Want to swing trade but still wearing your trading training wheels? Great! Today's column is for you.
You don't have to juggle tech stocks to be a swing trader. In fact, many newbies crash and burn on the big tech names. The markets offer a less frantic way to learn the trading game: Start your career in less volatile markets. Doing so builds confidence and gets you ready for the big leagues. And you'll also sleep better at night.
The markets are filled with quiet little corners waiting for exploration. Dozens of utilities, Baby Bells and food companies print reliable chart formations. Rust Belt industries, chemicals and
REITs hide great opportunities and considerable profits. All you have to do is take the time to look.
Pick a few slow movers and take positions within your risk tolerance. Then watch the swings closely and see how the markets give and take. These trading turtles' trends take much longer to build and unwind than the tech hotties. The new trader can learn the game at a comfortable pace in this less-demanding environment.
Got milk? The chart of dairy processor
moves as slow as a cow most of the time. DF recently formed a three-month bull flag right at its 1999 high. Its price now sits at the top of this channel and could be ready to break out. A good surge might open the barn door for a trip into the 50s in the weeks ahead.
The best entry for a bull flag is right against the top trend line, on either side of it. Most traders like to wait for the breakout and buy on a pullback, but there is another solution. An entry into narrowing price bars within the channel can catch a bigger piece of the move. This strategy often works extremely well because narrow bars predict an impending surge in volatility.
But entry within the channel can be dangerous because price might just roll over and fall. So if we buy in anticipation of a breakout, we need close support under our position. Fortunately, the 60-minute chart shows an unfilled gap just above the current price. If Dean Foods jumps above this resistance, the gap will become support even if the move doesn't trigger a breakout in the larger pattern. This could give us an opportunity to get into the trade ahead of the crowd.
has recovered nicely since Sept. 11. It has now pulled up to August resistance and could break over 20. The setup looks like a cup and handle, or even an inverted head-and-shoulders pattern. In either case, this will be a small trade no matter how it plays out. The reward target is only about 1.25 points. So the risk must be worth the effort.
The 60-minute chart reveals a setup with less than 40 cents of risk. If price drops into the lower gray zone, it breaks the short-term trend line and we should be out of the trade. So the reward/risk ratio if we take a long position will be close to 3:1 (1.25: 0.40). It's very important with low-reward setups that we optimize our entry level. The upper gray zone identifies where we need to be positioned to manage it effectively. If Southwest pops up above this zone before we get filled, we should pass on the trade.
We started with milk. Let's finish up with soda pop.
is the world's largest retailer brand soft drink supplier. It broke out to a new high on strong volume earlier this month and has now pulled back to fill the breakout gap. Buying the first pullback after a breakout is a high-probability trade, as long as selling dries up on the decline. But how do we know Cott won't just lose its fizz?
The small down gap on Nov. 20 raises a red flag. Are we now dealing with a bearish "island" reversal? Cott offers a partial solution for our dilemma. Sixty-minute bars draw a symmetrical triangle right through the filled breakout gap. We can choose to enter or stand aside depending on how this small pattern plays out. Buying a break above the triangle positions us for an attack on the down gap resistance. And we can then place a low-risk stop loss within the triangle itself.
Alan Farley is a professional trader and author of
The Master Swing Trader. Farley also runs a Web site called
HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley held no positions in any of the stocks mentioned in this column. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to
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