Swing trading is a style of trading that tries to capture gains within 2 day to few weeks. So this is a short-term trading style where traders must act rather quickly in order to find potentialy big moves in stocks. This style is mainly used by individuals as large institutions can often not act that fast.
Swing trading is trading in the direction of a trend – before entering a trade you wait for a pullback and you enter the trade only if you see signs that the price will continue in the direction of the trend.
Note that swing trading is not day trading. Swing traders usually do not buy and sell the same stock within the same day.
Like with everything in stock market, money management is important here. Not more than 10% should be put on any one stock. So diversification is important. Though diversification etc, this is something to think about when trading with not so big capital. While this has always been an important point of mine, I will soon make a post with thoughts I got from Max Gunther’s „The Zurich Axioms” that pretty much says something complitely different than the whole other universe. But for now, lets go on with the usual strategies of swing trading.
During uptrend you buy on a pullback and during downtrend you sell short when the price pulls up.
Which stocks to choose?
Look for stocks with the minimum price of $12 and minimum daily volume of at least 500k. Then find stocks that are in a visible up or downtrend, from this list now find stocks which have pulled back or pulled up (depending on the trend), now place a limit order (whether buy or sell short depending on the trend).
Once the trade has been made, place a stop loss and take profit limits.
Swing trading patterns
SMA – simple moving average
This is a moving average that is average closing price for the set number of days. Each new day, the last day’s price is added and the first day’s price is removed from the calculation. Here we use mainly 3 SMA’s – 10, 20 and 50 days.
If the stock is in the uptrend we would normally see that the today’s price is above the 10 and 20-day SMA. And the 10 day SMA is above the 20 day SMA. And in order to find the pullback, today’s high should be lower than yesterday’s high and yesterday’s high is lower than than the high the day before.
This is something I haven’t talked about before. It’s a technical indicator developed by Dr. Alexander Elder and combines the magnitude of price with the direction of the change and the trading volume. Force Index is now used to confirm the relative force behind an uptrend and the pullback. For that 3 and 13 day moving average of Force Index is used.
If the 3-day moving average of the Force Index is less than 0 and 13-day greater than 0 then we have sort of a confirmation.
Note that this is just a very-very basic introduction to swing trading. I was counting on material from mrswing.co but it’s really lots of advertising, specific methods with their software rather than useful information. At least that’s the way I saw it.