The Master Swing Trader

There was a comment a few days ago I’ve been thinking about, so I thought I’d put together a few posts on some of the content of The Master Swing Trader by Alan Farley. We all have our favorite books, but out of the ones I’ve read, I think this one covers quite a lot of useful trading stuff, however, has quite a bit of randomness in thought, and I think he assumes you know what his terminology means, because when he uses a new term, he doesn’t define it or show an example. It’s kind of hard to follow, so I’ll put down in the next few posts some salient features.

Farley talks about a trend and a range. What he means by this is that there will be a price range that a stock is trading in, and the trend is essentially the centerline of the range. Like this:




He talks about patterns and cycles. His idea of patterns is not the Japanese Candlestick patterns I posted about last week, but his concept is that these ranges rise and fall, and make trend patterns. In a later post, we’ll talk about some of the reasons for the patterns and useful information about helping predict their nature. Anyway, here is a stock that is displaying one of my favorite patterns, the ‘W”



The W is kind of hard to see, it’s in the heavy green lines in the center of the ranges. But if you can see it, you'll see that this is a W where the right side has a higher low, and then goes to a higher high. This is a great pattern for making money, and I almost always use it for my trades; I never enter on a high. I only enter on a pullback. More on that later.

Farley talks about reasons for these patterns to repeat themselves, in cycles. You can see in the CLF example above, that the W will repeat itself in time, as you move the time scale to the right. He mentions other aspects of the market, which help suggest reasons for the changing cycles, including mob philosophy, TICK, futures, and credit. These will be topics of posts in the future, so you get and introduction of how these can affect the cyclic nature of the patterns.

Not to be too long, here’s an example of my "favorite short". I am trading this long right now. (The reason it’s my favorite short is because it continues upward and when I look at the P/E on the balance sheet, it’s negative). Before you look at the chart, our goal is to try to predict what will happen tomorrow, because that’s how we make money, When you look at the chart, before the final price bar (assuming you don’t know it’s tomorrow yet), you need to determine if you should leave the stock, that is, will X break trend and turn lower, and follow the new green line trend range, or should you stay/add, hoping it will continue trending positive, in its range. And what reasons do you have to take this position? It’s in the chart, but follow the heavy green line downward, it will show you the reason.



As you can see from the relative strength, the price action of X relative to the S&P 500 is accelerating. The slope of the relative strength line is positive. X’s stronger than the market. If you put up a chart of the S&P, you would see it’s trending up. Therefore, my bet was that X would not go counter-trend. (Don't fight the tape). I stayed in, and added on the close. Today, I got a 3% pop.