<s> Marc Rivallandon
SwingTradingA guide to profitable short-term investingglobal-investor
Marc RivallandonSwing Trading
Marc RivallandonSwing TradingbyMarc Rivalland
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HARRIMAN HOUSE LTD43 Chapel StreetPetersfieldHampshireGU32 3DYGREAT BRITAINTel: +44 (0)1730 233870Fax: +44 (0)1730 233880email: enquiries@harriman-house.comweb site: www.harriman-house.com
First published in Great Britain in 2002Reprinted 2003Copyright Harriman House LtdThe right of Marc Rivalland to be identified as the author has been assertedin accordance with the Copyright, Design and Patents Act 1988.ISBN 1 897 59719 3British Library Cataloguing in Publication DataA CIP catalogue record for this book can be obtained from the British Library.All rights reserved; no part of this publication may be reproduced, stored in aretrieval system, or transmitted in any form or by any means, electronic,mechanical, photocopying, recording, or otherwise without the prior writtenpermission of the Publisher. This book may not be lent, resold, hired out orotherwise disposed of by way of trade in any form of binding or cover other thanthat in which it is published without the prior written consent of the Publisher.Printed and bound by Ashford Colour Press Ltd, Gosport, Hampshire.
No responsibility for loss occasioned to any person or corporate body acting orrefraining to act as a result of reading material in this book can be accepted bythe Publisher, by the Author, or by the employer of the Author.
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For L and L-F
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About the authorAfter graduating with a Bachelor of Commerce in 1975, Marc Rivallandwas employed as a share analyst for one of South Africa’s leadingmerchant banks. At the same time he undertook his Bachelor of Lawsdegree. In 1979 he emigrated to the UK and worked in the futuresindustry, first as an analyst and then as an account executive. He wasteam leader for Conticommodity on the LIFFE floor when it opened inSeptember 1982. After a stint as a floor trader and arbitrageur, Marc wascalled to the English Bar by the Middle Temple in July 1987. He remainsa practising barrister in the Chambers of Edward Faulks QC.For 2 years Marc wrote educational articles on point & figure charts for London’s EveningStandard. He also writes ‘The Trader’ column for Investors Chronicle, as well as givingseminars on technical analysis.
Updata chartsThe charts used in this book were produced on ‘Updata Technical Analyst’, and reproduced withthe permission of Updata plc.Updata plcUpdata HouseOld York RoadLondonSW18 1TGtel. 020 8874 4747http://www.updata.co.uk
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CONTENTSPREFACE
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1. INTRODUCTION
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Early lessonsWhat is a swing trade?What is the point of swing trading?What makes a swing trader?Who swing trades?Swing trading and chartsThe logic underlying the use of charts2. SWING TRADING IN PRACTICE
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Selling shortNormal serviceLinear phases and how to spot themMy approachThe tooled-up swing trader3. GANN SWING CHARTS
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W.D. Gann’s secretStandard Dow theoryChanges of trend and intermediate swingsConstruction of a Gann swing chart4. MODIFIED SWING CHARTS
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DefinitionsFaults with the Gann swing chartModification 1 - ‘Get in Early’Modification 2 - ‘If the third day is an outside day, it is part of the correction’Modification 3 - ‘Relax the requirement for three consecutive days’Modification 4 - ‘Count trading days only’Buy and sell signalsChange of trend signalsContinuation of trend signalsProblem areasTailpiecev
Marc Rivalland on Swing Trading
5. SWING CHARTING TACTICS
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My approachProfit maximisation techniquesStop lossesSetting profit targetsLinear phasesTrading all the swings6. POINT & FIGURE CHARTS
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IntroductionEthos7. POINT & FIGURE SIGNALSIntroductionThe signalsThe Double Top and Double BottomThe Bullish SignalThe Bearish SignalThe Bearish Signal ReversedThe Bullish Signal ReversedTrianglesThe Triple TopThe Ascending Triple TopThe Spread Triple TopThe Triple Top with Long TailThe Bull TrapThe CatapultThe Triple BottomThe Descending Triple BottomThe Spread Triple BottomThe Triple Bottom with Long TailThe Long Tail DownThe High PoleMy evaluationMy favourite point & figure signalsThe Triple Top with Rising LowsThe Triple Bottom with Lower HighsThe Bearish or Bullish ShakeoutThe Whipsawvi
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Contents
8. POINT & FIGURE TACTICS
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Choose the right securityWhen to take profitsDon’t trade every chart formation you seeReliability of point & figure chartsTailpiece 1Tailpiece 29. INTEGRATING POINT & FIGURE AND SWING CHARTS
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Integrating p&f charts and swing charts when trading indicesIntegrating p&f charts and swing charts when trading individual equitiesTailpiece10. RSI AND OTHER INDICATORSAn explanation of RSIWeekly RSIOther IndicatorsMoving AveragesThe Coppock IndicatorBullish Percent chartsCandlesticksRelative Strength
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11. TACTICS FOR LTBHs
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Limited use of swing chartsUsing options and charts to enhance returnsTailpiece12. SUMMATION
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My approach - a summaryMistakes to avoidFinal wordAPPENDICESAppendix 1 - Construction of a point & figure chartAppendix 2 - Swing charting with Rio TintoAppendix 3 - Integrating point & figure with swing charts
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GLOSSARY
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INDEX
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PREFACEExploiting swings
One can tell from the great popularity of newspaper and magazine articles about obscure littlecompanies that there are still hordes of investors out there trying to discover the next Cisco(before supernova). And a very worthwhile search it is too. Even though Cisco has fallen morethan 80% from its highs, if you had invested £6,038 on the day it floated you’d be a millionairetoday. This book will not help you do that for the following reasons:• Swing trading is more about exploiting swings in share prices, both upswings anddownswings, than trying to discover unperceived value.• I imagine that some swing trading can be done in the little known, small capitalisation stockswhich fascinate so many investors. However this book embraces a strictly chart-based approachto swing trading. Charts work best with well-known stocks which already enjoy high visibilityand high volume.Unearthing gems is no part of this book.Why swing trade?
At the beginning of 2002, the financial press was trying to reassure investors that the FTSE wasunlikely to go down, because it is statistically rare for it to fall 3 years in a row. As I writehowever (FTSE 100 = 4200), the FTSE will have to go up 19% in the second half of the yearmerely to breakeven. More than one Cassandra is suggesting that it has further to fall. If you’rea long term buy and hold investor, what will you do? Probably nothing. That is what mostinvestors do, persuading themselves that “It will all turn out all right, equities are a sound longterm investment”.That may be true, but whereas many people think of 15 years as long-term, equities are a goodinvestment only when you select a particularly lucrative phase (like 1982-1999) or when youmeasure returns over a period of more like 30-40 years. For example, adjusted for inflation, theDow Jones peaked in 1966 and it went sideways or down for 16 years. It was the 1990s beforeit surpassed its 1966 highs on an inflation-adjusted basis, which means that those who investednear the peak in 1966 had a long wait for real returns.What happens if the FTSE oscillates for a decade or more between about 3600 and its December1999 highs of 6950? It is by no means impossible. By swing trading you can do something aboutit. You don’t have to be a passive victim. I think of swing trading as the proactive way ofapproaching the markets.There is not only a sound argument for swing trading. It is also exhilarating. I don’t need toexplain that. It’s either true for you or it’s not.1
Marc Rivalland on Swing Trading
Swing charts and point & figure charts
Many traders already use charts as an integral part of their decision-making, and a goodproportion of them will have heard of the particular trading method known as swing trading. Notmany, however, know that there is a type of chart, a swing chart, which is tailor-made for swingtrading, and even fewer will be actively using these swing charts. One of the main aims of thisbook is to introduce you to swing charts and to enable you to harness their power.Some readers may be so convinced that they come to use swing charts as their primary tool.Others will prefer to stick to the charts they have used hitherto. I invite them to use the swingchart in conjunction with their existing techniques, or, at the very least, not to ignore themessage conveyed by the swing chart. I use a combination of swing charts and point & figurecharts.For those whose swing trading depends more on value judgments than on charts, I offer thismiddle ground: if you must be led by a value judgment, why not use charts as a filter? Act onlyon value judgments when the share has a supportive chart; do not act on those value judgmentswhen the share does not have a supportive chart. If your value judgment is correct, the chart isbound to reflect that in time.Audience
I have my doubts whether the book will be wholly intelligible to those who have only a passinginterest in the market. Recently, I tried to explain one of the simpler concepts to a legalcolleague, but he professed total bewilderment (although I suspect him of brutish obstinacy).The book should appeal to a wide range of market participants and would-be participants.a) Amateur TradersThere are private investors who come close to swing trading even though they don’t knowit. Take for example those who see a tip in a newspaper, buy the shares, and then, after theshare price has gone up 20%, cannot resist bagging a profit. Unwittingly they have much incommon with swing traders. They have exploited an upswing in price and, for whateverreason, have not held on in the way that a long term investor would. In addition, there arelegions of private investors whose explicit intention it is to exploit price swings of variousdurations. This book should appeal to such swing traders.b) Professionals TradersThis book is also suitable for professional traders, who could skip Chapter 1 and whoprobably know everything contained in Chapters 6 and 7 and most of what is contained inChapter 10. Chapters 4 and 5 cover new ground the like of which has never, at least to myknowledge, been published before now.
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Preface
c) Long Term Buy and Hold InvestorsMy publisher says I’m wasting my time trying to pitch to long term buy and hold (LTBH)investors. I know he’s right, to an extent. Many people are simply too busy to devote time tothe stock market, and many are too uninterested or daunted by it. It’s true that if you don’tknow what you’re doing, every decision you make is just an opportunity to make anothermistake. Much better to make no decisions at all other than to drip-feed an amount from yourmonthly pay into a retirement fund. If you fall into this category, this book is not for you.However it seems to me that there is a subset of reasonably active, market-oriented long-terminvestors who ought to read this book. Even if it doesn’t persuade them to take up swingtrading, it may persuade a few of them to look at a chart every now and then. If you are anLTBH investor, and you doubt the value of charts, consider the one below showing thecollapse in Enron's share price. I’ve done it in point & figure format, but much the samecomment would flow from a swing chart.
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XXX OX OX OX OX OX OX O OXOXOXOXOXOXOXOXXOX OXOX OXO OOXOX OOX OOX OXOX OX OOX OXX OOX OX OX OO OX OX OOX OXX OXOX OX OX OX OOX OX OXX OX OOX OX OX OX O OXOX O OX OXOX OOXO OOX OOXOX OOO OOXOX OOX OOX OOX OXOX OX OOX OX OOX OX OO OX OO OOOOOOXOX OOX OOX OOXX OOX OX OOX OX OO OXX OOX OX OOX OX OOX OX OO OX OO OOOXOX OOX OO OOOOOOXOX OOX OO OOOOOOXOX OOX OOX OOX OOX OO OOOOXXOX OX OOX OX OOX OX OOX OX OOX O OOOOOOOOOO
fig 0.13
Marc Rivalland on Swing Trading
After it peaked at over $80, Enron gave one buy signal at $58. As you will see from readingChapter 7, that signal was the least trustworthy of all point & figure signals, and a sell signalwas generated the next month (June 2001) at $53. Another sell signal, one of my favourites,occurred at $41, and other sell signals were given on the way down. At no time before reaching12 cents did Enron give a buy signal. Need I say more?In Chapter 11, I show how the occasional use of swing charts could assist LTBHs to hedge theirholdings, to protect them from the sharp falls in the markets which have dismayed so manyrecently.Structure of this book
The book is structured to cover my two favourite types of chart: the swing chart in Chapters 3to 5 and the point & figure chart in Chapters 5 to 8. Chapter 9 explains how to use these chartstogether and Chapter 10 deals with the RSI. Chapter 11 covers LTBHs and Chapter 12 draws allthe threads together.The rather grand title of this book may suggest to some that I consider myself a ‘guru’ in thissubject. Nothing could be further from the truth. My publisher’s motive in choosing that titlewas to make it plain that the book is my subjective view of certain aspects of charting techniqueand interpretation, rather than a distillation of well-worn rules. The book can’t cover everythingI know, but I believe it does cover the most important techniques to enable you to make moneyout of swing trading.I hope the book provokes thought. Any constructive criticism or ideas can be sent to me by emailat info@marcrivalland.com or at m.rivalland@no1serjeantsinn.com.
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INTRODUCTION• Early lessons• What is a swing trade?• What is the point of swing trading?• What makes a swing trader?• Who swing trades?• Swing trading and charts• The logic underlying the use of charts
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Marc Rivalland on Swing Trading
Early lessonsFrom an early age I was fascinated by how bad my father and his acquaintances were when itcame to investing in the stock market. I remember listening to the radio with my father as wemarked off the closing prices in a jotter or on a newspaper. I seem to remember most of the newsbeing adverse. Resigned disgruntlement seemed to be the order of most days. But when therewas an upward run, well … transports of delight. Midas had competition. My father had knownit all the time. That idiot market had been wrong, as it so often was, but now it was starting toget the hang of things. There was still a faint hint of disappointment that more of the particularwonder stock had not been purchased.In time he gave up, and concentrated on making money in something that he was skilled at. Buthe, and almost every adult I met in the late 1960s and early 1970s, had tales to relate of anoccasional exciting financial killing, interspersed with considerable woe. They were very clearthat stock market speculation was only for insiders and fools, and that it was impossible to makemoney out of the market other than by buying a mutual fund and leaving the money there for alifetime. As a rebellious adolescent with the usual contrarian instincts, it seemed to me that theymust be wrong.I decided to do a first degree in commerce to learn all about the stock market and to find outwhat made it tick. I saw my first point & figure chart in 1973, my freshman year at University.It electrified me, and, judging from the letters to the newspaper, it roused considerable publicinterest. But I had studies to attend to. A couple of years later I did manage to obtain, almost byaccident, a copy of A.W. Cohen’s seminal work on point & figure charting1.After graduating I decided to do my law degree part-time so that I could get a job with amerchant bank and further my understanding of the stock market. A few months later, filled withthe confidence of youth, I bought my first share, Tedelex, a manufacturer of televisions. In therepressed South Africa of the 1950s and 1960s it was thought that television would corrupt themorals of the people. Later on the government relented. Most South Africans saw their firsttelevision broadcast in about 1973. In mid-1976, as I was working in the research department ofthe merchant bank, Tedelex was due to report its results. It was a small company which hadmanaged to secure one of only five (I think) licenses to manufacture/assemble televisions. Ourresearch department expected its profits to rise over 200%. We were all standing over the tickerwhen the news came out that profits had in fact increased 600%. Nearly everyone in the officeimmediately bought the shares.What is more, I bought far more than I could afford, on margin, because this was, after all, asure thing. And so it proved, momentarily. The shares ticked up, then down, then up again. Itseemed as if every fourth or fifth trade crossing the tape was Tedelex. Even the old hands hadnever seen anything like it. By the end of the day, on record volume, the share price was downabout 1% from my purchase price. Nothing to worry about, save that my manager was peeringat the ticker with a grim expression on his face. It’s churning, he said. He explained that there1. How to Use the 3-point Reversal Method of Point & Figure Stock Market Trading by A.W. Cohen (Chartcraft Inc.1947)
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Introduction
was too much selling. I didn’t understand that at all. There was just as much buying, so it seemedto me. He sold out the next day. I held on and naturally lost a lot.• It was my first real time lesson in the message which price action delivers. In a bull market,expanding volume makes prices go up. If it doesn’t, question your premise. Perhaps the bullmarket has ended or is about to.
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Marc Rivalland on Swing Trading
What is a swing trade?Unlike day trading or long-term investing, swing trading is not a well-defined term. Broadly, itfits between day trading and long-term investing, in terms of time horizon and in other respects.A definition which I find useful is:A swing trade is one which seeks to capitalise on the short-term downswings and upswingsin share prices.
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Introduction
You can see from the chart opposite that the FTSE moved from a high of 6950 on 30thDecember 1999 down to a low of 5973 on 15th February 2000, a move of 970 points (13.9%)in 6 weeks. Thereafter it moved up, virtually in a straight line, to 6770 by 27th March 2000, amove of nearly 800 points (13.3%) in just short of 6 weeks. Those two swings accounted for 1770FTSE points or the equivalent of a return of over 27% in just 3 months. Yet somebody who boughtand held a basket of stocks similar to that in the FTSE 100 index would have been showing aloss of 180 points (2.5%) on the 27th March 2000 when compared to 30th December 1999.The broad swings were:• down from point A to point B• up from point B to point C• down from point C to point DThe swing trader attempts to profit from each of those swings, which plainly represented theshort-term trend of the market. But within those broad swings there were many lesser swingswhich amounted to corrections (brief movement counter to the trend) which also providedattractive opportunities to the swing trader. So an aggressive swing trader would aim to sell shortat points a, b, c, d and e, and to go long at points f and g.In this book, I use the term ‘swing’ interchangeably to refer to the broad swings and to the lessermini-swings. It should be obvious from the context what I am referring to, and even if it isn’t, Idoubt whether it will make much difference to the point I will be trying to make.Short-term trends tend to last about 4 to 16 weeks. That is the time horizon of the swing trader.Plainly it differs from the time horizon of the long-term buy and hold investor.But it is not only time horizon which separates the swing trader from the buy and hold investor.Their attitudes to adversity differ fundamentally. The buy and hold investor will ride outdownturns in the market in the confidence that his stock purchases were made at 'rational' pricesand that the market will, in due course, reflect the full value of the shares. From this point ofview, a market downturn may be an opportunity to buy more shares below their true value andto profit when they recover. Warren Buffett, the ultimate LTBH investor, expressed thisapproach most eloquently when asked by Forbes magazine in 1974 how he felt about the bearmarket:“Like an oversexed guy in a harem. This is the time to start investing.”But until the LTBH investor thinks it is time to “start investing”, he will bear his paper losseswith apparent stoicism.By contrast, the swing trader will admit defeat when the market moves against him andhe will alter his trading stance to take advantage of the newly perceived market direction.
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Marc Rivalland on Swing Trading
What is the point of swing trading?Why bother, you may ask. Why not try to emulate Warren Buffett, who has not done badly tosay the least. Why not re-balance one’s portfolio once or twice a year and sit back and watch themoney roll in. Well, it is perfectly true that the 18 year bull market from 1982 onwards gaveinvestors a relatively easy ride, and has altered, for the worse I suspect, their approach to themarkets. Putting money in the markets has been a sure thing, until the last 2 years.Reverting to the above chart: although the buy and hold investor might have consoled himselfin late March 2000 that he was only 2.5% worse off than at the beginning of the year, the truthof the matter was that the year had already provided two glorious trading opportunities for theswing trader to make a killing. Being ‘not much worse off’ in March 2000 amounted to a wasteof one of the few easy phases to make money which the market presents. When the stock marketfinished the year at 6222, another 8.1% down from the highs of March 2000, the long term buyand hold investor could only hope for better times, which, so far, have not materialised.Why should a market which goes broadly sideways or down imprison one’s capital? Trading theswings is not only fun, it is profitable. 2000 and 2001 were good years for swing traders, and Idon’t mean only because they fared better than buy and hold investors. What I mean is that thecharts had several clear swings with consistent and profitable chart signals.You may say: so what? This is a post-bubble pause. Normal service will be resumed, andmaking money by armchair investing will once again become easy. That may happen. But whatif it doesn’t?I have already mentioned the 16 year period between 1966 and 1982 as a leading example ofshare price stagnation. It is not the only example. After the 1937 highs, it took the Dow 8 yearsto make new highs, and those were still well below the 1929 highs. Those who bought sharesnear the top in 1929 had a 25 year wait for new highs in the Dow.Finally I suppose swing trading is, to some extent, born out of leverage, at least for the privateinvestor. The ability to buy futures, options and contracts for a difference means that trading abroad swing successfully can yield substantial profits, out of proportion to the capital employed.W.D. Gann said:“A study of swings in active stocks will convince a man that he can make far greaterprofits in swings than in any other way of trading.”However true that may be, please note that Gann was not suggesting that long-term investing isless profitable. He didn’t address that issue at all. Of course buy and hold can be more rewardingthan swing trading in certain market conditions. I am certainly not suggesting that swing tradingis the only way to approach the markets. But unless (and even if) you foresee another long andsustained bull market of the type that happened in the period 1982 to 1999, swing trading doeshave much to commend it.10
Introduction
What makes a swing trader?Swing trading is not something to be undertaken lightly. Anyone who enjoys and is good atplaying cards, particularly a game like bridge, should be a good swing trader. The same skillsare used, namely drawing inferences from incomplete information.But whether or not you like playing cards, swing trading needs more than ability. Shortly afterI started writing about point & figure charts for the Evening Standard, my head of chambersEdward Faulks QC approached me and said “Catherine and I sat down last night to read one ofyour articles but I’m afraid we could make no sense of it at all”. Of course, it was just a tease.If Edward had been briefed in a case involving point & figure charting he would have masteredhis brief within days and he would have been ready to cross-examine an expert on the subject.The true message was that he was not sufficiently interested in speculating on the stock market.No doubt he owns shares, but trading in and out of them is not something that fires hisimagination. On the other hand, I am and always will be gripped by price action. To be a swingtrader, you need to love playing the markets.
Who swing trades?There is an army of short-term private investors who are trading swings, even though some maynot realise it. Anyone who is not intending to open and close a position in a day or so, norintending to ride out whatever valleys may be encountered, is attempting to capitalise on afavourable swing. Indeed, in part, this book is aimed at those who have the ethos of the swingtrader (in that they bag a good profit when they see one) but who may not have made clear tothemselves a method for repeating their successes.In addition, much hedge fund trading is effectively swing trading. The same is true ofproprietary trading by investment houses.
Swing trading and chartsMany swing traders are avid users of charts. Some swing traders, although they decry the use ofcharts, draw inferences from sentiment indicators and use the price action of the market or aparticular security to time their entries, which to my mind means they use similar skills to thechartist. It is possible to swing trade without using a chart at all, but I’m not sure how successfulit would be. At any rate I wouldn’t attempt it.Last year I gave a talk to a private investment club of about 10 members. They were struggling.They had made money in the technology media and telecom sector as it stormed up until March2000. They had prudently sold out at the first sign of trouble and even more prudently they hadhad the discipline not to dive back into the sector for about six months. But the temptation had11
Marc Rivalland on Swing Trading
become too great to resist. They showed me seven purchases they had made and invited me tocomment on where they had gone wrong. They did not use charts at all.To my astonishment, every single purchase had been timed excellently. Within days of eachpurchase they were showing profits. It was plain on analysis what they were doing. They werecatching falling knives. They had chosen well-respected companies. And each time thatcompany took a battering which appeared overdone, they leapt into the stock. Their judgmentwas rewarded when the stock bounced, sometimes over a period of several weeks. They weremaking a value judgment, and the market confirmed, temporarily, their beliefs. When the stocklater fell below their purchase level, it must have seemed as if another bargain was on offer. Intwo cases, they did add to a losing position, which at least had the virtue of logic, although itwould be anathema to a swing trader.Effectively they were failing to take their profits quickly enough. Their profit expectations weremore aligned with their previous happy experience. But they did prove that it is possible to usepurely value judgments to initiate swing trades.The trouble is, value judgments are subjective, and if they are not shared by the rest of themarket participants, you will suffer losses. Losses arising from value judgments can bebewildering, annoying and most importantly, discouraging. Like my father, you cannotunderstand why this dunderhead of a market has got it so wrong. Of course the chartist alsosuffers losses, but they are entirely explicable, and although they are not to be welcomed, onceyou become case-hardened they are not discouraging. I suspect too, although I cannot prove it,that the size of the loss suffered by the chartist on each transaction is much smaller than thatsuffered by the non-chartist.I commend the use of charts. Indeed although I have in the past made precisely the same mistakeof catching falling knives, I would no longer dream of doing what that investment club did. Ifyou have a full-time job, it seems to me the playing field is not level if you base your decisionson value judgments. The leading banks and brokers have legions of highly paid, highly trainedinvestment analysts to research companies and to work out the value of a stock. When you, aprivate investor, buy a well-known stock based on your own value judgments, you are impliedlysuggesting that the market, or those analysts, have got it wrong or in some way they have misseda trick. That seems like a pretty bold idea when you are devoting the majority of your time topursuits other than the market.This book will put forward a disciplined way of swing trading. You will not have the thrillexperienced by the aforementioned investment club of seeing your value judgments almostinstantly rewarded, because you will not buy stocks in a downtrend, however cheap they mayseem. Cheap and expensive will not be part of your lexicon.On the other hand, you will not suffer the same losses as the investment club. Of course, youwill suffer some losses, but you