at a breakout point. These often mark short covering moves, stop runs within smaller time frames, and countertrend climaxes. The swing trader seeks profit from single, direct price thrusts except when highly favorable conditions demand greater flexibility. When momentum cycles align through several time frames, and positions already show a profit, try to capture a series of expansion bars. But recall that markets trend only fifteen to twenty percent of the time. Odds favor accepting the gift of a few bars and moving on to the next trade. Only seasoned trading skill can consistently select the right path to take with any particular setup. Learn to watch opportunity in three dimensions and take a giant step toward this wisdom. LEADING-LAGGING Most technical indicators rely upon simple price/volume inputs. When these data points shift back and forth, they also generate chart polarity in derivative math calculations. This interrelationship explains why the swing trader should not seek the perfect indicator. The restless crowd drives price change, but mathematics only interprets the residue of their participation. The eyes see emerging trends long before the numbers signal their presence. For this reason, always use technical indicators to support the pattern, not the other way around. Apply popular price indicators to examine chart polarity that leads or lags shifting cycles. Oscillators look forward to locate major swing reversals. Stochastics and Wilder’s Relative Strength Indicator (RSI) both watch the changing axis of overbought-oversold conditions to identify turning points. Trend-following indicators look backward to examine price development. Plot MA ribbons or use the classic MACD Histogram to measure the trend-range axis and pinpoint the current phase of the swing-momentum cycle. A finite pool of buyers and sellers participates in each market at any point in time. Rallies and corrections feed on this supply until it dissipates. The stronger the rally or weaker the correction, the more quickly a stock will reach the bottom of its fuel supply. Oscillators measure this important gauge through overbought-oversold polarity. These forward-looking indicators tend to hover near extremes and then swing sharply toward the opposite pole. Swing traders anticipate where this shift will occur in both entry and exit strategies. Markets can tap fresh crowds as prices move. New participants may quickly replace depleted supplies. This self-feeding trend mechanism allows extreme buying and selling conditions to continue long after measurements suggest that reversals should take place. Oscillators reflect this when they move to one extreme and just stay there. For this reason, don’t rely on these indicators in trending markets. They work best within constricted ranges where natural cycles allow regular shifts in supply and demand. Forward-looking indicators oscillate back and forth between 0 and 100 or swing through a central axis. Popular interpretation suggests that price reaches overbought levels near the top value and triggers selling pressure. This same reasoning dictates that oversold conditions exist near the lows and invite longs to consider new positions. Over time, chartists have defined intermediate values where plot crossovers signal the start of the related phase. For example, RSI commonly uses levels of 30-70 to signal oversold-overbought states. Trend-following indicators measure directional polarity. Moving averages fit right into the price pane while many other plots draw separately. Some print common patterns that uncover new trends and pinpoint trade timing. But trend-following indicators lag most chart action. In other words, they will turn up or down after price movement and not before it. They identify directional cycles over many different time elements. For example, half the averages may point up and the other half point down at the same time in a typical MA ribbon. Use these lagging measurements when oscillators stop working. Trend-following indicators offer a better road map in directional markets and identify lower-risk entry triggers. They pinpoint a stock’s location on the trend-range axis and reveal natural pullback levels. Apply them to momentum strategies that capitalize on strong trending conditions. Also let them signal the start of a new range. Then pull up some oscillators to reexamine the changing environment. |
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