|Swing Trading: A
style of trading that attempts to capture gains in a stock within
one to four days.
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.
The principal difference between day trading and
swing trading is that swing traders will normally have a slightly
longer time horizon than day traders for holding a position in a
stock. As is the case with day traders, swing traders also attempt
to predict the short term fluctuation in a stock's price. However,
swing traders are willing to hold stocks for more than one day,
if necessary, to give the stock price some time to move or to capture
additional momentum in the stock's price. Swing traders will generally
hold on to their stock positions anywhere from a few hours to several
Swing trading has the capability of
providing higher returns than day trading. However, unlike day traders
who liquidate their positions at the end of each day, swing traders
assume overnight risk. There are some significant risks in carrying
positions overnight. For example news events and earnings warnings
announced after the closing bell can result in large, unexpected
and possibly adverse changes to a stock's price.
Swing trading involves identifying short-term
support and resistance and where a market will likely re-assert
itself. It is not about fading the market by picking tops and bottoms.
Therefore, wait for follow through before attempting to enter a
For instance, suppose a market is in rally mode and begins to sell
off, chances are the next move will be a resumption of the original
uptrend. However, until that uptrend begins to resume, positions
should not be initiated. For longs, this means waiting for the market
to turn back up, and for shorts, it means waiting for the market
to turn back down.
Swing trading is a pure, technical approach to
the markets. Simply put, we study and analyze the individual
movements that comprise the bigger picture trends. Our goal is to
become masters at interpreting the individual 'swings.' This is
the purest form of market analysis we know of, with roots going
back over 100 years to the early tape readers.
Swing trading relies on the interpretation of the length and duration
of each swing. Each swing defines important support and resistance
levels, or prices where the market can be expected to find increasing
supply or demand. We also measure the momentum of each swing, to
determine whether momentum is increasing or decreasing.
We ask ourselves: how do these various swings, with differing lengths,
durations and momentum, fit into the structure of the bigger picture,
higher-time-frame trend? And is there sufficient volatility to justify
trading specific swings? Volatility is an area that we have done
considerable research on, and which we incorporate into the classic
understanding of swing trading in our own unique way. Putting these
pieces together and sorting out the implications is the swing trader's
It is important to emphasize that the swing trader judges the market
solely by its own actions. Monitoring the magnitude, duration and
quality of the swings tells us when to trade for a small target
or a larger objective, and which swings to follow and which ones
to ignore. A professional learns how to work the swings in the direction
that achieves the highest level of trading efficiency. In most cases
this will be in the direction of the longer-term trend.
Trends are defined by specific patterns and are comprised of many
individual swings. The individual swings define our risk points.
These are all quantifiable elements. A trader who claims to be proficient
in swing trading should be able to quantify both the trade setups
as well as the probabilities for the outcome of each trade.
Swing trading is no different than playing poker or other
card games based on statistical probabilities. It comes down to
a basic understanding of game theory and the numbers surrounding
each point of play. As in all games, swing trading reveals to us
that money management and risk control determine the outcome of
the game more than any other variable.
The Basic tenets of swing trading: During strong trends,
we use retracement swings to enter in the direction of the trend.
These points are also referred to as 'pullbacks' or 'dips' in an
existing trend. When a new momentum high is made, we look to our
highest probability trade, which is to buy the first pullback. When
a new momentum low is made, we look to sell the first rally. We
continue trading in the direction of the main trend until there
is a buying or selling climax, or a failure test. A failure test
would be the most aggressive type of trade entry when swing trading.
A retracement in a trend would be the most conservative. Pattern
recognition is used to determine the trend and also to define a
'failure test.' Experienced swing traders always look to trade in
the direction of the higher-time-frame trend, while using the lower
time frame patterns to determine risk and entry.