Swing Trading Using the 4-Hour Chart (Book 1): Introduction to Swing Trading

Buy Swing Trading Using the 4-Hour Chart here: https://amzn.to/3PRR0fX

Swing Trading Using the 4-Hour Chart is actually three short books in one.

Book 1: Introduction to Swing Trading

Book 2: Trade the Fake

Book 3: Where Do I Put My Stop?

In this summary of Book 1, we introduce the fundamentals of swing trading with the Heikin-Ashi chart using the 4-hour candlesticks.

There are several types of traders. The one you choose to be is dependent on your goals and preferred lifestyle.

When most people first come into the world of trading, they think of becoming a day trader.

Day trading is fast-paced. You buy and sell securities over hours, minutes, and perhaps even seconds. And all trades are closed by the end of the working day.

It’s true that you can make money from day trading – many people do, but others don’t.

Day trading is hard. Your competition is well trained and has far better technology than you do.

Fortunately, there are other options.

Position trading, where you buy and hold a position for a much longer time frame (months and years), is much slower paced and is a better option than day trading for most people.

Here you will use the daily or weekly charts.

Unlike day trading, you can take your time to do your analysis and make a decision.

However, there is a lot of competition here too, such as investment funds, insurance companies, hedge funds, and other big players.

Swing trading fits in the middle of day and position trading. You hold a position for days, weeks, or sometimes, months.

Most swing traders will use the hour, 4-hour, or daily charts.

In this time frame, there is little institutional trading, which means competition is low.

Day traders typically use the 5-minute or 15-minute chart.

But these smaller time frames can’t clearly represent the true flow of money that the swing trader needs to ride trends.

In comparison, any technical patterns you see in the 4-hour chart will have more information value.

The Heikin-Ashi chart can be a good alternative to the traditional candlestick chart.

In the Heikin-Ashi, the candlesticks are smoothed out by averaging prices over a period of time. They do not offer as much detail as the candlestick chart, but they are excellent for visualizing trends as they show the “swings” very clearly.

In a candlestick chart, red candles could appear in the middle of an uptrend, which may give you false signals. Heikin-Ashi charts mostly filter out these false signals.

Market movements generally last three to five days, then enter a consolidation period.

As a swing trader, you can make money range-trading during the consolidation phase, but the real money is made by riding the trends.

Price changes will often occur against you, but that does not necessarily mean you should exit a trade. You must learn to recognize the difference between pullbacks and trend changes.

When you think there is a trend change, wait a while for confirmation.

When going long (buying stock), a limit order is when you set a maximum price you are willing to pay for the stock.

The other option is a market order, where the order gets filled at the current price of the stock.

It is often worth placing your limit order a little lower than the market price.

One of the best things about being a swing trader is that you don’t have to stare at the computer all day.

In fact, this type of thing is discouraged.

Instead, spend time each day first scanning for trades. When you find a promising one, assess it using your risk management plan. If it is good, place your buy limit with a stop-order and take profit order.

Then walk away.

Do not constantly check your positions. This will only make it more likely that you will make emotional decisions. Stick to your plan.

There are many types of financial instruments.

Shares, commodities, ETFs, crypto, forex, etc.

Technically, you can swing trade in any of them.

But of course, some offer better opportunities than others depending on what you want to achieve.

Shares are probably the most common trading instrument.

There is a wide range of them, and they can have big fluctuations, which can be good for the swing trader.

One downfall with shares is that there is a closed period.

Every night and over the weekend the stock market closes. The problem is that there is still price movement over this closed period. If the movement is large, then there may be a significant gap between a stock's price from the time it closes to the time it opens.

Any stops you have set will not trigger while the market is closed, so if the price gaps over your stop, it won't trigger until the next opening. This means that you could lose more money than you planned.

Markets include equities indices (such as the Dow Jones or NASDAQ), commodities (gold, silver, oil, etc.) and currencies.

Markets can also have gaps, but they are usually much smaller than with individual stocks.

If you ever see a gap of 5% or more in an indice’s price, you should consider exiting the market until things settle down.

The VIX is a volatility index which expresses the fluctuations of the S&P 500.

If the value of the VIX is below 20 it is considered low-volatility. Values above 30 are high-volatility.

It is a good idea to keep an eye on the VIX so you can be aware of extreme volatility in the market.

Here are the 16 financial instruments the author keeps an eye on.

Indices: DAX, Dow Jones, S&P 500, NASDAQ100

Bonds: Bund futures

Commodities: WTI Crude Oil, Gold, and Silver

Currencies: EUR/USD, EUR/JPY, GBP/USD, USD/JPY, USD/CHF, AUD/USD, NZD/USD, USD/CAD

If you observe these every day, you are going to get a good picture of what is happening in the overall market.

There are some general rules that apply when it comes to the different markets and how they interact with each other.

Stock indices are often highly correlated. When the major US indexes rise or fall (Dow Jones Industrials, S&P 500, and NASDAQ100), the Asian and European indices usually follow the same trend.

The US dollar is still in control. When it rises, other currencies tend to go down.

The US dollar usually opposes commodities. When it is up, commodities are down, and vice versa.

There are many instruments you can use for swing trading.

But not all are created equal…

You can trade most markets (as opposed to individual stocks) using ETFs.

An ETF (exchange-traded fund) is a basket of assets that are usually aimed towards a specific theme, such as tracking an index or a sector, such as technology. ETFs allow you to gain exposure to a particular market or investment strategy without having to pick a bunch of assets yourself.

Most ETFs that track the major financial markets have good liquidity. Popular ones include the S&P 500 (SPY), the NASDAQ (QQQ), and Gold (GLD).

When you buy futures, you are agreeing to purchase an asset at a predetermined price on a specified future date.

When you swing trade futures, you need to deal with price gaps, though they are usually smaller than price gaps with equities.

Futures are considered quite risky as you can employ high leverage. That means that you can effectively borrow money to purchase bigger position sizes. You may earn more, but you could lose a lot more too.

Because of this risk, trading futures is not recommended.

CFDs, or Contracts for Differences, are financial derivatives that allow you to speculate on the price movement of an asset without actually owning it.

Like futures, CFDs can have very high leverage and trading them is not recommended.

Trading currencies is one of the few ways to shield yourself from price gaps.

This is because the currency market is open 24 hours a day. It is closed on the weekend, so as long as you close all positions before Friday night you will not experience any price gaps.

Additionally, the simplicity of trading currencies makes it easier to calculate risk. There is no leverage involved. Your risk is your entry price minus your stop loss.

When trading currencies, you can start with microlots. A microlot is worth 1,000 units of the base currency (e.g., $1,000 USD). When trading in USD microlots, a pip change is equal to 10 cents, so if you lose 50 pips, then you have only lost $5.

When you look at the charts, there are common patterns that may appear.

These are known as setups.

Learning to recognize these setups can give you signals of when to buy and sell.

Support and resistance are one of the most fundamental setups there is.

Often, there is a price point that a security will dip down to but keep bouncing off. This is known as the support level.

There is often also a high point that the price cannot break through either. This is known as the resistance level.

You can use the gap between the support and resistance levels as a trading range. If trading long, buy the asset near the support level and then sell it near resistance. Place your stop-loss slightly below the support level.

Note: Once the price does break through the resistance level, that old level often (but not always) becomes the new support. The same is true if the asset breaks down through the support level.

A double top is the shape of the letter M. It is when an asset reaches a high point and drops back down. It then retests the high point but still can’t break through.

This is a signal that the trend is reversing and often (but not always) the price will drop to new lows in comparison to recent history.

To go short on a double top, enter at the bottom of the second leg of the M. Put your stop-loss at the top of the M.

A double bottom is the opposite.

Trading a triple bottom would be an even stronger signal.

A good strategy is to look for markets that have experienced a crash and then buy in at the sign of reversal. Eventually, markets recover. However, this is not true for equities since a single company can go bankrupt.

A breakout is when an asset finally breaks through a level of resistance or support after a period of consolidation (sideways movement).

In general, the longer the consolidation period, the stronger the breakout will be.

Wait for confirmation to buy on a breakout. Place your stop-loss just below the resistance level if going long.

A flag is a common continuation pattern, meaning that it signals a trend is going to keep going.

After a strong upwards trend, prices will often dip a little bit and consolidate before continuing to rise.

This can form the shape of a flag, and is known as a bull flag. The strong trend up is the pole and the consolidation is the flag.

The break of the upper line of the channel (the flag) is your entry point. Place your stop-loss just below the same line.

You could also get a bear flag, which is basically an upside down flag.

Capital is how much in total you have for trading.

Your position size is how much money you invest into a single asset.

As a general rule, never risk more than 1% of your capital in any single position.

For example, if you have $1000 capital, you can risk no more than $100 per trade.

This doesn’t mean that your position size is $100. It means if you lose the trade, you will not lose more than $100.

So to figure out your position size, you need to know the price difference between your entry price and stop-loss. Multiply this by the number of shares you buy. That final figure should not equal more than $100 in our example.

Keeping a trading journal will, after a while, present you with some interesting statistics regarding your behaviour.

You may start to notice which markets or types of trades you perform better in.

It can also help for motivation. When things aren’t going so well, you can look back and see that perhaps there have been down periods before, but then you bounce back.

Likewise, it can keep you humble. When you are on a streak you may start to think you are unstoppable, which can lead to risky decisions and poor money management. Looking back on your past will show that good and bad times run in cycles, so you must still keep to your trading plan.

Read the next chapter here.

Buy How to Swing Trade here: https://amzn.to/3BMRLDr