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Section Two
Swing Trading and The Underground Trader System
Swing trading is like a marriage of the investor and the trader. The intraday trader focuses strictly on technicals, chart patterns, and formations, whereas investors do a great deal of research; they believe in a buy and hold mentality anchored by fundamentals.
The Underground Trader Swing Trading System developed out of a necessity to be able to fuse the methods together; to come up with a system that applies the sharpness of intraday trading utilizing technical analysis and pattern recognition, and temper that with the fundamentals.
Most swing trading systems focus predominantly on fundamentals with a buy and hold mentality that fares well in rising markets, but leaves the investor absolutely helpless like a deer in the headlights in falling markets. Falling markets separate “the men from the boys.” Most systems perform great in rising markets, but what happens in falling markets?
The Underground Trader Swing Trading System is an all-encompassing system that performs strongly in rising markets and even stronger in falling markets. The system has been meticulously forged and derived by hand from over 20,000 market hours of active participation and analysis since 1999, through bull and bear markets.
The Underground Trader Swing Trading System operates on four factors:
1. Macro market context (technical/timing)
2. Stock technicals (triggers/support resistance clusters)
3. Stock fundamentals (five components for a good night’s sleep)
4. Trade management (precise allocation/execution management)
The system is extremely risk averse, which raises the question: If you are so risk averse, then how can you produce two to five percent monthly gains while limiting losses to less than one percent? Simple (not really). The system thoroughly filters, ages, and stalks, then measures within complete context with pre-determined allocation and times the market with precise entries and exits. In other words, the preparation is where most of the effort is made. Once the trades are executed, it’s just a matter of pressing the buttons.
The Underground Trader Swing Trade System places the most effort into the preparation portion. With the proper allocation and risk controls in place, the system is tilted to magnify profits and minimize losses. The system has very little tolerance for losses, and therefore makes sure each trade counts ahead of time!
The mechanics behind The Underground Trader Swing Trading System may seem overwhelming in the beginning, but they are actually quite simple. This e-book will detail the basics of the Underground Trader Swing Trade System to enable you to start profiting right away. You will be able to track the swing trade portfolio alerts and see the actual pattern set-up that triggered the alerts, as well as monitor your trades.
GETTING STARTED
Does a rifle have the potential to kill a deer? Yes. Can a rifle be used to kill a deer in the woods? Yes. Can that same rifle be used underwater to kill a shark? No. Why? Because you can not use a rifle underwater. But does that make the rifle insignificant as a weapon? Of course not.
The key is the environment in which the rifle is being used. No one would dispute the deadly capabilities of a rifle when used properly in the right environment. Common sense tells us this. If we extrapolate that thinking to trading, then it is easy to see why methods and patterns are effective trading tools only when used properly in the right environment.
In trading, the environment is the market context. The value of context is often misplaced in the market analysis, mainly because it is so difficult to interpret and align. But in reality, context is the most important part of a trading setup; it is what allows a particular pattern to be effective. I have a system for defining and quantifying the context at any given moment in the markets.
The Underground Trader Swing Trading System defines and quantifies the context at any given moment in the markets. It is only after identifying the correct context that a trader can spot the high probability setup within that context for maximum results.
TIME FRAMES
Truly effective indicators and patterns are linear through all time frames and markets. The methods, patterns, and charts that make up The Underground Trader Swing Trading System are fully scalable should you want to tweak your own trading to suit your personal style.
For my intraday trading, I focus on four intraday time frames—daily, 60-minute, 15-minute, and 5-minute—along with the 1-minute chart, which I call the “fuse.” We are looking for that rare occurrence when the stochastics and moving averages converge in the same direction on all of these time frames. This occurs for an extremely limited period of time; a very profitable window of opportunity will not stay open forever. The goal is to time the final trigger with the “fuse” to take advantage of that window before it closes and the market reverts back to divergence and noise. My Swing Trading System expands on this intraday practice, incorporating some long-term investing strategies to create a uniquely profitable swing trading system. To acclimate to the swing trading time frames—the 60-minute, daily, weekly, and monthly—it is important to first process how the system works on an intraday basis—the 1-minute, 5-minute, 15-minute, 60-minute, and daily. The only difference will be the time frames. The indicators and charts are identical.
It is important that you are aware of the mechanics that go into analyzing a trade and the process of making the trade from beginning to end. Let’s start by taking a closer look at the charts.
CHART BASICS: THE STOCHASTICS MOVING AVERAGE CHART
The stochastics moving average chart is the basic tool used for swing and intraday trading across all markets. This chart is broken down into two halves. The top half contains the price data, moving averages, and the Bollinger bands. The bottom half contains the stochastics momentum bands and volume.
Make sure that your data are set to include pre- and post-market trades. Try setting the data to run from 8:00 a.m. to 8:00 p.m. instead of just 9:30 a.m. to 4:30 p.m. while the markets are open.
Figure 2.1 gives the full scope of view.
Depending on your quote provider or online broker, the indicator settings should be universal. Open up a new chart and then add the following indicators and studies:
1. Four simple moving averages including a 5-period, 15-period, 50-period, and a 200-period moving average
2. Bollinger bands set at 20 periods and 2 standard deviations
3. Stochastics slow with the settings of 15,3,5 with 1 for smoothing
4. Candlestick charts (not line or bar charts)
5. Volume bars (this would be optional for a single time frame chart)
Open up four more identical charts. Change the time frame of the charts to 60-minute, daily, weekly, and monthly (one chart to each time frame). These are the four time frame charts needed for swing trading (Figure 2.2). The 60-minute, 15-minute, 5-minute and 1-minute charts are the intraday trading charts (Figure 2.3).
