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A short swing is used to make money when a stock’s price is predicted to go down. We sell short the stock. For those unfamiliar with shorting stocks, we sell the stock without having previously owned it. Additional detail about shorting stocks can be found the Appendix. For now, it is only necessary to know that our goal is to sell the stock and buy it back at a lower price.
While anyone can sell short, you must make sure that your brokerage account is approved for trading on margin. If you do not have a margin account, simply fill out the necessary forms with your current brokerage firm or open an account with one of the firms recommended for swing trading.
A short swing is a mirror image of a long swing. The price of a stock in a downtrend tends to have periodic, short-term rallies (pull-ups) as the price moves lower. The set up for a short swing is the brief rally (or pull-up). The decision rules in the Master Plan help enter the trade when the stock is resuming it’s downward path.
A chart showing a downtrend that is conducive to short swing trading is shown above.
Notice in the chart below that the downtrend is interrupted by short-term rallies (pull-ups). The trade is placed after a short-term rally (or pull-up), once the stock resumes its downtrend.
The trade is entered on a day when the price falls below the low of the previous day.

The rules for entering and exiting a short swing are shown schematically on the next page.
While the rules might seem somewhat complicated, several brokerage firms make the process quite easy. Interactive Brokers – described in the next section – allows you to enter the three components of the trade all at the same time. For a short swing they are:
• A sell stop to sell the stock when the price moves below the stop price
• A buy stop to buy back the shares if the price moves up 4%
• A buy limit to lock in profits (on ½ the shares) when the price drops 7%
The schematic diagram provides instructions for how to adjust these prices on the second day, third day, and so on, based on whether the stock has been sold short or not. The schematic provides exit instructions as well.

Once half the shares close at a 7% profit, the other half remains open to “ride the wave”. When do we close the second half of the trade?
A trailing stop is used to close the 2nd half of the trade. Remember that a trailing stop is used to raise the sell stop (stop loss) during the trade. The same rules apply (see 6.6 above). The shares are sold when the price drops to 6 cents below the low of previous day (no gap on open) or the current day (gap on open).

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Ride The Wave The Elliott Wave Theory For Forex Markets

One of the best known and least understood theories of technical analysis in forex trading is the Elliot Wave Theory. Developed in the 1920s by Ralph Nelson Elliot as a method of predicting trends in the stock market, the Elliot Wave theory applies fractal mathematics to movements in the market to make predictions based on crowd behavior. In its essence, the Elliot Wave theory states that the market – in this case, the forex market – moves in a series of 5 swings upward and 3 swings back down, repeated perpetually. But if it were that simple, everyone would be making a killing by catching the wave and riding it until just before it crashes on the shore. Obviously, there’s a lot more to it.

One of the things that makes riding the Elliot Wave so tricky is timing – of all the major wave theories, it’s the only one that doesn’t put a time limit on the reactions and rebounds of the market. A single In fact, the theories of fractal mathematics makes it clear that there are multiple waves within waves within waves. Interpreting the data and finding the right curves and crests is a tricky process, which gives rise to the contention that you can put 20 experts on the Elliot Wave theory in one room and they will never reach an agreement on which way a stock – or in this case, a currency – is headed.

Elliot Wave Basics

Every action is followed by a reaction.

It’s a standard rule of physics that applies to the crowd behavior on which the Elliot Wave theory is based. If prices drop, people will buy. When people buy, the demand increases and supply decreases driving prices back up. Nearly every system that uses trend analysis to predict the movements of the currency market is based on determining when those actions will cause reactions that make a trade profitable.

There are five waves in the direction of the main trend followed by three corrective waves (a “5-3″ move).

The Elliot Wave theory is that market activity can be predicted as a series of five waves that move in one direction (the trend) followed by three ‘corrective’ waves that move the market back toward its starting point.

A 5-3 move completes a cycle.

And here’s where the theory begins to get truly complex. Like the mirror reflecting a mirror that reflects a mirror that reflects a mirror, the each 5-3 wave is not only complete in itself, it is a superset of a smaller series of waves, and a subset of a larger set of 5-3 waves – the next principle.

This 5-3 move then becomes two subdivisions of the next higher 5-3 wave.

In Elliot Wave notation, the 5 waves that fit the trend are labeled 1, 2, 3, 4 and 5 (impulses). The three correcting waves are called a, b and c (corrections). Each of these waves is made up of a 5-3 series of waves, and each of those is made up of a 5-3 series of waves. The 5-3 cycle that you’re studying is an impulse and correction in the next ascending 5-3 series.

The underlying 5-3 pattern remains constant, though the time span of each may vary.
Forecasting Forex Trading What This Means For You

A 5-3 wave may take decades to complete – or it may be over in minutes. Traders who are successful in using the Elliot Wavy theory to trade in the currency market say that the trick is timing trades to coincide with the beginning and end of impulse 3 to minimize your risk and maximize your profit.

Because the timing of each sequence of waves varies so much, using the Elliot Wave theory is very much a matter of interpretation. Identifying the best time to enter and leave a trade is dependent on being able to see and follow the pattern of larger and smaller waves, and to know when to trade and when to get out based on the patterns you identify.

The key is in interpreting the pattern correctly – in finding the right starting point. Once you learn to see the wave patterns and identify them correctly, say those who are experts, you’ll see how they apply in every facet of forex trading, and will be able to use those patterns to trigger your decisions whether you’re day trading or in it for the long haul.
cinneide.net > Ride The Wave The Elliott Wave Theory For Forex Markets

Let’s say that you are receiving recommendations from MasterSwings or MrSwing Lite and your trade is not executed on the day the order is placed. You can repeat the process for up to 5 trading days.
• If the stock gaps up or down, wait the appropriate amount of time (30 minutes for a gap up and 5 minutes for a gap down) – determine the entry and exit prices based on the current day’s prices.
• If the stock opens within 50 cents of yesterday’s close, the entry and exit prices are based on the previous day’s prices.
The chart on the following page should make the trading rules clear.

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Trading Strategy: Using Trailing Stops

Trailing Stops can Limit Risk and Lock In Profits

Trailing stops are a great trading strategy that uses stop loss orders. Simply put, as the price of the stock goes up, your trailing stop will also go up. The trailing stop prices are set at a certain percentage (%) below the current price.

As the price of the stock goes up, the trailing stop will also go up. The stop follows, or trails, the stock price, giving us the name “trailing stops”.
Only Raise Your Trailing Stop - Never Lower It!

The advantage of using trailing stops is that you only raise your trailing stop price. You never lower your trailing stop!

Why do you only raise trailing stops? You want to only raise your trailing stops to reduce risk and lock in profits.
Examples of Using Trailing Stops

Here are examples of trailing stops in action.

You buy XYZ stock at 10.00. In this example we will set our trailing stop price at 10% below the current price. Our initial trailing stop will be 9.00. How did I get 9.00? Take 10% of 10.00 to get 1.00. We’ll set the initial trailing stop at 1.00 less than the current price of 10.00. Subtract 1.00 from 10.00 to get 9.00. If the stock price hits 9.00, our trailing stop will sell our position.

Scenario: Stock Moderately Decreases in Price - XYZ stock declines in price! If XYZ declines in price to 9.50, you will not alter your trailing stop - do not lower your trailing stop order price!

Scenario: Stock Sharply Decreases in Price - XYZ is falling fast! First it hit 9.50, then kept dropping and now it is approaching 9.00. When the price of XYZ hits 9.00, our trailing stop will automatically sell the stock. We will have lost 10% of this trade’s value. Keep in mind that this is 10% of only this trade, not 10% of our total portfolio value. We knew we were risking 10% of our money in this trade. This risk is money we were willing to lose. If XYZ keeps falling to 8.00, we’ll be protected thanks to our trailing stop - we will have sold this position (at a loss) at 9.00. Our risk was limited to 10%. If we didn’t have a trailing stop in place, we would currently be down 20% on this trade - 10.00 price falling to 8.00 is 20% decline.

Scenario: Stock Moderately Increases in Price - XYZ stock increases in price! If XYZ stock prices goes up to 11.00, we will alter our trailing stop. The new trailing stop price will be 10% below 11.00. First calculate this price by taking 11.00 * 10% (10% is the same as multiplying by .10). So we have: 11.00 * .10 = 1.10. Second we will calculate the current price of 11.00 minus 1.10. We’ll set our trailing stop price at 11.00 - 1.10 = 9.90. If XYZ stock hits 11.00, our trailing stop will be 9.90.

Scenario: Stock Sharply Increases in Price - XYZ shoots up to 15.00 per share. We’ll have to calculate a new trailing stop price, again 10% lower than the current price. First calculation: 15.00 * 10% (or .10) = 1.50. Second calculation: 15.00 - 1.50 = 13.50. Our new trailing stop price is 13.50. The return rate from 10.00 to 13.50 is 35%! We’ve just locked in 35% in gains. If XYZ hits 13.50, our trailing stop loss order will automatically sell XYZ at 13.50. If XYZ falls to 9.00 per share, we won’t care. We’ve locked in profits and our trailing stop sold our positions for us.

Trailing Stops Reduce Risk

Trailing stops reduce risk by setting an absolute minimum price and monetary value you are willing to risk and possibly lose. For simplicity I will use a trailing stop price of 10% below the current stock price. The trailing stop price you use depends on your trading style, strategy, and amount of risk you are willing to accept. Some people may want to set a trailing stop at 5% below the current price, while others use upwards of 20% below the current price.

Keep in mind that some stocks are volatile and may fluctuate 5% to 10% in price per week. If your trailing stop is set at 5% below the current price, and the stock falls 5% shortly after you buy it, your trailing stop will execute and sell your stock position at a 5% loss. However, if your trailng stop is set at 10% below the current price, the stock price can initially fall 5%, then the stock price may shoot back up. Volatile stocks require careful research and analysis before you determine the trailing stop percentage to use.
<2>Trailing Stops Lock In Profits

Trailing stops lock in profits or reduce losses when the price of the stock goes up. As the stock prices increases, your trailing stop price also increases.

If the stock continues increasing in price - say 20% above the price you purchased at - your trailing stop will lock in 10% in profits. If the stock continues climbing and hits 40% above the price you bought it, your trailing stock will also climb, locking in a 30% gain! When the stock finally declines in price, your trailing stop will sell your position, locking in a gain of 30% profits for you.
Use Trailing Stops!

Everyone should use trailing stops. They benefit you in two ways: reducing risk and locking in profits. Trailing stops are a very important and useful tool available to traders and investors, but many traders do not use them. If you plan on being a successful trader or investor, trailing stops are an easy way to increase your profits and your chances of success.
Read More > tradingwinner.com Trading Strategy: Using Trailing Stops

As with when to trade and how to enter, the following day’s activity depends on whether the stock gaps up/down or not. If the stock price doesn’t gap up or down, the stop loss is changed based on the previous day’s prices. If the stock gaps up or down, the stop loss is changed based on the current day’s prices. Whether based on the previous day’s prices or the current day’s prices, stop loss rule is the same.
• When the stock opens within 50 cents ($0.50) of the previous day’s close – if 6 cents below the previous day’s low is higher than yesterday’s stop loss, raise the stop loss to this new price. This is known as raising the trailing stop, which further limits the downside risk.
• When the stock gaps up or down 50 cents or more – wait 30 minutes for a gap down or 5 minutes for a gap up – if 6 cents below the today’s low is higher than yesterday’s stop loss, raise the stop loss to this new price.

As with when to trade and how to enter, the following day’s activity depends on whether the stock gaps up/down or not. If the stock price doesn’t gap up or down, the stop loss is changed based on the previous day’s prices. If the stock gaps up or down, the stop loss is changed based on the current day’s prices. Whether based on the previous day’s prices or the current day’s prices, stop loss rule is the same.
• When the stock opens within 50 cents ($0.50) of the previous day’s close – if 6 cents below the previous day’s low is higher than yesterday’s stop loss, raise the stop loss to this new price. This is known as raising the trailing stop, which further limits the downside risk.
• When the stock gaps up or down 50 cents or more – wait 30 minutes for a gap down or 5 minutes for a gap up – if 6 cents below the today’s low is higher than yesterday’s stop loss, raise the stop loss to this new price.

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Gaps

Playing the gap is one of the most powerful trading techniques you can employ, and it is particularly useful for making a “quick buck,” once in the morning. We call this the Dumb Money Gap Down, or “DMGD.” It is when a stock opens substantially lower than its previous close, or plummets sharply soon after the opening bell.

The technique is based on the fact that inexperienced (”dumb”) investors will frequently buy or sell stock before the market opens. If such pre-market action is to the sell side, the stock will gap down, which means it will open below where it closed in the previous session.

Although we refer to stocks that gap down (open lower), a DMGD includes a stock that opens flat, or even slightly higher, but quickly plummets during the first few minutes. Whether this occurs right at the bell or shortly thereafter, the theory is the same: the “dumb” money sold the stock.

Why “DMGD” Works

The theory of the “DMGD” is that no real professional would ever sell stock first thing in the morning without a compelling reason to do so. Hence, any sharp action in either direction is due to inexperienced traders. And, more often than not, the “smarter” money frequently swoops in to drive it back up. Using proper timing, you can usually catch the bounce and make substantial gains in only a few minutes.

Another reason that stocks gap down sharply is that the less experienced traders and investors will overreact to news, or to an analyst downgrade, etc. The interesting point about this is that the DMGD strategy tends to work even if the stock is gapping down for a “reason.” More often than not, a reaction to a negative event is overdone, sometimes blatantly so.
garsworld.com > OracleTrader > Gaps >

Once the trade is executed, the exit orders are placed.
• The profit order – a sell limit order is placed at a price that is 7% above the entry price.
• The capital preservation order – a sell stop (stop limit) order is placed at 4% below the entry price OR 6 cents below the low of the day that was used for the trade (whichever is higher) – for a stock that opened without a gap the previous day sets the prices; for a stock that opened with a gap, the price action before the day (high and low) sets the prices.
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Article:

Big Gap Down After Big Down Day: Historical Precedents
Brett Steenbarger
My historical studies typically take the most distinctive aspects of the present market and then ask, “When this has occurred in the recent past, what has typically followed in the markets?” As it looks right now, the S&P 500 Index (SPY) looks set to gap open much lower following a very weak day on Friday. What has typically occurred when a large gap to the downside has followed a big down day?

I went back to 1996 (N = 2934 trading days) and found 26 occasions in which SPY was down by more than 2% the prior day and then gapped open to the downside by -.5% or more. From the downside gap open to the close of that same day, the market was up 15 times, down 11, for an average gain of .86%. The following day (from the close of the gap down day to the close of the next day), the market was up 18 times, down 8, for an average gain of 1.18%. All in all, from the downside gap open to the close of the following day, the market was up 20 times, down 6.

In short, there has been no bearish edge to selling into a sizable gap down when the prior day has been down sharply. Indeed, on average, the trader would have made money by buying the open and holding through the following day.

While that’s not a pattern I’ll be trading mechanically, it is one that primes me to look for buying setups during the day–especially price lows that are accompanied by fewer stocks making new lows and less extreme negative TICK readings. Should we not get those setups, that too would be an important indication, as it would suggest that the market is so weak that it cannot live up to historical precedent.

As with when to trade, how to enter depends on whether the stock gaps up/down or not. Typically, the stock price doesn’t gap up or down and the entry price is based on the previous day’s prices. When the stock gaps up or down, the entry price is not based on the previous day’s prices, but on the current day’s prices. Whether based on the previous day’s prices or the current day’s prices, the entry rules are the same.
• The most common occurrence – the stock opens within 50 cents ($0.50) of the previous day’s close – buy the stock the moment it trades 6 cents (1/16) above the previous day’s high. This can be accomplished by using a buy stop order. This increases the likelihood that the price is moving in the direction of the bullish (long) trade.
• Occasionally a stock gaps up or down 50 cents or more – buy the stock the moment it trades 6 cents above the high of the new day. This would be 30 minutes after the market opens for a gap up or 5 minutes after the market opens for a gap down.

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Opening Gap
Definition:

Many day trading markets open and close at specific times each day, such as opening at 8:30 AM and closing at 5:30 PM. If the market opens at a different price than it closed the previous day, the market has experienced an opening gap. This price pattern is called a gap because on a trading chart there will be a gap (blank space) between the closing and opening prices. Opening gaps can be caused by news releases or other events that happen while the market is closed, or by traders deciding what prices they will trade at, and placing their orders, before the market opens.

There are several different types of opening gap, with the most common being the following :
Full Gap Up

A full gap up occurs when the market opens at a price that is higher than the previous day’s high. For example, if the previous day’s high was 5000, and the market opened at 5050, there would have been a 50 point full gap up.
Full Gap Down

A full gap down occurs when the market opens at a price that is lower than the previous day’s low. For example, if the previous day’s low was 3150, and the market opened at 3010, there would have been a 140 point full gap down.
Partial Gap Up

A partial gap up occurs when the market opens at a price that is higher than the previous day’s close, but lower than the previous day’s high. For example, if the previous day’s close was 4500, and the previous day’s high was 5000, and the market opened at 4560, there would have been a 60 point partial gap up.
Partial Gap Down

A partial gap down occurs when the market opens at a price that is lower than the previous day’s close, but higher than the previous day’s low. For example, if the previous day’s close was 3650, and the previous day’s low was 3400, and the market opened at 3630, there would have been a 20 point partial gap down.
Also Known As: price gap, market gap
From Adam Milton, Your Guide to Day Trading.

Using the Master Plan, swing trading opportunities are identified after the market closes. Trades are entered in the morning, usually within the first half hour of trading. When you enter the trade (and the decision rule you use) depends on whether or not the stock has gapped up or down from the previous day’s closing price. According to the Master Plan, a stock is considered to have gapped up when it opens 50 cents or more higher than the previous day’s close; it is considered to have gapped down when it opens 50 cents lower than the previous day’s close. Most frequently, the stock price will open within 50 cents of the previous day’s close, neither gapping up nor gapping down.
• The most common occurrence – the stock opens within 50 cents ($0.50) of the previous day’s close – the order can be placed a few minutes after the market opens.
• Occasionally a stock gaps up 50 cents or more compared to the previous day’s close – the order is placed at least 30 minutes after the market opens.
• Occasionally a stock gaps down 50 cents or more compared to the previous day’s close – the order is placed approximately 5 minutes after the market opens.
• To summarize, if the stock gaps in the same direction as the trade, wait 30 minutes, and if the stock gaps in the opposite direction of the trade, wait 5 minutes.

sell limit

Profit is taken using a “sell limit” order – once the price is reached, the specified number of shares are sold.

Definition of sell “limit order“; An order to a broker to sell a specified quantity of a security at or above a specified price (called the limit price).

stop loss

Capital is protected using a “stop loss” order – when the stop price is reached, all the shares are sold.
Definition of “stop-loss”; A stop order for which the specified price is below the current market price and the order is to sell.

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Market Orders and their Risks
Your market order is executed at the best price obtainable in available markets at the time the order is executed. Please note and remember that the price at which your order is finally executed could well be different from the quoted price you got for yourself before you placed your order. Again, the reason is that the market is dynamic. Prices are changing continuously in the market as the minutes and seconds go by. Orders are executed in accordance with prescribed priority rules, delays in execution can occur due to market demand of a security, and in the meantime market price can change as a result of investor demand and other factors. Market orders guarantee an execution (subject to the availability or the liquidity of the security) but they do not guarantee an execution at a specific price. Large orders can take longer to fill and can move the market for the stock, sometimes to your disadvantage.

Limit Orders
In contrast to the market order, there is another type of order called a “limit order” that does in fact guarantee a price but not an execution. Limit orders are so named because you place a limit on the amount you are willing to pay to buy a stock or on the amount you are willing to accept to sell a stock. Naturally, you will accept more favorable prices if you can get them. Here’s how limit orders work using Disney as an example.

Buy Limit Order
DIS is selling for $84 a share. Based on your experience, you think the stock could decline in the short-term and then rebound strongly upward. So you place a limit order GTC (Good Till Canceled) to buy DIS at $81. (Any price different from the current market price is said to be “away from the market.” Limit orders are always placed away from the market - below when you buy and above when you sell.) Now the broker/dealer’s computers monitor your order and when the stock price hits $81 your limit order is executed. If the stock price does not decline to $81, your limit order is not executed. Execution is always subject to the availability or the liquidity of the security.

Sell Limit Order
You own Disney which is trading at $84. You think the stock can still go higher. So you place a sell limit order at $88. When the stock price rises to $88, your limit order is executed. If the stock price does not rise to $88, your limit order is not executed. Execution is always subject to the availability or the liquidity of the security.

Risks of Limit Orders

Limit orders give you more control over execution price, but control also comes with certain limitations that you should be aware of: i.e. you may miss owning or selling stock, depending on the circumstances. The stock may never reach your limit price and your limit order will not execute. For example, in the Sell Limit Order example above, if Disney only reached $87 and then started to fall, your limit order would not have executed and you’d still own the stock as its price drops.

Fail to execute. Even if your stock reaches or passes through the limit price, your limit order may not execute if there are orders ahead of yours at the same limit price. The orders in line ahead of you must be filled first and there may not be enough stock available to fill your order when its turn comes.

Stop Orders
Stop orders are mainly used to limit loss on profitable long or short positions which is why they’re also called “stop loss” orders. Although they resemble limit orders, stop orders have one feature in particular that sets them apart. Unlike a limit order which can be filled only at a specific limit price, when a stop order reaches its stop price, the stop order then becomes a market order to be executed at the best price available at the time of execution. As a result, there are trading situations where the stop order could end up getting executed at a price that is significantly higher or lower than the stop price and potentially unfavorable to the investor. Stop orders are not allowed on OTC Bulletin Board or Pink Sheet stocks.

Buy Stop Order
The buy stop is frequently used to protect the profits of a successful short sale. Let’s say you shorted Disney at $89 and the stock subsequently dropped to $82. Concerned that the stock could start going up, you place a buy stop order at $83 to cover your short position and protect your profits. The stop order becomes a market order when the stock trades one board lot or more at $83.

Sell Stop Order
You bought Disney at $80 and it’s gone to $89. You think it’s headed down so you place a sell stop order at $88 to protect most of your profit. If the stock hits $88, your sell stop order will be triggered and become a market order. At that point, your order is then eligible for execution at market, and the price you obtain could be lower than $88, depending on the price available at the time your order is executed.

Stop Limit Order
The stop limit order can be used to buy or sell. The stop limit order is a regular stop order that becomes a limit order rather than a market order when the order is triggered. With the stop limit order, an investor is trying to be even more precise about what price is acceptable. In the E*TRADE Canada system you must place your stop and your limit at the same price. Thus, a sell stop limit order in the sell limit example for Disney above would be placed as “sell Disney at 88 stop, 88 limit” meaning: “I want out at 88 and not less than 88″.

Since it is a limit order, there is no guarantee that the order will be filled.

An important aspect of the Master Plan is setting a profit target and preserving capital. The approach is fairly conservative – the profit target is approximately 7% with a potential loss capped at 4%. The actual profit is likely to be more than 7% while a loss is likely to be smaller than 4%. Here’s how it works.
• Once the target price is reached (7% above the entry price), half of the shares are sold, locking in a 7% profit. The other shares remain invested to benefit from any further increase in price.
• If the price moves against the trade, the maximum loss tolerated is 4%. This preserves capital for future trades.
• Typically, more trades will produce a profit than a loss. The net result is profit.
• The movement of the entire market is very powerful. When the market is moving with your trades, a very high percentage of your trades will be profitable.
• When the entire market is moving against your trade, a higher than expected percentage of your trades will lose. The stop loss protects you from excessive losses.