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FINANCIAL CHRONICLE™ » CHRONICLE™ SUPPORT » Swing Trading...

Swing Trading...

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1Swing Trading... Empty Swing Trading... Sun May 01, 2011 11:06 pm

StocksWatch


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

Have you all heard about Swing Trading?

There is a huge amount of information available on the internet if you search for key words, "swing trading". Have a look.

2Swing Trading... Empty Re: Swing Trading... Sun May 01, 2011 11:10 pm

StocksWatch


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

Introduction To Swing Trading by Jason Van Bergen

(Contact Author | Biography)Email Article Print FeedbackReprintsShareFiled Under: Active Trading, Forex, Swing Trading

Swing trading has been described as a kind of fundamental trading in which positions are held for longer than a single day. This is because most fundamentalists are actually swing traders since changes in corporate fundmentals generally require several days or even a week to cause sufficient price movement that renders a reasonable profit. (See Introduction to Types of Trading: Fundamental Traders)

But this description of swing trading is a simplification. In reality, swing trading sits in the middle of 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 a day; a trend trader examines the long-term fundamental trends of a stock or index, and may hold the stock for a few weeks or months. Swing traders hold a particular stock for a period of time, generally a few days or two or three weeks, which is between those extremes, and they will trade the stock on the basis of its intra-week or intra-month oscillations between optimism and pessimism.

Reviewing Different Types of Traders

Before we focus on swing trading, let's review all the other major styles of equity trading:

•Scalping - The scalper is 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. (You can read about scalping in Introduction to Types of Trading: Scalpers.)

•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. (You can read about momentum trading in Introduction to Types of Trading: Momentum Traders.)

•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. (You can read about technical trading in Introduction to Types of Trading: Technical Traders.)

•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. (You can read about fundamental trading in Introduction to Types of Trading: Fundamental Traders.)

The Right Stock

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. 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 market that is between these two extremes. In these extremes, even the most active stocks will not exhibit the same up-and-down oscillations that they would when indexes are relatively stable for a few weeks or months. In a bear market or a raging 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.

The swing trader, therefore, is best positioned when markets are going nowhere - when indexes rise for a couple of days and then decline for the next few days only to repeat the same general pattern again and again. A couple of months might pass with major stocks and indexes roughly the same as their original levels, but the swing trader has had many opportunities to catch the short-term movements up and down (sometimes within a channel).

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.

The Baseline

Much research on historical data has proven that in a market conducive to swing trading liquid stocks tend to trade above and below a baseline value, which is portrayed on a chart with an exponential moving average (EMA). In his book "Come Into My Trading Room: A Complete Guide To Trading" (2002), Dr. Alexander Elder uses his understanding of a stock's behavior above and below the baseline to describe the swing trader's strategy of 'buying normalcy and selling mania' or 'shorting normalcy and covering depression'. Once the swing trader has used the EMA to identify the typical baseline on the stock chart, he or she goes long at the baseline when the stock is heading up and short at the baseline when the stock is on its way down.

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 uptrend or downtrend 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 and wait for it to drop if the longer trend is down.

Taking Profits

When it comes time to take profits, the swing trader will want to exit the trade as close as possible to the upper or lower channel line without being overly precise, which may cause the risk of missing the best opportunity. In a strong market when a stock is exhibiting a strong directional trend, traders can wait for the channel line to be reached before taking their profit, but in a weaker market they may take their profits before the line is hit (in the event that the direction changes and the line does not get hit on that particular swing).

Conclusion

Swing trading is actually one of the best trading styles for the beginning trader to get his or her feet wet, but it still offers significant profit potential for intermediate and advanced traders. Swing traders receive sufficient feedback on their trades after a couple of days to keep them motivated, but their long and short positions of several days are of the duration that does not lead to distraction. By contrast, trend trading offers greater profit potential if a trader is able to catch a major market trend of weeks or months, but few are the traders with sufficient discipline to hold a position for that period of time without getting distracted. On the other hand, trading dozens of stocks per day (day trading) may just prove too great a white-knuckle ride for some, making swing trading the perfect medium between the extremes.

http://www.investopedia.com/articles/trading/02/101602.asp

3Swing Trading... Empty Re: Swing Trading... Wed May 11, 2011 8:35 pm

ha_na


Manager - Equity Analytics
Manager - Equity Analytics

StocksWatch wrote:Have you all heard about Swing Trading?

There is a huge amount of information available on the internet if you search for key words, "swing trading". Have a look.

I'm a swing trader (rabbit hunter) rather than Trend trader (elephant Hunter). It is very profitable. you can't profit these days without this strategy.

4Swing Trading... Empty Re: Swing Trading... Wed May 11, 2011 8:45 pm

tubal


Vice President - Equity Analytics
Vice President - Equity Analytics

Majority of people in this forum think traders are found only on the pavements of Pettah and call themselves investors while looking down on the traders (for example see recent thread about day trading).

In reality they are all failed traders. For example see the recent thread about HOPL, where people were scrambling to get in at 75 or even 80 citing it as a value stock for a long term investment. So while some people bought at 80 and automatically became long to medium term investors the traders are waiting for the price to swing low so that they too can enter.

And Ha_na, in another thread you said that people are overly pessimistic, but surely as a trader you need to be pessimistic too? I thought one of the mantras of swing trading was to expect each and every trade to go against you?

5Swing Trading... Empty Re: Swing Trading... Wed May 11, 2011 8:46 pm

StocksWatch


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

ha_na wrote:
StocksWatch wrote:Have you all heard about Swing Trading?

There is a huge amount of information available on the internet if you search for key words, "swing trading". Have a look.

I'm a swing trader (rabbit hunter) rather than Trend trader (elephant Hunter). It is very profitable. you can't profit these days without this strategy.

Hi Thanks for your comment. Can you explain a bit more about swing trading in the conext of CSE from your expereince? This will be beneficial for all who are intested.

6Swing Trading... Empty Re: Swing Trading... Wed May 11, 2011 11:57 pm

gann

gann
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

csf has been a real cash cow for day traders. a good chance for you guys to test your trading skills with less rick since the price is low.

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