Swing trading allows you to make money when the market is bullish, or bearish, or just going sideways. That is why it has a distinct advantage over other approaches to investing. The goal is to make money, not to rest one’s hopes on the future of a stock, a sector, or the economy.
What is Swing Trading
Everyone is familiar with waves. A wave alternates from positive to negative, then to positive and negative, and so on. Waves are found in nature – you see waves when you throw a rock into a lake. Sound is transmitted in waves. And when stock prices change, they follow a wave-like pattern. The wave is rarely as orderly a sine wave, but they are waves nevertheless, and we use these waves in Swing Trading.
Let’s Look at an Up Trends
The chart below shows the price movement of Myriad Genetics (MYGN) in an uptrend. Notice that after the price moves up, it takes a rest, or pulls back. When we swing trade an uptrend, we buy on the pull-back.
An uptrend can be identified by a series of higher highs and higher lows (the bottom of each pull-back). In other words, an uptrend is a series of successive rallies with each rally going higher than the previous one and each pull-back stopping above the previous one.
The price movement looks more like the zig-zag of a saw blade than a sinusoid, but once an uptrend is established the pattern tends to repeat itself. In swing trading we capitalize on the predictability of the pattern. We buy during the pull-back to increase our chances of making a profit.
Let’s Look at a Down Trend
The chart below shows the price movement of Verisign (VRSN) in a downtrend. Notice that after the price moves down, it takes a rest, or pulls up. The price movement follows a zig zag pattern.
A downtrend can be identified by a series of lower lows and lower highs (the peak of each pull-up).
When we swing trade a downtrend, we sell short during a pull-up. If you are unfamiliar with selling short, we discuss it in the next session.
The Steps in Swing Trading
First, restrict your selection to the universe of stocks that fulfill certain criteria. Choose stocks that …
• Have a price of at least $7
• Have an average daily volume of at least 500,000 shares
Then …
STEP 1 – Identify a stock that is in an uptrend or a downtrend.
STEP 2 – For stocks in an uptrend, identify those that are experiencing a pull-back. For stocks in a downtrend, identify those that are experiencing a pull-up.
STEP 3 – Once an appropriate candidate is identified, place a limit order to buy (uptrend) or sell short (downtrend) the stock based on the Master Plan.
STEP 4 – Once a stock has been traded (a position opened), place a stop-loss order to limit downside risk and place a limit order to identify the price at which you will take profits. (Ideally, these two orders are placed together as an OCO (One Cancels Other) order; this is sometimes called an OCA (One Cancels All) order.
STEP 5 – At the end of each day, adjust the stop loss prices based on the Master Plan.
What Can You Expect?
First – only a portion of your trades will be executed. The Master Plan is designed to only trade stocks that initially move in the anticipated direction. If the price moves in the opposite direction (continues pulling back or pulling up), the trade is not placed.
Second – you will be holding positions for a limited amount of time. While swing trading is not day trading, you are only holding positions until targets are met.
Third – some of your trades will result in losses, however losses are minimized by the Master Plan which raises the stops as the stock price rises; this is known as trailing stops. Being disciplined, and following the Master Plan will insure that profits exceed losses which means you will make money.
How Do You Identify Stocks that are Appropriate for Swing Trading?
All of the methods that are used to identify stocks that are appropriate for swing trading are based on technical analysis. Technical analysis is a way of using historical price/volume patterns to predict future behavior. It is not necessary to have a detailed understanding of technical analysis in order to swing trade. There are tools available that can assist investors at every level – from novice to expert. While there are many sources of information and tools that help identify swing trading opportunities, this book will focus on those provided at www.mrswing.com. Once you understand the principles, you can explore other sources of information.
Read More : What is Swing Trading?
