Swing Trading.
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When you swing trade you look to trade a stock that is in a confirmed up or down trend. Within this trend are mini-cycles. Your goal (if going long), is to buy on the dips and sell on the peaks. The profits are relatively small, so you repeat this action hopefully 3-4 times within a month. If you are making 3% - 5% on each trade it adds up. Not to mention it puts some excitement in your life.
In the short term a stock’s price reacts to news, sector strengths, volume, commodity prices and what have you. Let’s just say it’s a bit on the chaotic side. Why? Because investors trade with their emotions and best guess in the short term.
Successful swing traders make their money based on people’s emotions. No, they’re not charging for group therapy. But it so happens that most traders are reactive to stock market events. They see a stock going up so they jump in and buy it. Most of the time the price will already be near it's high. In the short term the "crowd" ends up buying high and selling low.
Swing trading is about sticking to the charts and technical analysis. Income statements and balance sheets are something you put your coffee mug on.
It’s truly buying low and selling high. If you’re a trend trader, these short term fluctuations won’t mean much you. After all, you’re in a longer term relationship.
We established what swing trading is. What stocks do we swing?
The company is less important than its attributes. You want to put together a list of stocks that:
• Have good fundamentals. If you’re going long you don’t want the darn thing crashing. You want it to maintain its trend. If the stock continues to trends, at least you can hold it and make money.
• Existing short term volatility would be nice. You can find that by looking at the chart or checking to see if there’s recent news. You can get creative with a stock screener. Seach for high relative strength and a high beta.
After a stock chart perusal, narrow down the ones that exhibit a recent uptrend. An uptrend is defined by 3 or more days in which the closing price is higher than the opening. In addition, there should be higher highs and higher lows.
According to physics or psychology for that matter, after a two to five day upward move, the price will drop. During the downtrend look for the opposite to occur. Lower highs & lower lows.
It’s setup time. The stock has dropped for 3 days in a row. What confirmation do you need to buy? After a fairly sharp downtrend in price we look for a “narrow range day”. Stocks may just reverse and head north, thereby not exhibiting a “narrow range day” at all. But this sign is confirmation that the sellers are done.
A narrow range day as shown below, is a much shorter range between the high and low of the days before. If this day has much higher volume than the previous days you have a good indication of trend reversal.
Since stocks do not go up in a straight line, swing trade opportunities exist. You must compare the previous swing ranges to see if there is enough spread to make money. If the stock is in a consolidation range, forget it. Consolidation ranges have ups and downs but they are too random.
When traders are buying shares in a frenzy (greed), swing traders will get ready to sell. The price is about to peak. When the market is selling their shares, swing traders look to buy. The price is dropping and the professionals will circle an undervalued stock like chum.
A couple other factors I look at are moving averages. I search for stocks that are about 20% from a new high. This shows strength and Wall Street likes stocks near it's high. I’ll plot the 20 day and 50 day moving averages. A stock that has just bounced off either of these averages is a potential buy. Make sure it is not extended from the moving average line. And use a 3 month chart.
Using the technical indicators mentioned above helps define an exit point. As I said earlier, many definitions call swing trading a 3 – 5 day holding period. Since the profits are relatively small, you must trade frequently and in volume.
Look at INAP. On September 7th the stock is below the 20 day MA. I may not have touched it. But notice the narrow day range of September 8th accompanied by higher than normal volume. The stock took an upswing.
If you picked it up mid-September when it just breaks through the 20 day MA you could have made some money if you held enough shares. October 4th we break through the 20 day MA again and score some extra points by October 11th.
For the times the price broke below the 20 day, you could have shorted or sat on the sidelines.
• The rules are, there are many rules. There are traders who incorporate Fibonacci numbers and Elliot Waves into their analysis. I don’t. I usually trend trade so for my occasional swing trades I’ll use moving averages and a couple indicators.
If you do a Google search you’ll find a plethora of newsletters, eBooks, and software on swing trading. Check out Amazon.com. You’ll find books and books on this topic. Who has the best strategy? I haven’t the slightest idea.
If you trade often you ring up commission charges. You might be able to make more money by buying an upward trending stock and babysit the thing.
There. I discussed the swing trade. It’s official. I have a financial web site.
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