6 Steps to Profitable Swing Trading

Part 4: The Platform or Setup

So far in this series, we have discussed expectancy (Part 1), the market environment’s effect on your performance (Part 2), and how to find stocks with the most potential (Part 3). By now, you should understand that tracking your trades and starting with the odds in your favor is job number one.

In fact, Ivanhoff said best, "Some say that discipline and risk management are the solutions to all trading challenges, but they are not going to help you if you trade a setup without an edge in the current market.

Discipline + A losing setup = Consistent losses and frustration.

The one big thing that can improve your trading life is learning how to recognize market changes and quickly adapt to them. Different setups work in different markets. Knowing what works and doesn’t work in each environment is 80% of the battle.”

I understand this all too well. Like any “disciplined” trader, I swore to cut losers religiously because all my idols emphasized how important that was. It wasn’t until reading this passage from Ivanhoff that I finally understood the source of my struggles in trading and why I would often end up in a “death spiral” of performance.

The deeper my drawdowns became, the further away my trading dreams drifted, and the more desperate I became. Finally, understanding what expectancy and odds really meant finally broke me free of my excruciating 15-year boom-bust cycle, hopefully forever. So where do we go from here?

Step 4: The Platform or Setup

I will assume that you’ve started logging your trades, know your expectancy, and understand the importance of trading in harmony with the market environment. Fake the funk on those parts all you want, but I guarantee nothing that follows in this series will help much. You can hide your sins from others and lie to yourself, but the numbers never lie.

I’m also going to assume you’ve isolate your stock pool to only the fastest stocks with the greatest potential - those stocks with RS, momentum, trend, volatility, fundamentals, and smaller supply. Trade WHR 0.00%↑ all you want, but you won’t reach your goals quickly, in all likelihood.

The Big 3: Dual-Timeframe, Price Cycle, and Pattern

I have to give credit where credit is due: Oliver Kell, the 2020 USIC champion with a staggering 941% return, is the creative genius behind this concept. Out of all of the Champion traders I’ve studied, it wasn’t until I watched his interviews, read his book, and watched his course that all the pieces finally came together in my mind.

All the fragmented pieces of the hundreds of methods I had studied over the years finally made sense to me. Stockbee, Kristjan, Minervini, O’Neil, and so many more - their methods, while unique to their creators, finally fit neatly into a single framework of price action. I also credit him and Kristjan Kullamaggie, along with my market breadth indicator, for me not getting skinned alive in 2022.

The image below shows my methodology in a single image - rooted in dual time-frame and the cycle of price action analysis, overlayed with simple, common chart patterns.

Oliver details these patterns in his book “Victory in Stock Trading”, which I highly recommend. It’s a short read but not short on meaty content. Much like Oliver, I aim to plan my trades based on a higher timeframe analysis but execute my trades on a lower timeframe. While I use his concepts, I’ve added my own flavor to them, as you can see by the pattern overlays. Below is an example of how this plays out in the market year after year.

OSPN rallied more than 80% off the 2022 lows, then proceeded to correct for eight weeks. The 8-bar correction on the weekly pulls the price back to the rising 10/20 weekly EMA (right). On the daily chart, this is enough to flip the 10/20 daily EMA lower. After the weekly puts in a hammer candle, OSPN “wedge pops” back through the daily 10/20 EMA, then puts in an EMA cross-back (first two green arrows). After pulling back to the 50-day EMA for three weeks, forming a base-n-break, OSPN gaps out of the pattern and races higher. While this is just one example, it highlights many things I’ve discussed so far.

Like I said before, I can fit every great momentum trader’s method I’ve studied, using Oliver’s dual timeframe and price cycle analysis, into a single, cohesive framework.

Kristjan’s flag setup is essentially a base-n-break after wedge-popping off the lows.

Minervini VCP template - wedge pop off the lows and multiple base-n-breaks off the rising 20-day MA.

Stockbee Momentum Burst is a base-n-break; if you can imagine the 10/20 overlay on this chart, the stock would have returned to that same sweet-spot.

All of the O’Neil patterns - cup and handle, flat base, double bottom, square box, etc- can easily fit into the same framework. The patterns on the weekly easily translate to tradeable patterns on the daily.

The key thing is knowing where you are in the cycle of price action, both on the higher timeframe and the lower timeframe. I use the exact same process when I day trade the index futures, whether the YM, RTY, or NQ, using the 30 min higher timeframe and the 2 or 5 min lower timeframe.

Practical Application

When the higher timeframe is uptrending with the 10 EMA over the 20 EMA, focus on the bullish patterns on the lower timeframe - W-bottoms, buy setups, and higher-low wedge/flag/triangle patterns.

When the higher timeframe flips over and starts to downtrend, DON’T trade any of these bullish patterns - the odds are not in your favor. You should have already moved to cash based on the lower timeframes rolling over, violating their MAs, and not offering valid long setups in the process.

I personally don’t short. I find that the bullish patterns are far more reliable and cleaner. The downside is choppy and violent - I’m not the first to notice this. The market takes the stairs up and the elevator down. Also, because of the tendency to buy stocks when they are “cheap”, this represents demand at lower levels that causes sudden, sharp reversals and undercuts. Theoretically, the short side should work in reverse of what I explained on the long side, but you’ll have to venture into that territory yourself. I’d rather day trade the futures than short stocks.

What’s Next?

In Part 4 of this series, we have focused on finding high reward, low risk setups by combining dual timeframe, cycle of price action, and simple, repeatable patterns. In the next part, we will drill down into tactics I use to determine the exact entry trigger, sell stop, and position management strategies, along with the tradeoffs of each.

Stay Tuned!!