Swing Traders Action Zone
The Trading Strategy
The Traders Action Zone (TAZ) is a buy and sell zone on a chart that swing traders can use to identify possible reversals in a stock.
This is just simply "area" that we look at to see if a stock that is in a strong uptrend, after pulling back to this area, will likely reverse.
First of all, let’s take a look at all of the different types of traders involved in the stock market when looking at a daily chart.
Then, we will look at where they buy stocks. We'll focus on the long side only.
This type of trader is looking to hold stocks for long periods of time. They buy stocks that are first breaking out of basing patterns into a stage two uptrend. This is likely where you will see institutions buying stocks. This buying pressure is what starts the uptrend. They are hoping that the next two groups of buyers will push the stock higher.
This type of trader buys stocks that are, well, showing momentum! They buy stocks right after a major move in a stock and hold for a short period of time. They are hopping on a board a fast moving stock looking to capture short term gains quickly.
This is where you come in! You are trading the swings within the trend. Here is a chart that may help you to better see how everything unfolds…
Now you can see where you fit into the big picture of this animal we call the stock market! Ok, I forgot to mention the day traders that make up each of the individual candles but I think you get the point.
Traders Action Zone
On the chart above you can also see the traders action zone which is the area in between the 10 sma and 30 ema. This is where you, as a swing trader look for reversals back to the upside when going long and reversals to the downside when shorting stocks. I've drawn arrows on the chart to show where you get buy (green) signals and short (red) signals to enter a stock. Pretty cool, huh?
It doesn’t matter whether you use sma’s or ema’s. There is little difference between the two so don’t get caught up in the variations. We are just using these moving averages to create a zone that we will find our entries for long and short positions. We’ll cover the entries (and exits) on a separate section of this site.
What is so special about this zone?
I have found that for swing trading, a lot of reversals happen in this area. So in order to create a focus in your trading strategy, it is helpful to narrow down your potential stock setups to one area on a chart. This zone provides a plethora of setups on a daily basis.
We are not really concerned with the moving averages themselves. When a stock pulls back into this zone, look to the left to identify support and resistance, trend lines, candlestick patterns, etc. You are looking for multiple signals all pointing in the same direction.
Will this strategy make me a profitable trader?
You may be surprised by my answer.
The answer is no. There isn't ANY trading strategy that will make you a consistently profitable trader. Sorry to disappoint you. The only thing that will enable you to consistently pull money out of the markets is YOU.
YOU must have discipline. YOU must be able to take losses. YOU must be able to take your profits. YOU must eliminate fear. Put simply, you must be able to control the emotional and psychological problems that prevent success.
That will be your biggest challenge in learning how to trade stocks with any strategy.