How to Trade Shakeouts

A Swing Trap is a chart pattern that traps momentum traders causing a cluster of stop loss orders to be taken out. This offers a great opportunity for swing traders to hop on board a fast moving stock.

The examples below are on the daily chart, but you will see this pattern show up on intraday charts as well.

Here is an example:

Momentum traders tend to buy stocks near the 10 period moving average. This stock pulled back near that moving average and then moved up the next day (1). Generally, traders are taught to put their stop loss order underneath pivot lows. So, when this stock moved below that level, many traders either sold or got stopped out.

And that sets up a great trading opportunity for swing traders (2).

There is another Swing Trap on this chart that I didn’t highlight. Do you see it? (Hint: Look on the far left side of this chart!)

Here is another example:

Once again, this stock looked like it was going to continue the uptrend (1). But, it fell below that pivot low and many traders sold. Once the sellers were shaken out of the stock, it could finally rally. This stock had an added bonus of forming a hammer candlestick pattern (2).

The key to trading this pattern is to wait for the “shakeout”. The second pullback has to go below the pivot low of the first pullback. Once the majority of sellers are taken out of the stock, buyers will likely come in and the stock will rally.

You will also see this pattern on the short side also. That pattern is just reversed.

Your going to love trading this pattern. It offers a great opportunity to hop on board a fast moving stock after the majority of traders have sold!

Craig Ferguson is a swing trader with 10 years experience trading stocks. His trading methods use price and volume only to enter and exit positions. He is the founder of the website Swing-Trade-Stocks.com , which has helped thousands of traders learn to trade stocks since 2005.

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