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Basic chart setupsWhen it comes to chart setups it is important to understand the following concepts: Multiple time frames Most traders use technical analysis as their primary tool to find potential trades and to determine entry/exit points. Only momentum traders and scalpers might only look at the stock movement or the supply and demand they can see on the level 2 screen. When using technical analysis is very important to get the bigger picture of the stock’s price movement. That’s why you should always have a look at multiple time frames of charts before making a trade. Imagine a stock is looking ready to go up on the 5 min chart but is running into strong resistance on the daily chart. You don’t want to get caught buying it here but rather wait for it to break that resistance before entering a long position. I always try to look at least one intra-day chart as well as the daily chart. Previous days highs and lows are always points that are every important. Other time frames that I like to look at are 5min and 15min charts. The perfect chart setup shows the same “picture” on multiple time frames. Speaking of charts, here's a link from a colleague of mine who specializes in charting Dow stocks. When you start to chart Dow stocks, it's like you can clearly see what Dow 30 index investors are thinking about doing next from deep inside their brains, because you can see so many opportunities and also the risks. Here're other concepts from the top down approach: Market and sector analysis The overall market is most likely to determine how strong the stocks you are watching might move. Make sure to not trade against the overall market and know what to expect every day. I use the same tools and patterns for market analysis that I use for stock analysis. The most important thing for me to look at is the previous day’s range. The previous day’s low will serve as support to the downside and the high will serve as resistance to the upside. Besides analyzing the overall market you should also know what the individual sectors are doing to further increase your success rate. A good top down approach would be too look at the overall market first, then to determine what the general direction is most likely going to be and to look for sectors that reflect that direction the best, and finally filter out stocks out of that particular sector that provide interesting chart setups. These last few sentences can make the difference between making you a successful trader and one who is not… Sometimes, it’s the simplest things that have the biggest impact! Before I finally go into the specific chart setups I'd like to touch base on a topic which usually becomes important once we have found a chart setup: The setup prices A setup price is a predetermined price where you are looking to enter a position. Make sure that setup prices get broken significantly before you enter your position. For example if I am looking at a buy above $50, I would wait for the stock to break that price by approximately 5 cents. This varies though, and depends a lot on the stock I am trading. The important thing is that there are trades being made ABOVE the setup price in order for the setup to be valid. Also make sure, that the stock actually trades above the setup price. This can be problem with low volume stocks where the inside market (best bid and ask) changes without any trades taking place. Of course this is all common sense but you will be surprise when you start trading and end up jumping the gun. You`ll even start getting paranoid because you`ll think somebody is actually watching you and waits for you to make a move to go the other way! This is actually very creepy… I can`t tell you how many times I have entered a trade and the second I did the stock , to my disbelief accelerated the other way! That`s why you want to wait for the trend to confirm itself. Of course it will still happen sometimes but generally if a reversal is to occurred, it occurs slightly over a target price like a whole number. The other thing that will likely happen to you, is that you will become the opposite of “trigger happy”, i.e. you will freeze and won’t be able to pull the trigger at all. That’s when the stock will start accelerating the right way, but without you. That’s why it will be very important to develop a trading plan and stick to it like you would strictly adhere to the instructions on how to put together a 125000BTU BBQ… OK, wrong example, who needs instructions for that! ;-) … you know what I mean… In the strategy part of this section I will discuss a few famous set ups but here I will look at the basic buying/shorting set up: The basic buy setup is a pullback into support within an uptrend. It is very important, that the pullback is significant. Ideally, there will be at least three consecutive days of lower highs and lower lows. The support can have many forms. I like to focus on moving averages as well as trend lines and support/resistance levels. This setup is taking place on a daily chart. The example I used earlier for the hammer candlestick is a very good example here too The stock has pulled back significantly into support and had a reversal signal in the form of a hammer candlestick .The entry is above the high of the hammer candle and the stop is placed below it. Generally, the entry signal is given, once the price moves above the high of a previous day after a significant pullback. I like charts that form a doji candle even more since they usually have a more narrow range and therefore give me a smaller stop. The most important aspect for me in swing trades is the stop. It can often be rather large and I am very selective in only choosing the ones with extremely small stops. Instead of placing my stop below the previous days low, I will often use the current intraday low for my stop and I will combine the swing trading setup with day trading criteria. The basic buy chart setup:
 The basic short chart setup:
Like I said earlier, I'll describe more chart setups in the strategy chapter following the next chapter (trends) but before I move on you need to understand the importance of: Volumes I use volume in conjunction with all of my chart setups to confirm my entry as well as to find exit points. For example after entering a breakout setup long I want to see a volume increase and a lot of trades on the ask side. Trades on the ask side indicate that there are active buyers in the stock and the stock is likely to continue higher. For shorts I want to see trades on the bid side of the market. Stalling or even declining volume after my entry indicates that the stock will be rather "trendless" and therefore I don’t expect much from the trade and might raise my stop rather fast or exit sooner with profits. Dramatically increasing volume/activity very often signals the end of the move as the mass of people is getting involved; therefore I use these points to take profits. Basically, volumes confirm or negate your premise. Pay attention or pay the price! Now, Let's move on to trends. 
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