To be an effective trader, though, you need to be able to play the markets from both sides. This has become especially true over the last dozen years or so, what with the two massive bear markets in equities that have taken place. And to determine the best moments for selling short, the swing charts are a great source of inspiration.
Of course, while major bear markets are especially fertile times for short selling, you can speculate on stocks to go down at other times, too. The indices often experience perfectly tradable falls even when their long-term direction is upwards. By exploiting these as well as the moves up, you can boost your profits over time.
When the trend on the swing chart is upwards and it switches to downwards, a sell signal occurs. A swing-chart uptrend is where you have a series of rising swing lows, as I show in my introductory video on the subject, which you can watch here: bit.ly/R3xVSR. To generate a change-of-trend sell signal, the price needs to breach its most recent swing low.
Dow changes trend
When we talk about a breach of a previous swing low, we mean any time during the trading session that the price goes below that level. It does not mean that the price has to close the day below that level. Closing prices are typically the most important ones in technical analysis, and especially in Dow Theory, which is closely related to swing charting.
If the price is currently in an uptrend and begins to drop towards its last swing low, an obvious strategy is to place an order to open a sell position just beneath that low. That way, you will automatically get short the moment that the trend changes.
Once a downtrend has been established in this way, further opportunities to sell the market short will typically occur along the way down. A repeat sell signal happens when the market experiences a corrective rally amidst its downtrend, and then resumes that downtrend.
Repeat sell-signals in gold
To qualify as a corrective rally for the purposes of swing trading, the market needs to experience at least three up-days. An up-day is one where the day's highs are above the previous day's highs, and the day's lows are also above the previous day's lows. Unlike on a traditional Gann swing chart, the up-days on these Rivalland-modified charts do not have to be consecutive. There can be one or more down-days or inside-days mixed in.
As soon as such a correction has been registered, a repeat swing chart signal can occur. For this to happen, the price needs to drop below the lows of the previous day in the correction. At this point, we assume the downtrend is getting under way again. Once more, it is always obvious in advance where this level lies. So, the obvious strategy therefore is to place an order to go short just below the previous day's low. We simultaneously instruct our trading provider to cancel that order at the end of the day, in case the price is not taken out.
If you want to see these concepts explained in more depth, I'll be posting a video on our website very soon.
