OPTION SWING TRADING – The Trend is Your Friend
The second way is to first identify an emerging trend and then wait for a pullback on a trending stock. Broadly speaking, you need a signal that indicates whether the financial instrument is in an uptrend or downtrend.
For this, a favorite tool is moving averages – typically, the 10 and 20 period moving averages for shorter term trends and the 50 and 200 period simple moving averages (SMA) for longer term trends.
Using charting software, you also draw trend lines under the “lows” if the trend is rising, or over the “highs” if the trend is downward. Some prefer the zig-zag lines drawn through closing prices instead.
Trend lines help you decide whether the trend is weakening or not. If the trend is upward and you have drawn your lines under the troughs, you should also take note of the peaks.
KNOWING THE PATTERNS
If the angle of the peaks is converging toward the angle of the troughs, the trend may be weakening and may be signaling an impending reversal. Same goes for a downward trend, only in reverse.
Some of the best swing trading signals occur when resistance becomes support, or vice versa. Then you wait for a decisive continuation candle which confirms the trend.
Trading opportunities on the stock market are usually identified after the market closes, so that you are prepared for entry within the first half hour of trading after the market opens the next morning. When looking for a reversal signal from a pullback, candlestick charting patterns often provide good signals.
Another classic signal is called “Price Volume Divergence”. This is where the price is still moving in one direction while the volume is drying up at the same time. This is a classic indication that price action is about to continue with the trend.