Swing Trading

Serious Information

Trivia

Swing trading is in the continuum between day trading to trend trading.

A day trader will hold a stock anywhere from a few seconds to a few hours but never more than one day. A trend trader (ex. Warren Buffet) examines long term fundamental trends of stock and may hold stock for a few weeks or months. Swing traders hold particular stock for a period of time, generally a few days or two or three weeks, between those extremes, and they will trade stock on the basis of its intra week or intra month oscillations between optimism and pessimism.

The first key to successful swing trading is picking the right stocks. The best candidates are large cap stocks that are among the most actively traded stocks on the major exchanges: for example, Intel, Microsoft, and Cisco Systems. In an active market, these stocks will swing between high and low extremes, and a swing trader will ride a wave in one direction for a couple of days or weeks only to switch to an opposite side of a trade when stock reverses direction. It should be noted in either of the two market extremes, the bear market environment or raging bull market, swing trading proves a rather different challenge than in a market that is between these two extremes. In these extremes, even the most active stocks will not exhibit oscillations.
So swing traders are not looking to hit the home-run with a single trade--they are not concerned about perfect timing to buy a stock exactly at its bottom and sell exactly at its top (or vice versa). In a perfect trading environment, they wait for the stock to hit its baseline and confirm its direction before they make their moves. The story gets more complicated when a stronger up-trend or down-trend is at play: the trader may paradoxically go long when the stock jumps below its EMA and wait for the stock to go back up in an uptrend, or he or she may short a stock that has stabbed above the EMA (exponential moving average) and wait for it to drop if the longer trend is down.

An exponential moving average (EMA), sometimes also called exponentially weighted moving average (EWMA), applies weighting factors which decrease exponentially. The weighting for each day decreases by a factor, or percentage, on the one before it. The graph at right shows an example of the decrease.A moving average, in finance and especially in technical analysis, is one of a family of similar statistical techniques used to analyze time series data.

Pre-trading preparation takes you only so far, because there's a degree of risk-avoidance in the process. Paper trading lets you game and consider all the angles without actually losing money. But realize you will draw down, and you will lose money with real trades. You need to get used to that idea right now.

The problem is there's a lot about trading you won't understand until you place yourself at risk. So you have no choice but to jump in and learn the hard way. In fact, it's the nature of risk that determines your ultimate success or failure in the markets. I always recommend that new traders expose themselves to real losses as soon as possible, so they can get past the book learning of technical analysis and Trading 101-type lessons.

You'll find your losses have a much greater impact on your thinking and strategic planning than you can imagine or believe right now. In fact, they'll make you tone deaf and give you 10 thumbs. The trick is to survive long enough to wrestle that beast to the ground.

No two traders are alike, nor do they approach the markets in the same way. Some folks do this part time and risk very small percentages of capital. Others do it full time and place a high percentage of equity at risk in each trade. Some have $5,000 discount brokerage accounts, while others manage large hedge funds.

Swing trading isn't an exact science or system. It's a way to get an edge so you can profit from trades. Every swing trader chooses to enter and exit the market in a slightly different way. So the average returns are all over the map, from those who double their money every six months to those who can't beat the interest rates in their checking accounts.
If you're an experienced and profitable trader, using a percentage of capital is a good way to manage risk. But if you're a new, semi-new or struggling trader, this isn't the best way to approach position sizing. Each trade setup has a size that's right for your risk tolerance. This is independent of your account size. Newer traders routinely take positions that are too large for their risk or knowledge level. In fact, their overall performance suffers when they take larger trades, because (a) they get so jumpy that good trades are exited too soon, or (b) they hold positions too long because they panic watching the wider swings and get the deer-in-the-headlights syndrome.

If you can make a 100% return on your capital in a year, you will be in a very elite group indeed. Sure, you can make $1,000 in a week on a $10,000 account, but at that risk level you'll wash out of the market quickly because of bad or unexpected losses.

To find situations in which a stock has this extraordinary potential to move in such a short time frame, the trader must act quickly. This is mainly used by at home and day traders. Large institutions trade in sizes too big to move in and out of stocks quickly. The individual trader is able to exploit the short term stock movements without the competition of major traders. Swing traders use technical analysis to look for stocks with short-term price momentum. These traders aren't interested in the fundamental or intrinsic value of stocks but rather in their price trends and patterns.

Yet remember one has to pay a cost to buy and sell shares so the cost must be taken into account.

Different Types of Traders

Scalping - An individual who makes dozens or hundreds of trades per day, trying to "scalp" a small profit from each trade by exploiting the bid-ask spread.
Momentum Trading - Momentum traders look to find stocks that are moving significantly in one direction on high volume and try to jump on board to ride the momentum train to a desired profit.
Technical Trading - Technical traders are obsessed with charts and graphs, watching lines on stock or index graphs for signs of convergence or divergence that might indicate buy or sell signals.
Fundamental Trading - Fundamentalists trade companies based on fundamental analysis, which examines things like corporate events such as actual or anticipated earnings reports, stock splits, reorganizations or acquisitions.

Of course, the problem with both swing trading and long-term trend trading is that success is based on correctly identifying what type of market is currently being experienced. Trend trading would have been the ideal strategy for the raging bull market of the last half of the 1990s, while swing trading probably would have been best for 2000 and 2001. With the 2002 bear market, the best strategy would have been to follow the trend and short everything in sight. As economists and traders would agree, the most accurate insight into trends is viewed in retrospect.

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