Swing Trading is exactly what the name implies. As a stock’s price swings from one extreme to another, within a predefined time period and range, often defined by support and resistance, you trade in and out of the equity.
Trading techniques all have as a foundation a specific length of time within which the stock is being analyzed for potential trades. These range from years to the nanosecond time frame that flash traders utilize. All of these time frames can produce sine wave like cycles that all look exactly the same. These cycles can be described as having fractal like properties. The term “fractal,” is Latin for “broken,” i.e., a geometric shape that can be broken into parts, each a smaller, but identical representation of the original. In the case of stock trading the elements that have the ability to get smaller to produce fractal subunits are time and price.
Swing traders are focused on one half of one of these parabolic swings. From the troughs to the peak or in shorting a stock, from the peak to the troughs, irreguardless of the fractal element / time frame you have chosen to trade.
The largest benefit of a Swing Trading strategy is an increase level of safety this type of trading brings to your account. It allows you to go into battle, gain some ground and then retreat to the safety of cash. You are in the markets for shorter periods of time and this helps you avoid some of the volatility that defines todays rapidly shifting markets. We focus on volume spikes and this will often have you in a stock prior to news that will dramatically changes the momentum of the equity.
In a sense this entire website is a primer on how to swing trade stocks, but four of these pages are much more important to your financial safety and profitability. Successful Swing Trading involves four fundamental actions: 1) Finding good candidate stocks to trade; 2) money and risk management for those trades; 3) trading, actually entering and exiting your stock selections utilizing SDG and finally, 4) Situational awareness which is discussed and strongly advocated from within an extensive collection of web links curated to help jumpstart your trading education. That discussion and those links can be found on the Traders Links page.
Absolutely read and take to heart the page on Risk & Money Management, before you risk any of your own money.
Step 1: Picking Stocks to Swing
This guide has a very hard bias toward stocks that protect your ability to conserve capital. The stocks you choose to enter will have multiple ramifications regarding both the risk you are exposing yourself to, as well as what the potential reward might be. There are many elements involved in finding the stocks that are best suited to this type of trading. This page will provide you with a simple and easy to follow screening / selection system.
Step 2: Risk & Money Management
It’s step two, but this is without a doubt the most important decision you will make in you trading career. Determining how many shares to purchase defines both your profit potential, but much more importantly it also defines and hopefully, limits your risk, thereby limiting your losses. When you have pre-managed your losses, limiting them well in advance of any other decision, you can focus on optimizing your profitable trades in a much more reactive and aggressive manor.
Step 3: StockDotGenie Trading Application
SDG is your technical analysis guide that provides a form of trading autopilot. It shows you when stocks are likely to produce entry points, signals you with specific indicators on when to enter and then assists you with very intelligent feedback on when to exit the trade based on a large number of factors. Each element that SDG analyzes and then signals to the trader, are recognized technical indications, producing high probability signals, that a stock is staying the course or about to, or has changed direction.
SDG can be utilized to provide signals in any trading style or situation, as the feedback being provided will be valid at any turning point in any chart. Swing trading is taking advantage of smaller or shorter price movement oscillations within larger bigger swings. Although the magnitude of these oscillations is smaller compared to the overall trend, the changes in price and volume that precede most turning points is the same for short or long intervals.
SDG is focused on the following technical indicators allowing you to constantly have a real-time picture of what your swing trade is likely to do.
1) A global picture is produced by SDG that indicates to you when the stock you are watching is approaching Support and Resistance levels.
2) This enables you to focus on exactly when the change of direction occurs and SDG's arrow and dot systems indicate the earliest possible confirmed entry point.
3) As the stock swings from support and approaches resistance you are again alerted and made aware that a trading decision point is upon you.
4) The most overt signal that you should exit the trade is a change in direction of price, which will also change the color of the dot.
5) Because there are often small retracements of price within any cycle, we do not exit on the first red dot, but analyze the following criteria to determine if we should exit on the next red dot.
6) If the next days candle is green you have reset the process and no immediate action is required.
7) If you are seeing a second red candle you probable want to exit the trade if:
8) The size and the shape of the price action for the last day is producing a specific candle type. This will be analyzed by SDG in four distinct manors and a background color flag and the outside ring color will assist you in determining if this exit should occur based upon this analysis.
9) Volume is also analyzed to either confirm or refute that todays retracement is a reversal of the trend.
10) Don't hesitate to Take Profit$.
A comprehensive explanation of how SDG is analyzing each days trading actions is included in the SDG Instructions.
Most swing traders utilize entry positions that are created by support and resistance levels. There are many indicators that can automatically calculate and plot these levels. Moving averages are the most commonly utilized and they, like all indicators have advantages and disadvantages. Trend lines are another important tool utilized in identifying optimal swing entry and exit points. Turning Points are the specific candles that represent the beginning of a new swing direction. By simply drawing a connecting line through the tops of the highest prices over a set period of time you will be able to easily visualize resistance. Do the same for the lowest price points over the same period of time and you will have support. This is exactly what SDG is automatically doing for you.
Support and Resistance trend lines often produce a patterns that are helpful in judging when a stock is likely to change directions. These patterns combined with the SDG application can also prepare you with a strong indication of which direction the price will move when it exits the pattern.
Chart Patterns and the resulting opportunities are produced when these support and resistance lines draw identifiable patterns. They dramatically assist your trading in two important ways. The first is they allow you to visualize potential entry and exit points. Secondly, they alert you to be very diligent in tracking your position as the equity approaches the support or resistance levels that are converging or diverging to produce these pattens. Again there are two reasons here. First of all it is very likely that you stock will reverse “swing” when it get’s near or touches either of these levels. If it exceeds these levels, it is very likely that the stock will run, i.e., make a dramatic move in the direction that is was going when it moved through the support or resistance level. This later opportunity is why you don’t want to automatically sell your position (or buy to cover if you are shorting a stock) when a candle-representing price touches one of these lines. You want to be prepared to capitalize on whatever developes next, exiting only when the price action goes against you. These patterns have been well defined and are described here and here.
This process is detailed in the SDG application instructions. Pivot Points are also a common, but less utilized indicator. You can also add a free Pivot Point Channel indicator to your charts, produced by Chris Moody. The link to that excellent indicator can be found here. SDG’s Technical Analysis page can provide you with detailed descriptions of these and many more.
Swing Traders usually stay in their trades for a relatively short period of time. Typically it’s from a few days to a couple of weeks. It has many similarities to Trend Trading, but the later normally stays in the trade until the price action dramatically violates the channel defined by long term support and resistance trend lines. There is a good book on trend trading called “The Complete Turtle Trader,” by Michael Coven. There are many very helpful trading lesions in this book even if you do not intend to trend trade. I personally consider swing trading to be trend trading, but with a shorter time frame.
I came to swing trading while watching my day trades almost always move dramatically higher over the next few days. Day traders are looking for surges in momentum and when all of the correct signals line up you will often see that equity continue on this trajectory for several days. After repeatedly watching my day trades squirt up on the susaquint trading days, I decided to research and finally switch to swing trading.
In the chart of Scientific Games Corporation, (SGMS) below the Swing opportunities follow the gold lines drawn by the ZigZag indicator. The first up-trend opportunity is defined by the green-bordered call-outs and green line connecting (A) to (B). The swing trader's goal is to identify an entry opportunity at the prior trend reversal and stay in this trade until this short-term trade reverses direction. (√ Click to Enlarge)
The primary advantage to swing trading is the relatively short period of time that the trader is in a trade, thereby limiting their financial risk to that same short timeframe. As today’s markets have become more volatile, swinging limits your exposure to negative world, national or local news as well as market or segment shifts. It also clearly defines when to get into a trade, flags areas where you need to watch the trade intently and finally produces a clear exit indication, defined by an approach to the support or resistance lines, coupled with a change in direction of the price.
Today’s markets are much more volatile than at any time in US equities market history. This element of the markets has been increasing since 2004 and the primary reason for this is Quantitative Analysis combined with High Frequency Trading often referred to as flash trading. The second link on High Frequency Trading is to a book titled " The Heretic's Guide to Global Finance: Hacking the Future of Money," by Bill McKibbben.
Here is his brief description of flash trading so your will have a good ideas of what todays markets are really like.
"In the time it takes you to read this sentence, a high-frequency trading (HFT) algorithm, connected to a stock exchange via “low latency” trading infrastructure, could make, perhaps, 1,000 trades.
I say 'perhaps', because it really depends on how long you pause on those commas I put in the sentence. If you’re an individual with great respect for commas you might give the algorithm a chance to throw in a few hundred more orders.
Let’s just clarify this. That means computers owned (or leased) by a firm somewhere can 1) suck in data from a stock exchange, 2) process it through a coded step-by-step rule system (algorithm) to make a decision about whether to trade or not, 3) send a message back to the exchange with an order for shares of ownership in a company – for example, a company that makes children’s toys – 4) get the order executed and confirmed, and 5) repeat this maybe 250 times a second."
These two links provide good descriptions of these trading systems and why they add large amount of liquidity and volatility to the markets. From the Zero Hedge blogspot the following sentence captures this effect. “The latest widening of volatility bands for advance-decline occurred around start of quant craze. Long-short quants received large capital allocations from pension funds and endowments in 2004 and flood gates really opened up in 2005.”
The dramatic increase in the number of shares being shorted as well as the number of individuals shorting stocks is another element that has increased volatility. Now, even when strong stable stocks experience an increase in the share price, shorter’s move in to capture the reversion to mean.
The TradingView App., “StockDotGenie” has been designed to optimize everything in this brief discussion of swing trading. Additionally there are educational pages within the this site including the Trading Guide that covers, Technical Analysis Indicators, Risk & Money Management, Emotion, Extracting Sentiment from Markets, and effective ways to select the best candidate stock to swing with in the Picking Stocks to Swing.
Most swing traders rely on the basic turning points, indicators that the current short-term trend is about to turn. The most reliable point in time to trust that a change in direction is occurring is when the stocks price has approached either support or resistance.
Three out of four stocks will go the direction of market averages. The only way to determine what the broader markets are doing is to study the price and volume every day.
In an uptrend, if a higher high is made but fails to carry through, and then prices drop below the previous high, then the trend has reversed. As previously stated these inflection points will often, but not always occur at support and resistance levels. There are several other clues that can be utilized to deduce if the turning point for the next swing is occurring. Specific candles such as a Doji that can indicate indecision in a stocks direction. Many other candles and combination of candles producing patterns also have names and can be strong indicators of impending change. There are several great sites that will provide you with a strong background in candlestick analysis listed in Trading Resource Links.
Stocks trade in the same direction as wide range candles. This is an important component of SDG's dot color calculations. It shows a high level of interest by traders. See "Candle Body Height".
Narrow range candles imply low volatility. This is a period of time when there is a reduced level of interest in the stock. Narrow range candles are often seen in advance of a change in direction.
Wide range candles can be excellent indicators of extreme fear and greed. SDG's closing score indicators will greatly assist you in making that determination. One simple trading rule that some traders fellow is to exit a trade after a series of long candles and only enter trades during periods of narrow range candles. See "Candle Body Height".
Volume often is a confirming indicator of Price. If you see an increase in price from the previous day, on increased volume, then volume is confirming price and you should continue to see increases in prices over the next few candles. If you see a decrease in price on less volume than the previous up days, then there is less negative sentiment supporting this retracement and it will likely revert back to the prevailing uptrend tomorrow or the next day. If you have a down day in an uptrend and the volume is greater than the last up day it is likely you are seeing the beginning signal of a trend direction change. See "Turning Point Volume".
Stock are either trending or consolidating. Statistically stock only are in trending patterns about 30% of the times. If you look at any stock on a chart that is in a strong uptrend, you will find that the pullbacks are short lived. This gives you an opportunity to buy the stock before it resumes the uptrend. The rest of the time they move sideways in trading ranges and the prices action can be choppy. Consolidation is not an entry opportunity as the stock could move either direction at its conclusion. Wait to determine what the stock is actually going to do next before you jump onboard or you may be jumping overboard.
No one can know what tomorrow will bring and thus no system can predict, with certainly, what direction any stock will move in the future. Generally, technical analysis and specifically Stock Dot Genie excels at identifying turning points and the trends produced in the aftermath and the likelihood that those trends will continue. The most that you can do is protect yourself by carefully watching the equities's price action and be prepared to react quickly. No one has the patience to watch all of their stocks all of the time. The StockDotGenie package of indicators, as well as he tools and information provide here, will allow you to quickly learn when your need to be laser focused on your trades so you can realize profits, while minimizing risk.
The Traders Guide can assist you in getting started, but one word of caution should be noted. When you first start, I would strongly recommend paper trading until you are confidant that you can execute profitable trades most of the time. No trader is 100% successful and new traders are lucky to hover above 50%. By tracking and documenting trades you would have put real money into, you are able to learn from mistakes in a relatively cost fee manor.
One other suggestion can make your paper trades much more valuable. Write down the day and time you entered your trade. Write down the number of shares you would have purchased and what percentage of your portfolio those shares represented. Finally, and this is the most important and beneficial result of paper trading, write down in your trading notes for this trade, the technical, financial or psychological reasons you chose to enter this trade, at this point in time. Last, document your results as well as your reason for the specific exit point you choose.
Being able to go back and review what has worked and what ate your shorts, will put you on the path to developing a successful trading toolset and checklist. Develop and refine a living list of Entry and Exit signals. I use the world "living" because it should be a constantly updated component of your trading activities. Keep what works, dump what hurts.
Good Luck, enjoy your journey and please come back and share your ideas, suggestions and questions with us on the SDG-TOO-BLOG.