Swing Trading

As global stock markets continue on their daily rollercoaster, traders are increasingly looking for new ways to make a return. The fast and furious world of day trading – where traders take advantage of small movements in share prices during single days – is being replaced with the slightly less hectic world of swing trading.

Now, to those not au fait with the lingo in the trading world referring to yourself as a ‘swing trader’ may well raise some eyebrows. But for those ready to try something new, this tactic could see you net a tidy sum. The real difference from intraday traders is that swing traders analyse stock movements and look for up and down trends that cycle or ‘swing’ over periods of time lasting longer than one day. If the cycle is down, it’s a ‘short swing’. If it’s up, it’s a ‘long swing’.

Swing traders look for opportunities to profit from significant market movements in a short space of time by watching for stocks with the potential for trend reversals or retracements (a temporary reversal in the direction of a stock’s price that goes against the prevailing trend).

As such swing trading takes advantage of short-term ‘swings’ in the market. It usually means holding a stock for a limited amount of time…we are speaking about days or weeks. In fact swing trading is typically a short to intermediate term trend following system lasting anywhere from a couple of days to a couple of weeks and are often created using orders that use trend reversals and retracements for their entry/exit points in the market.

During volatile market periods, swing traders may hold the shares for even smaller periods and take smaller gains.  Most swing traders use technical analysis to identify possible set-ups and theoretical low risk plays.

Trading in a raging bear or bull market can be challenging for a swing trader because the values of assets are carried on the long term in one direction.

Nothing, however, is that simple and swing trading also comes with its risks. The strategy, in reality is one that carries high risks as well as the potential for high rewards. Trading in a raging bear or bull market can be challenging for a swing trader because the values of assets are carried on the long term in one direction (typically lasting for a few months). In this case, the trader’s resources are tied up for longer periods of time, thereby increasing the opportunity cost.

Some believe that the best time for swing trading is when the market is going nowhere – when the rates rise for a couple of days then decline for the next few days and repeat the opposite pattern again and again. The key challenge for any trader using this tactic is to catch the market extremities early so they can profit from the reversal. To do this, the trader has to know how to analyse baseline data and monitor the direction of a stock on a daily basis and reason as to whether it will rise or fall at some point.

Mastering both trading with the trend and swing trading trend reversals can be especially important if you are placing financial spread bets or dealing in CFDs in order to achieve higher gains through leverage, because, if the market moves against your position, this can result in losses greater than your initial deposit.

The aim is to not just to buy at expected bottoms and sell at expected tops, but also identify the best locations to enter a trade to ensure that you trade with the trend and not against it.

Swing Trading Patterns

Breakouts

Stocks can become “range bound” for extended periods of time…sometimes for days or weeks. They will bounce off of the same support and resistance levels over and over creating a “channel” or a flat line on the chart. Sooner or later the stock will “break out” of this congestion period, either up or down. A stock will usually breakout in the direction of its last major trend…but this is not written in stone. One thing we definitely look for is a surge in volume. Stocks trading in a tight range will usually have diminished volume. When a stock goes on to trade above this range and is accompanied by a substantial increase in volume it can signal the beginning of a new trend.

Here is a chart of Merck, a pharmaceutical stock. The ticker symbol is MRK. You can see by the chart that MRK tested the $140 price level several times. We drew a blue horizontal line across the tops which represent the “congestion” or resistance level. Any break through this level on good volume may make a decent entry point for a swing trade.

Intel (INTC) was trading in a range here. The upper resistance point was around $90. Any breakout of this price would be bullish. Going long on this breakout would have resulted in a great trade.

Oversold/Reversals

This is pretty self explanatory. If a stock has been beaten down due to poor market conditions, earnings warnings or has fallen out of favor with analysts temporarily it can be considered oversold. We are looking for signs that bargain hunters, institutional traders or fund managers are accumulating stock at low prices. This can cause the stock to reverse and “bounce” off of its lows. To do this we look for volume surges off key support and resistance levels.

We can see by this chart that Aspect Development (ASDV) can have a tendency to become oversold. It also can have big rallies when the volume picks up. Do not underestimate the power of volume. Volume usually proceeds price. Also, if a stock does not have enough volume it will not get up off the floor. We can see a big volume surge at the end of October. The stock had experienced a sharp decline prior to this and was looking oversold. The volume proceeded a big rally in the stock. Now as we look at January we see a similar pattern setting up…a volume surge and a nice long green candle rallies it off the lows.

Hammer or Doji

This refers to a Japanese candlestick pattern. Dojis and Hammers represent a stuggle between the bulls and the bears…and are also a good indication that a key reversal in trend may be coming. We like to see them coupled with a surge in volume.

The Hammer candlestick gives us some good information. In this case we can see that the stock opened and fell considerably lower as shown by the “tail” it leaves below (or above). It rallied off these lows on a huge volume spike to close almost at the opening price. It is important to keep in mind that we look for hammers and dojis after dramatic uptrends or down trends. You can see here that the hammer signaled a reversal in Dell.

In this chart we can see an example of a doji and a hammer. There is also another doji in mid-November which produced a short term reversal from the top. Remember, we plan on holding our stocks 2-5 days. Keep a trailing stop loss once in a position. This second doji trade would have been a nice short opportunity…but if you would have gotten greedy you would have given it all back.

New 52 week highs with volume spikes

This is a variation of the breakout pattern. The idea that stocks that make new 52 week highs on strong volume will keep right on going. In other words they may breakout to establish a new trading range.

Home Depot (HD) shows us a good example of a 52-week breakout. It is important to make sure the stock makes a new high before trading it in order to avoid false breakouts.

Worldcom (WCOM) broke out of its old highs here and rallied almost 20 points. There was a nice volume surge around the breakout.

Some Tips

We have posted some rules that are common among swing traders for entering and exiting profitable trades.

Adhere to the target prices : The prices are carefully calculated using technical analysis and support and resistance points. If a stock cannot trade through a resistance point or bounce at a support then it means it is weak…and we do not want to make a habit of buying weak stocks.

If a stock gaps above your entry point but the gap is small: Buy if and only if the stock trades above the high of the first 30-45 minutes. This way you are not buying a “gap and trap” and also you are not buying a stock on the way down. Buy strength.

Try to watch the overall market as an indicator
In other words if the Nasdaq is down -60 points it may not be a good idea to go long a Nasdaq stock. It is good to take a look at the daily chart of both the Dow and the Nasdaq and see where short term support and resistance levels lie.

During times of high market volatility take profits quick
And be wary of holding a lot of positions overnight. We do not mind holding positions overnight but there is no need to expose ourselves in volatile market conditions.

Always liquidate a trade when the stop-out price is reached
Set your own stops. You may use the stops listed on our watch list or you may choose to exit sooner. Only you and/or your broker can determine this.Ride your profits and liquidate your losers.

Move your stop to break-even when the trade moves in your favor
If the market is unusually volatile you may want to adjust this. What we want to avoid is having a nice profit turn into a loss…it is not very good for morale.

Time Stops
If a stock has not moved in weeks we will consider closing the position. If a stock hasn’t budged in weeks your money will be better off in another position.

A word about Key Times to trade….
There is an old saying…”The open belongs to the amateurs and the close belongs to the professionals.” The market tends to open according to the S&P futures. The first half-hour of trading is usually filled with volatility. (9:30-10:00AM). We like to wait and see how the market opens and the dust has settled. Be wary of stocks hitting their buy points in the first 15-30 minutes of the day. From 10:00-10:30AM is known as a key pivot time. This is a time when the market can reverse direction. We usually can expect a pullback during this period as the market may reverse its initial direction. If the market holds its initial direction, it can mean that the opening move was indeed “real’. We prefer to enter positions between the hours of 10:00 and 11:30AM. The next period of the day is Lunchtime. Stocks tend to be drifty and it is usually a “dead” space in the day. Traders go to lunch and things slow to a crawl. After lunch (2:30-3:00PM) we usually see a pick up in trading…stocks begin to move and set up for the crucial last hour of trading. The last hour of the day is very important. (3:00-4:00PM). The market usually makes dramatic swings…sometimes in both directions. The last 20 minutes of trading will give you a big clue as to how the market may open the next day as traders set up their positions for the close.