It’s my belief that chart patterns behave similarly in all timeframes. As a result, I have been using 1- and 5-minute charts for intraday day trading and 5-,15-, and 60-minute charts for short-term swing trading over the years with great success.
It’s very important to start your day analyzing pre-market action, when pertinent news may be affecting price. I spend about 90 minutes every morning, before the market opens, going over all the news, and looking at the amount of volume in all the stocks that are trading up or down dramatically with gaps in the pre-market. I compare that to the average volume and if it’s trading dramatically greater than its average volume -- for example, if 50,000, 100,000 or even more shares of a particular stock is trading in pre-market -- it's a heads up to me to keep a close tab on that stock to see if there’s any news released on that stock and if it’s something that I call a game changer.
An excellent way to judge relative volume is Worden Brothers proprietary technical indicator called “Volume Buzz,” which tells you how much volume is trading at any point in time relative to historical volume at that point in the day.
Often, when a stock is initially gapping or thrusting, it's an indicator that a trend may be changing. It could be a stock that is either in a downtrend that's reversing or a stock that's been in a downtrend, has based for a while, and has broken back out. In other words, it has reversed the trend from flat or down to up and may be initiating a new trend.
See Harry's book, Profitable Day & Swing Trading (Wiley 2014), for more detail on his strategy.
My favorite day-trade pattern is an opening gap or fast early price surge that settles into a steady rising parallel channel throughout the trading session. I typically look for a stock that gaps up, pulls back and holds the gap, and then forms some sort of early consolidation pattern. Usually this becomes evident in the first 20-30 minutes of trading. If that first pullback is a steep one with a lot of red bars and with heavy volume, then I stay away from it. Here it is likely in a “pop and drop” scenario, a good indicator that the remainder of the session may be difficult for that stock at best and if it needs to be exited quickly or avoided altogether. If, on the other hand, the pullback is gentle with dissipating volume then I consider getting in. I look for it to consolidate in what I call the “Boxer Wedge” – be it a coil, pennant, flag, etc. -- holding the gap or other significant support on lower volume, indicating an abatement of sellers. As the price narrows and ebbs near the apex of that triangle or pennant, the stock usually gets very quiet and can suddenly surge with the price breaking out. You get a price-volume surge out of that pattern -- a strong indicator of a potential profitable trade for that day.
Price-Volume Surge (Video Interview 3-min)
When the stock pulls back and consolidates, you still have to place a stop because there is a chance that the stock could break down just as much as it could break out. My recommendation is to constantly be raising your stops as the trend progresses at a point a bit below where your technical analysis has determined that the next key support may be based on price, trend lines, and moving averages. You may also want to decide to scale out partial positions when this occurs, making sure you’ve adjusted the stops for the remainder of the position, again at a point below the next technical chart support.
I continuously draw and monitor/update throughout the session my trend lines, channels, and important developing continuation patterns such as flags, pennants, coils, in addition to adding support and resistance lines for targeting purposes and to be able to catch an intraday move that begins later in the session as a result of an intraday breakout of one of those continuation patterns. As mentioned, I monitor volume, and I also monitor moving averages (10-, 21-, and 50- period) and oscillators (stochastics, Bollinger Bands, and MACD).
For swing trades I look for key breakouts, sometimes including quick tests of those breakout points followed by a channel up over a 3-5 day period on the 5- or 15-minute chart. I’ll explore the trend going back a few weeks, and also look at the daily chart to see where the overhead resistance might be and where the projected targets might be. Then I set targets or price objectives based on prior overhead chart resistance or measured moves/fib levels, etc., and set stops where support, trend lines and/or moving averages are violated. I tend to scale out of positions at designated trade targets or use trailing stops under key levels.
Making a swing trade is more likely to yield good results when you have the following signs of favorable conditions.
#1 The market is on your side. You've determined that the market is trending in the same direction you want to swing trade. (If it isn't, you may need to find a different trending market entirely.)
#2 The industry group is on your side. Stocks tend to follow their industry groups up or down. If the security's industry group is trending strongly in the same direction you want to swing trade, chances are your trade will be more profitable.
#3 If you're trend trading, the candidate is moving out of a base. The candidate should be in an existing uptrend or downtrend that has pulled back in the short term.
#4 If you're trading ranges, the candidate has just bounced off of support/resistance with a technical indicator confirmation. Watch for the technical indicator (an oscillator) to generate a buy or sell signal. Divergences between your oscillator and the price action signal higher-confidence trades.
#5 The stop loss level is near your desired execution price. The best swing trading candidates are those where your emergency exit is nearby. The closer your desired entry price is to your stop loss level, the less you stand to lose if matters turn ugly.
#6 You make a disciplined not emotional decision to allocate the right amount to the trade. Loss is always possible, even with the best swing trading candidate. Set your position size in accordance with your trading plan, which should put an absolute ceiling on your position size and set a maximum percentage of capital you're willing to lose