The best swing trading entry and exit signals

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The best swing trading entry and exit signalsStay Connected

Most swing traders rely on the basic turning points, indicators that the current short-term trend is about to turn. This is a reliable system, but a few single-session candlestick patterns can enhance every swing trader's timing.

These traditional signs include:

1. Reversal days. The most apparent sign that the trend is ending is when the price begins moving in the opposite direction. However, this needs to be confirmed by at least one additional reversal signal.

2. Narrow-range day (NRD). This is a very strong signal. When the trading range of a session is exceptionally small, that indicates that the current trend may be about to turn. As with all entry/exit signals, this also needs to be confirmed.

3. A volume spike. When volume is unusually high on one session, it indicates a very active struggle between buyers and sellers, something most likely to occur at the end of a short-term trend.

The strongest possible swing trade reversal sign shows up when you see a reversal day followed immediately by an NRD and a volume spike. But even these three reliable reversal signs can be enhanced with a few valuable single-session candlesticks. These include the spinning top, long candlestick, and marubozu. Accompanied by gaps, especially in a running series, the candlesticks make timing of swing trades better than with just the three well-known signals.

Swing Trading Entry and Exit Signals

The figure provides an example of Yahoo (YHOO ) with these candlestick signals highlighted. The spinning top shows up at the top of the uptrend, and indicates a likely reversal in the next few sessions. It's a valuable session pattern because the long upper and lower shadows tell you that neither buyers nor sellers were able to move the price beyond the relatively small trading range. In other words, the existing trend is likely to be at or near the point of exhaustion.

Long candlesticks, as the name implies, are sessions with larger than usual trading ranges. A variety, the marubozu, is a long candlestick with little or no upper or lower shadow. In Japanese, "marubozu" means "with little hair." If you note the placement of the marubozu and long candlesticks on Yahoo's chart, you'll see that they tend to show up at or near the turning points in short-term trends.

Accompanying the valuable candlestick patterns and often confirming them are gaps. When big gaps appear right after important candlesticks, it indicates that whatever the candlestick implies may be particularly strong. It can also signal growing price exhaustion, with likely reversal to follow a few sessions later. The big move toward the end of August is framed by gaps on the way up as well as on the way down. This reverse and fill pattern is revealing and can be interpreted as a lack of momentum to the upside.

Chart interpretation is subjective and hindsight is always perfect. However, in the moment, you can improve timing in a swing trading strategy by being aware of how candlestick patterns confirm what the swing appears to be going through. Candlestick patterns are just one more tool to help you improve your swing trading strategy and the timing of entry and exit.

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