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Guide to swing trading

Swing trading represents a middle ground between fast-paced day trading and long-term trend trading. Those who follow a swing trading strategy typically hold a stock for a period of time, usually no longer than a few days or weeks, and trade shares based on the stock’s weekly or monthly fluctuations.

Keys to successful swing trading

Choosing the right stock: The most favourable candidates are the large-cap stocks that are most actively traded on the major exchanges, for example Cisco, Intel, Microsoft. In an active market, these stocks typically move broadly between high and low extremes. The swing trader follows the trend in one direction for a period of several days or week and then switches to the opposite side of the trade when it reverses.

Choosing the right market: Swing trading presents some unique challenges in both bear and bull markets. In these extremes, even the most active stocks fail to exhibit the normal oscillations that occur when indices remain relatively stable for weeks or months at a time. In a bear market or a bull market, stocks are carried by momentum in a single direction for long periods of time and may exhibit only subtle shifts that can be difficult to catch. Therefore, the best strategy during periods of market extremes is to trade along with the long-term trend.

A stagnant market is best suited for swing trading. When stocks and indices are stable, there is a greater opportunity to take advantage of short-term movements. For the swing trader, these short-term ups and downs generate the most significant profits.

Setting the baseline: Historical analysis has proven that a market favourable to swing trading is one in which liquid stocks tend to trade above and below a shared baseline value. This value is often shown on a chart with an exponential moving average (EMA). Once the swing trader has used the EMA to identify a desired stock’s typical baseline, the trader can then adjust the swing strategy to the long or short, depending on the direction of the trend. Conventional swing trading strategy dictates going long at the baseline when the stock is trending up and short at the baseline when the stock is trending down.

The most important consideration here is that swing traders are not looking to cash in on a single trade; there’s no real incentive to become preoccupied with precise timing, to buy at a stock’s rock bottom and sell at its ultimate high or vice versa. Instead, successful swing traders wait for a stock to hit its baseline value and reveal its direction before making a move.

When a stronger trend in either direction is evident, the trader may choose to go long when the stock falls below its EMA and wait for an uptrend, or may short a stock that has jumped its EMA and wait for the drop.

Taking profits: The object of swing trading is to exit each trade as close as possible to the upper or lower limit without being overly meticulous. Of course, this also increases the trader’s risk of missing the most lucrative opportunities. In a strong market, when stocks are exhibiting definitive and certain directional trends, swing traders are likely to wait for the stock to reach the channel line before claiming their profits. In a weak market, when trends are harder to predict, traders may take a profit before that limit is reached in anticipation of a sudden directional shift that forces the stock to miss the channel line.

Conclusion

Swing trading is historically one of the best strategies for novice traders, but still offers substantial profits for more experienced and even advanced players. Swing traders receive feedback on trades within a short time, which goes a long way to build motivation for those new to stock trading. The long and short positions that are typical to stock trading last several days, generally sufficient to stave off distraction.

Trend trading may promise greater profit potential if the trader can catch a major market trend over weeks or months, but few traders actually have the discipline to hold a position for that long without succumbing to distraction. On the other hand, while day trading may be more intense and exciting, buying and selling dozens of stocks each day usually proves overwhelming for the majority of traders who employ the strategy. Swing trading is a happy medium between these two extremes.

Published: 10 February 2011

You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.

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