Swing Trading – a style of trading that attempts to capture gains in a security within several days to several weeks.
The Right Stock
The first key to successful swing trading is picking the right stocks. The best candidates are actively traded momentum stocks with hight Beta. They tend to move more than the overall market and these moves are much smoother. In an active market, these stocks will swing between broadly defined high and low extremes, and the swing trader will ride the wave in one direction for a couple of days or weeks only to switch to the opposite side of the trade when the stock reverses direction.
The Right Market
It should be noted that in either of the two market extremes, the bear-market environment or raging bull market, swing trading proves to be a rather different challenge than in a ranging market conditions. In a bear or bull market, momentum will generally carry stocks for a long period of time in one direction only, thereby confirming that the best strategy is to trade on the basis of the longer-term directional trend. If the market is trading in a range, the best strategy tends to be buying support and selling resistance.
The tricky part here is to identify type of market is currently being experienced.
Market Stages
Stage 1 is the stage right after a prolonged downtrend. This security has been going down but now it is starting to trade sideways forming a base. The sellers who once had the upper hand are now beginning to lose their power because of the buyers starting to get more aggressive. The stock just drifts sideways without a clear trend. I call this dull times.
Finally stocks break out into Stage 2 and begins the uptrend. This is where the majority of the money is made in the stock market. But here is the funny thing: No one believes the rally! Trend followers keep shorting, so when the short covering comes, it also contributes to the rally. Still you have to believe your eyes only, because the fundamentals and news can still suck. The only ones not afraid to accumulate are professional traders or smart money. They are accumulating shares and getting ready to dump it off to those getting in late.
Finally, after the glorious advance of stage 2, the stock enters Stage 3, also known as distribution. Security begins to trade sideways again and starts to “churn”. Novice traders are just now getting in. Of course, it may still go higher, but you have to watch for signs of divergence closely, as the big dump has bigger chances to start at higher levels. This stage is very similar to stage 1. Buyers and sellers move into equilibrium again and the stock just drifts along. It is now ready to begin the next stage.
Stage 4 is the dreaded downtrend for those that are long this stock. As before no one believed in the beginning of an uptrend, no one believes the downtrend. The fundamentals are probably still very good, everyone still loves this stock and you can hear “buy this dip it’ll shoot to the moon” everywhere. The majority thinks that downtrend is just a “correction”. They hold and hold and hold, hoping it will reverse back up again. And when it doesn’t, they sell, contributing to the downtrend.
A picture is worth a thousand words, do here are my charts with a possible swing trading setups.
Swing trading in downtrend.
Swing trading in uptrend.
Swing trending in a downtrend. Following the trend is much more profitable and easier to control. That’s why I prefer to see an established trend before entering the trade. Always need to protect yourself with stops though, as nothing lasts forever.
