Posted by forex at 8:11 AM
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1. Chart any stock of your choice. Use stock charting software provided by your broker, or build your stock charts with free online charting services.
2. Identify the turnaround points on the chart. These are the moments when a consistent price move in one direction halts and turns around. For example, a stock may create higher prices for several days in a row. Then, finally, a day closes with the stock at a lower price, and prices continue to fall for a few days. In this example, the turnaround point is called a 'high.' Likewise, a stock that bounces higher after a previous price decline forms a 'low.'
3. Compare consecutive highs and lows with each other. This is the foundation of 'Dow Theory,' a 100-year-old approach to chart analysis. The Dow Theory outlines the characteristics that define a price trend in a stock. A trending stock provides a predictable sequence of swings that can benefit the novice swing trader. If a recent high is higher than its previous high, and the recent low is also higher than its previous low, the stock is trending.
4. Buy an up-trending stock after it falls from a recent high, but before it reaches the previous low. While it is impossible to always time your entry exactly as it forms a low and turns around, this strategy gets you into the stock prior to its next upswing. More conservative traders may wait for the turnaround to actually occur; however, you may pay higher prices when you purchase during the start of a new upswing.
5. Close your stock position by selling the shares at the first sign of the next downswing. You can sell all at once, or you can gradually liquidate your holdings a few shares at a time as your position at first becomes more and more profitable. Exit strategies widely vary, and you must determine the method that best suits your goals.