Intro to Chart Patterns –

Swing high and swing low; you might have heard the term being used many times, especially among day traders. If you have been confused by what this term means, then this article will explain what they are. By the end of the article you would be able to identify swing high and swing low points, and hopefully incorporate these strategies into your playbook.

Why swing highs and lows?

Price seldom moves in one direction. Pull up any chart across any market and you will undoubtedly see the zig-zag fashion. As price tends to flip-flop as it trends higher or lower, you are seeing the swing highs and lows forming.

As a day trader, swing high and swing low can reveal important market information. When you understand how to use this information, you can easily play with different trading strategies. With swing high and swing low you can ride the trend or even trade the market that is stuck in a range.

Swing high and swing low are common to all charts and therefore, the concept can be applied to any market. What’s even better is the fact that swing high and low can be applied to any time frame. What this means for you is that, understanding how swing high and swing low works enables you to swing trade or day trade the markets.

Another aspect to bear in mind is the fractal nature of the swing high and swing low points. Whether you look at a 5-minute chart or a weekly chart time frame, swing highs and swing lows are easily identifiable.

What is a fractal you might ask?

Well, fractal is defined as a curve or a geometric figure, according to this entry on Wikipedia. Each part has the same statistical character. It is a pattern that repeats itself. A good example is that of a snowflake where the fractal pattern occurs as you zoom in.

Undoubtedly, there is a lot of math involved and there is a specialized field in the study of fractals. This research article gives a basic insight into fractal geometry. It would be worth a read as it talks about the basics of fractals so you have a better understanding.

Below is an example of a Sierpinksi Triangle from this website.

Example of fractal geometry – The Sierpinski Triangle

You can see from the above figure how the triangle pattern is repeated when you zoom in. In other words, the larger triangle is made up of multiple smaller triangles in the same fashion.

Now that we know what a fractal is, let’s move on to explaining what a swing high and swing low is.

So let’s start with the very basics.

What is a swing high and swing low?

The text book definition for a swing high and a swing low is as follows:

A swing low is when price makes a low and is immediately followed by two consecutive higher lows. Likewise, a swing high is when price makes a high and is followed by two consecutive lower highs.

The first chart below shows this definition in action on the price chart.

What you see in the chart is a 5-minute chart for APPL. The flags at the top and the bottom show the swing high and swing low.

The flags depict the point when price makes a swing high or a swing low. Following the high and the low, the next subsequent sessions form a two consecutive lower high or a higher low. The above is an example of a very microscopic look at the swing high and swing low.

For intraday traders, the above chart can reveal quite some information. For example, starting with the first flat on the left side, you can see that after the swing low is formed, price tends to move higher. This tells you that the market is trend higher.

What’s more! The second swing low marked by the flag shows that it is a higher low compared to the first flag.

Now if you look close enough, you will see that the swing highs identified by the fourth and sixth flag are formed almost at the same price level. Subsequently, price tends to make swing highs and lows, each of which is higher than the previous one.

Capturing trends with swing high and swing low

This pattern tells you that price is in an uptrend. However, as you might figure out, this is only in hindsight. So how can we capture the uptrend as price tends to make higher highs and lower lows?

You simply look at the swing highs and the swing lows. Now let’s add a moving average to the chart above to get a better picture.

Swing high and low and the moving average to understand trends

Now the trend is clear when you look at the 10-period moving average. This is nothing but using swing high and swing low in order to understand the trend. The advantage of using the swing high and swing low is that you are able to define the trend by just looking at these patterns.

But you might be wondering why a swing high and swing low is formed in the first place.

Why are swing high and swing low formed?

A swing high and swing low is formed due to what is known as support and resistance. The technical explanation for support and resistance is as follows.

A support forms for the price when you notice that there are more buyers than sellers at a certain price. The demand for the asset or the stock overwhelms the supply and thus pushes price higher.

A resistance forms for price when you notice more sellers than buyers at the price level. In this case, price fails to move higher and therefore declines.

In the next chart below, the support and resistance levels are shown, which also coincides with the swing high and low.

Swing high and low identified by the support and resistance levels

When price breaches previous swing low or high point and follows up with another swing high or a swing low, price continues the trend. To put this in perspective, when price breaks the resistance level and forms a swing low, it means that buyers are in control. Similarly, when price breaks the support level and forms a swing high, it means that sellers are in control.

Now that we know the basic principles behind swing high and low, let’s look at how you can use this to improve your trading.

How to use swing high and swing low in your trading?

There are many ways to use the swing high and swing low in your day to day trading strategies. For one, the swing high and low method can be applied to identifying the trends in the market. You can also make use of the swing high and low based on the larger time frame.

In other words, instead of using the basic definition of swing high and swing low, you can identify the turning points based on a larger time scale.

The chart below shows a one-hour chart time frame for APPL.

Here, instead of using the swing high and low based on a session or a candlestick basis, we simply identify the swing high and swing low points on a larger time frame.

In the above example, you can see that the swing highs and lows are formed over a series of candlesticks or sessions. Using this method will help you to identify the trends and trade in the direction of the trend.

For example, the first four swing highs on the above chart indicate that price action is in a downtrend. However, after the swing low is formed, you can see that subsequent swing lows tend to post higher lows.

Eventually, price action starts to move higher and you can see that the trend changes direction. This is evident from the third swing low that forms above the previous swing high point around the 187.00 price level.

Using the above information you can easily trade the downtrend or even the uptrend when the direction changes.

The swing high and swing low also alerts you to potential breaks of support and resistance levels. This enables you to ride the momentum in price action.

Trend trading with swing high and swing low

As mentioned earlier, you can trade the trends with ease using the swing high and swing low method. You can apply other trend trading strategies as well using this method. Let’s take a look at the below example on how we can use a simple oscillator along with the swing high and swing low method.

The chart below you see is for MSFT, 1 hour chart. We only add the Stochastics oscillator with the default period settings of 14, 3, 3.

In the above chart, the usual swing high and swing low points are plotted on the chart. You can see that after price forms a bottom, the swing highs are formed around the same price level.

Similarly, the lows in price action show that price forms a swing low near the same area. After this bottom formation, price action starts to move gradually higher. This is evident from the fact that the swing lows start to post higher lows.

Eventually, price breaks the resistance level of 100.00. Just prior to this price action, you can see another (third) swing low being formed. By this you already can see that price is in a clear uptrend. Buying on the break above the resistance level would give you a chance to ride the uptrend.

The first profit can be booked near the previous swing high of 102.58, while leaving the rest of the position open and by covering the risk.

The above method is just a simple way to trade the trend by merely using the concept of swing high and swing low and an oscillator. You can also use this method with other indicators such as Bollinger bands or making use of overbought or oversold levels.

Why use the swing high and swing low method?

The swing high and swing low method as demonstrated above shows you how to capture the small but very significant movements in price action. The swing high and low methods can help you to identify mainly the support and resistance levels.

Using this information which can be applied to any chart and time frame, traders can easily build or improve their trading strategies.

A proper education in price action wouldn’t be complete without understanding when, how, and where to go long on a stock. Especially using bullish candlestick patterns.

While we’ve discussed some of the history of candlesticks in other recent posts, and outlined the 8 most popular bearish candlestick patterns, today we’re going to talk about the following:

The Hammer
Bullish Engulfing Crack
Bearish Engulfing Sandwich
Morning Star
Tweezer Bottom
Piercing Line

In addition, be sure to use our Bullish Candlestick Pattern Cheat Sheet for your trading and training purposes as you read along!

Bullish Candlestick Patterns Cheat Sheat

Bullish Candlestick Patterns Explained

Let’s face it. Day trading is difficult. It can be fast and furious, especially for beginners.

Stocks are up one minute, down the next. You want to get in at the bottom, but you’re unsure of yourself. You want to short the top, but how do you know it will come back down?

Not knowing how to make sense of charts in the heat of the battle only adds to the difficulty of day trading.

Thankfully, a lot of the work has been done for us – four centuries ago, actually. It is simply up to you to put in the time to understand price action trading.

Therein lies the importance and functionality of bullish candlesticks and candlestick patterns.

In this post we’ll explain the most popular bullish candlestick patterns. For each pattern, we’ll cover:

What these patterns look like
How to set entries and risk for each
What are the criteria for confirming them
What story do they tell
Some common mistakes when interpreting them
A few strategies for each

1. The Hammer

If you are familiar with the bearish “Hanging Man”, you’ll notice that the Hammer looks very similar. But as the saying goes, context is everything. Much like the Hanging Man, the Hammer is a bullish candlestick reversal candle.

The context is a steady or oversold downtrend. This creates the plot for the story that builds within the next few candles. As price declines more rapidly, we anticipate the eventual bounce.

But how do we anticipate without getting caught in more of the selloff?

This is where the Hammer comes into play. It offers us evidence that selling pressure is diminishing or being absorbed. In addition, if the volume signature associated with the Hammer candle is significant, it adds even more confidence to our thesis.

We are looking to capitalize on shorts who are taking their profits and covering, along with dip buyers who are taking a chance here on the oversold conditions. The expectation? A rally.

Ideally, you identify the hammer candle, take a position long on the break to the upside of the candle, and set a risk in the body of the Hammer, or at the lows.

Bullish Hammer Example

Let’s look at a real-life example with PLUG. Right off the open, PLUG retests the lows from the pre-market. Once it reaches those levels, volume increases slightly as it reverse on the 5-minute chart seen here.

Real example of a bullish Hammer candlestick pattern — PLUG reversing in the first 30mins of trading with a Hammer candle pattern

Visibly, there is a “shelf” forming near the lows of the hammer candle’s body. The bar to the left and right also close and open in that price “shelf” area.

The second 5-minue chart opens with a bit of weakness, then rallies strongly above the Hammer candle.

This is your signal to go long. The break of the Hammer candle body.

Set the stop below the close of this bullish 5-minute candle.

2. Bullish Engulfing Crack

Imagine the surprise if you are a short seller when a stock appears to confirm your downward thesis, only to completely reverse on you. Such is the case with the Bullish Engulfing Crack.

The down trend appears to be continuing. Shorts are nice and comfortable. Then suddenly we get a complete retracement of the preceding bearish candle.

How do we explain this?

Well, you can imagine that shorts will begin covering as they witness the rising price of the stock. This adds fuel to the buying pressure already present.

The result is a bullish candlestick pattern that engulfs the efforts of the bears. For the long-biased trader, the opportunity is perfect.

As with any setup, we are looking for evidence to build our confidence in either direction. The fact that bears were completely overcome in this single bar, is evidence enough for us.

You go long at the break of the prior bar, and set a stop at the lows.

Bullish Engulfing Examples

Let’s use PLUG as another example, on the same day as the prior example.

This time, later in the day, PLUG has a sharp selloff. After the steep decline, price reaches the support level from the prior Hammer candle mentioned above. This time, we get two bullish reversal candles that completely engulf the prior bearish candles.

PLUG with a bullish engulfing candlestick pattern — PLUG with a Bullish Engulfing Crack reversal pattern mid-day

Again, notice that the context is everything here. We are in an oversold condition with climactic selling pressure. Analyzing the volume at the lows, we can see that support is coming in as weak hands cough up their shares.

Let’s look at another example.

Here is a snapshot of TLRY, which offered us a beautiful Opening Range Breakout (ORB) opportunity right out of the gate on this particular day:

TLRY Opening Range Breakout and Engulfing Bullish candle example — TLRY with the ORB off the open using a Bullish Engulfing Crack pattern

After the selloff, buyers come in and overcome the prior selling pressure from the pre-market, engulfing the bears before moving higher.

To be safe, you would enter long on the break of the red candle, setting your risk at the lows, or in the body of the first green candle.

There are some advanced traders who are more aggressive and may take their positions early if they sense the reversal is imminent.

3. Bearish Engulfing Sandwich

Do not be confused. Just because the name says “bearish” doesn’t mean this is a bearish pattern. Far from it, actually. It is often referred to as the Stick Sandwich

The name is derived from the sandwiching of a “bearish engulfing” candle by two bullish candles. Thus, it is a bullish candlestick pattern in this context.

Very similar to the above example of the Bullish Engulfing Crack, this pattern simply takes a bit longer to “get going,” so-to-speak. An extra bar, essentially.

Again, the idea here is to think about who is getting trapped. In this case, the bears think that they have won the battle.

The assumption is that the trend has reversed and we are now headed down. After all, the Bearish Engulfing candle gives us that confidence, right?

Well, if you are on the short side, that is the hope. However, stocks don’t always do what we want them to. We have to react to what the market gives us, not what we think should happen.

In this case, the Bearish Engulfing Crack is consumed by two bullish candles that resolve to the upside. If you are short, hopefully you have respected your stop loss. If you are long-biased, you have a great opportunity here.

Bearish Engulfing Sandwich Example

PLTR offers a great visual of this in real-time after the open with a 5-minute candle chart.

PLTR Bearish Engulfing Sandwich — PLTR with a Bearish Engulfing Sandwich at the opening bell

In this case, the right side of the sandwich acts very similar to a Bullish Engulfing Crack candlestick pattern. For all intents and purposes, you should treat your entries and risk similarly to that pattern.

4. The Morning Star

Morning Doji Star and Morning Star Candlestick patterns

Technically speaking, the morning star should gap down. This is difficult to find on an intraday basis. For that reason we suffice for solid doji candle reversal pattern.

The initial candle should be long-bodied and bearish. The middle candle is short-bodied. The reversal candle is another long-bodied bullish candle (typically a gap up). The close of this bullish long-bodied candle should close above the midpoint of the 1st candle.

What is the story behind this pattern?

The plot is typical: oversold conditions (the gap down). But the body of the middle candle tells us that there is either indecision, or lack of follow through to the downside.

The result: without further selling pressure, the candle rallies to higher prices as sellers cover and buyers take advantage of discounted stock pricing.

Morning Stars can also appear as Morning Doji Stars. They look almost identical except for the body of the middle candle. The story of buyers and sellers remains the same.

Bullish Morning Star Example

You can see this in action with the PTON example below. A long bodied bearish candle, followed by a narrow bodied indecision candle. The bulls take control on the next candle and the rest is history.

PTON Morning Star Example — PTON displaying a Morning Star reversal pattern

It is worthwhile to note the volume in the first candle. We cannot assume that it is completely bearish. As you can see, there is some buying pressure at the lows. This gives us confidence as the doji candle forms.

Consequently, as price moves away from the lows in the green candle; it does so on low volume.

How can we explain that?

It took less effort for the price to rise. Therefore, we can assume that there is “ease of movement” to the upside. This should give us confidence in our long position.

For more examples of the Morning Star and other doji candles, visit our tutorial.

5. Tweezer Bottom

The Tweezer Bottom bullish candlestick pattern consists of two candles– usually with small bodies. The first should be a red/bearish candle, the second a green/bullish candle.

The bodies of the candles are typically very close with regard to their closing and opening prices, or wicks. This produces a “visual” of a pair of tweezers.

Thematically, the Tweezer Bottom alerts the chart reader to the fact that price is trying to be pushed lower, but to no avail. The two small-bodied candles represent the presence of demand in the market.

The volume signature will likely appear elevated as supply is being absorbed, keeping the candles small in the presence of selling pressure.

Entry should be taken as price breaks higher from the second candle. Stops can be set at the lows.

Bullish Tweezer Bottom Example

BNGO displays a beautiful Tweezer Bottom candlestick pattern for us here on the 5-minute chart. Pay close attention to the narrow body of the two candles, their symmetry, and the red to green close.

BNGO with a Tweezer Bottom reversal pattern

The volume is of particular interest on this first red doji. Notice how elevated it is here. Given the context, we can interpret this as absorption of supply.

The second candle (green) then diminishes rapidly in volume. Thus, our thesis is confirmed that selling has been absorbed and exhausted.

And what happens in the absence of selling pressure?

The price of the stock rises.

6. Piercing Line

The Piercing Line can look very similar to a Bullish Engulfing pattern. The exception is that the Piercing Line doesn’t completely engulf the prior candle.

It is still considered a bullish candlestick pattern because it overcomes the downward momentum to close at least midway into the body of the previous candle.

Hence the name: it pierces the lower line, but inevitably retracts.

The entry is on the next candle, confirming the uptrend, with a stop at the lows

Bullish Piercing Line Example

Piercing Lines can offer a great risk to reward at the lows of support. They can even act like springs in trading ranges.

This 5-minute chart of BB shows a combination of an Opening Range Breakout (ORB) with a Piercing Line. Together, it is a combination that can really add confidence to our entry.

BB Piercing Line and Opening Range Breakout Strategy — BB with an ORB and Piercing Line pattern

As with any setup, the more evidence we have to confirm our bias and plan, the better. For this reason, it is always good to ask yourself:

Is the trend in my favor?
Is it time for a reversal?
Does volume confirm my thesis?
Is the stock at an area of support or resistance?
Do multiple timeframes align with my idea?
What will I risk to, and where should I target for profit taking?

Your criteria may be more involved, but the idea is the same. Candlestick charts are just a last line of confirmation for a overall plan of attack.

Think of them like an extra indicator.

Conclusion

You may be asking yourself, “How do I recognize these patterns in real time?”

That’s a great question.

The answer lies in practice, practice, practice. Trading Psychologist Brett Steenbarger, Ph.D., believes that this is exactly “how expertise is created.” According to him, if we turn trading into a series of performance drills, it can increase our chances of consistency.[efn_note]Steenbarger, B. (2014, November 14). The One Trading Drill That Can Most Improve Your Trading Performance. TraderFeed. https://traderfeed.blogspot.com/2014/11/the-one-trading-drill-that-can-most.html.[/efn_note]

You may be thinking, well I don’t have the luxury of 10,000 hours of practice. And that may be true. You have a job, kids, obligations, whatever the case may be.

But as Steenbarger notes, if you can drill down the process to specific repeatable patterns, you can achieve mastery much faster.

There is no better way to do this than training your “chart eye” with a stock simulator.

How does this work?

Build Your Mental Repertoire

Imagine being able to replay three years worth of stock trading days.

For each “training” session, you decide to focus on a single candlestick pattern. As you click through the stock charts for any random day, you look for examples of that one pattern. Over time you save a repertoire, mentally (and digitally if you can take screen shots).

Once you feel you can recognize this pattern, you practice it in replay mode. You spot the pattern, you make the trade. You make notes on what confirmed the pattern, what was the context, what you did right and what you did wrong.

Then, you move on to the next pattern.

Repeat.

This is what we call deliberate practice. And it pays off in the end.

Want to learn more about Candlestick Charts? Check out our free resources here.

I think we can agree that choppy markets are a common occurrence in the market. You can see these flat chart patterns in stocks, futures and sometimes even bitcoin.

Choppy markets are tough to trade. If you try to buy breakouts, the stock will fail and roll over. The volume also dries up, and there are traps all over the place.

So, what are we to do with these setups? What’s the magic formula?

Which indicators work best to increase your chances of placing a winning trade?

Well in this post, we will cover how to trade during choppy markets by providing the following: (1) methods for identifying flat markets, (2) best indicators to use and (3) a winning trading strategy.

Choppy Market Overview

A choppy market is a market without any clear direction. Choppy markets can present themselves after an extended bull or bear market has been in place. When identifying choppy markets, a trader must first locate the highest high and lowest low over many sessions.

These two swing points will give you your range. The next thing to look for is how well the underlying security trades within this given range. If the security puts up a little fight when attempting to break through support or resistance, odds are the stock is in a choppy market.

Fact is 80% of the Time the Market is Choppy

The markets spend the majority of the time in sideways patterns. If you think about it logically, how can the market continuously trend up or down all the time? A constant linear move up or down is not sustainable.

Well, the problem with the fact the markets are flat the majority of the time is that it’s in direct conflict with what you want as a new trader. Meaning you will approach each day with an enormous desire to make money and to make money fast.

The market doesn’t care what you want, so you will find yourself banging your head up against the wall as your desire for significant gains are not possible because the volatility is not there.

So, as a trader, you will need to identify when the market is trending and when it is choppy.

For trending markets, you will want to take fewer positions and let the market do the hard lifting for you. Conversely, with choppy markets, you will want to trade the ranges.

When Does Choppy Trading Occur the Most?

Investing/Swing Trading

When investing, choppy markets will show up outside of the quarterly review cycles because there isn’t any real news to move the stock. Stocks will at times find some catalysts through the mention of a deal or a significant move by the broad market.

Before we go any further, you will need to decide if you want to trade before during or after earnings.

For me, when I was swing trading, I would not hold any position going into earnings. Reason being, my analysis had very little to do with the pending move due to the emotional reaction to the reports. Also, I would increase my trading activity when during earnings season because the trade opportunities were abundant.

Day Trading

As a day trader, the time window for choppy trading is from 11 am to 2 pm. Now, this does not mean there aren’t a few plays a day that make moves during lunch, but the vast majority of trades occur in the morning and then at the end of the day.

I have written countless articles supporting this point, so I will not labor over it too much now. But the critical point to remember is during the middle of the day the market is exceptionally flat.

Again, here you have a choice to make. Do you avoid trading midday all together? I do as a part of my trading plan because I was never able to turn a profit with these setups.

I will caution you that if you decide to trade the midday charts, you will need to play the ranges. Also, you will want to use an oscillator which can give you overbought and oversold readings. This will allow you to buy into support and sell into resistance.

Why is Profiting in Choppy Markets so Difficult?

The challenge with profiting in choppy markets is two-fold. First, it comes down to the small size of the price moves and secondly when things go wrong – they go wrong horribly.

Small Moves

The moves are small – relative to trending markets. So, you need to have a high winning percentage for this trading style to be worth your time. This means you need to shoot for the 60% to 70% win ratio level.

These small moves will also require you to keep tight stops and tight profit targets. This way when you are wrong, you can limit your losses, and when you are right, you can book profits quickly.

When Things Go Wrong

The other major challenge is that when things go wrong, they go wrong. Choppy markets are nothing more than the market building cause before it ultimately moves higher or lower. It’s like a constant dueling match between the bulls and bears.

The resulting declaration from these price battles is the breakout. Depending on how long the stock is in a range and how much volume is traded in this price area will help you forecast the strength of the ensuing breakout.

Remember, at some point the stock will breakout because again the market does trend 20% of the time.

To this point, if you are, for example, short a stock as it breaks out – you must close your position without hesitation. If you are unable to admit defeat and hold onto the position, this is where things can get out of hand.

Example of a Stock that Runs Away from You

Now imagine you are day trading and on average make .5% per trade trading the sideways choppy action. Then the unimaginable happens. After five successful trade signals in a row, the stock breaks out.

At this point, you freeze and do not take action. The sock breaks out, and you continue to hold on. Before you realize it, your low volatility stock is now up 8% in three hours.

Not only have you managed to erase your 2.5% worth of gains for the day, but you are also now down an additional 5.5%.

This fictional series of events is my attempt at showing you how you could have an 83% win rate but still manage to lose money trading a choppy market.

How to Identify Choppy Markets

This will come down to preference again, but there are a few ways you can determine if a stock is moving.

Fibonacci

Fibonacci retracements are a quick visual way for determining if a stock is trending.

A simple rule of thumb is that if a stock is continually retracing more than 61.8% of its moves, the stock is trading in a chopping pattern. Now, it’s more than just retracing 61.8% once or twice. You need to see the stock perform 78.6% and 100% retracements over and over again. This will produce the trading range that you can use to identify buy and sell signals.

Price Action

Another technique you can use for identifying a choppy market is price action. If you see multiple highs and lows in the same region forming a rectangle shape, you are likely looking at a choppy market.

Still unclear of what this looks like? Go back and take a look at pretty much every chart in this post.

Out of all the methods you can use to identify choppy markets, this is by far the easiest. This does not require you to draw multiple Fibonacci retracements or apply other indicators which you will need to interpret.

It’s merely a matter of drawing two horizontal lines and identifying the rectangle pattern.

Broad Market Indicators

So this example is not about specific stocks but more your ability to track the overall volatility in the market. I have a proprietary indicator I have created to gauge market volatility.

My indicator lets me know the market is flat if my list of possible setups is under 10. I can quickly see this by 9:45 am, at which point I make a conscious decision not to trade heavily during the morning.

So, what is your indicator that you can use in a scanner to give you some insights that the market is choppy?

Best Indicators for Choppy Markets

There are a host of trading indicators available in the market. However, do you think momentum indicators will help you trade a stock that is trading sideways?

Well, since the stock is range bound, wouldn’t it make sense also to use an indicator that is bound by a range? Based on this theory, you will want to take a hard look at oscillators.

I use the RSI to trade in choppy markets. But why limit yourself there?

You will also want to test out other oscillators such as the Stochastic RSI or the Awesome Oscillator.

Trading Systems for Choppy Markets

Buy at Support/Sell at Resistance

There are two methods for profiting in choppy markets. The first method is to buy at support and sell at resistance. When stocks are choppy, there is not enough supply or demand to push the issues through critical levels. So, if a trader buys the support levels and sells resistance, one can net substantial gains.

Trade with Oscillators

The second method for making profits in choppy markets is to utilize oscillating indicators.

These indicators will provide buy and sell triggers based on price movement. When stocks are in choppy markets, traders play close attention to oscillators, such as the RSI and Slow Stochastics. Many studies have shown that oscillators perform best during choppy markets, due to the fact if a stock is trending, a stock can stay overbought or oversold for long periods of time.

Real-Life Trading System – Pivot Points + RSI

There are many trading systems you can explore when trading in choppy markets. When trading these flat markets, I would highly suggest sticking to high float, high volume stocks. This way you can count on predictable price movements.

You really want to see high volume to avoid scenarios where market makers will push a stock to trip your stops.

A simple system would be to look for stocks hitting their pivot levels and overbought/oversold readings on the RSI. You can keep it that simple. Next, let’s look at a trading example so that you can see this system at work.

The above chart depicts a stock in a choppy trend. There are two key points to note: (1) low RSI readings right as (2) the stock is hitting the pivot point support line.

This combination of extreme readings in the oscillator with pivot points can produce consistent results. Go back and look at your charts to see real-life examples of this strategy.

You place your buy orders in or around the pivot point support area and then sell once the stock hits the high of the range. Remember, you have to keep those stops tight because once the stock finally breaks out, you do not want to lose a week’s worth of trading profits.

Before we wrap up this section, I need to leave you with a word of caution; volatile stocks do not care much for indicators giving their opinions on what should happen next. So please remember these setups and signals will not work as well with high beta stocks.

How to Hedge Against Choppy Markets

As a Day Trader

It’s simple – for me, I don’t trade choppy markets. That’s my hedging/risk mitigation technique for not overtrading and running up trading commissions. First, you need to identify the right setups. Next, you need to monitor stocks all day long. I don’t have the time nor the desire to sit in front of the screen all day.

You may read articles that tell you to buy bonds or invest in emerging markets. However, as a day trader, I can always find one or two setups a day.

As an Investor

Now as an investor I again will say you have alternatives to hedging against the chop. For starters, you can trade the sideways action as we have stated earlier in this article.

Another option for long-term investors is to place your money in dividend stocks that can turn a steady return until market activity picks up again.

In Summary

Change Your Mindset

Traders must change their mindsets in a choppy market. Many day traders in the late 90’s had grown accustomed to 25% gains intra-day. This of course changed as the market environment shifted from boom to bust. Hence, traders should not get greedy and will have to adhere to the rule that ”small consistent gains equals big profits.”

Decide If You Are Going to Trade Choppy Markets

Again, choppy markets are not good or bad. It comes down to your trading style. The key is deciding which one you are going to trade. If you are not going to day trade after 11, do not keep your chart open to keep an eye on the charts.

Reality is at some point, the market will pull you in, and you will place a trade you regret. How can you possibly resist?

Test Drive Choppy Markets in Tradingsim

If you found this post helpful, please head over to our homepage to learn more about Tradingsim. So give it a go. You can practice trading the futures and equities markets to see if you can turn a profit in choppy markets.

FSLR Support and Resistance levels

Hi Guys, I’ve put a quick video together on a great trade from earlier in the week. The trade illustrates how you can use key support and resistance levels on the larger timeframe charts (daily, weekly) to get some clues on intraday trading direction. As day traders, we need to be like detectives and get all the facts in front of us so we can make logical, fact based decisions I am reviewing a trade on FSLR which gapped down due to a ratings downgrade by a Wallstreet analyst. FSLR started the day down a mere 3.5%, or so; however, it quickly made a move through longer term support levels and showed no fight at all. What started out as a 3.5% loss quickly turned into a 10% loss.

When you look at this trade example, you will notice that once you enter this trade, there were little, to no reasons to get out of the short. As I mentioned, when larger support and resistance levels get broken with ease, you need to understand the message that is being sent to you. In this case, there was underlying weakness in FSLR which took it down all day long.

But, remember, hindsight is always 20/20 and we don’t have a crystal ball. It is easy to look at this video and say “hey, I could have rode this short down the entire day and made a boatload of cash”. However, there were certain points where a base started forming and divergences in the RSI started appearing and it was prudent to take some profits. You will find with experience that most trades do not make it this easy for you. This just happened to be an extremely weak stock the entire day. Expect a fight on most days.

Our trade example below uses our Tradingsim Market Replay tool. It is a market DVR which allows you to replay over 2 years of historical market trading activity as if you were trading it live. Check it out if you are looking to learn how to day trade.

Swing High and Swing Low – A great way to trade the trends