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The Basics of Swing Trading - What is Swing Trading?

It is important to understand the basics of Swing Trading to properly grasp how this methodology can capture short term gains in stocks on a regular and consistant basis.  Swing Trading can be described as the purchase of a stock to take advantage of a short term move in price.

The online trading revolution that has occured over the past 2 decades has transformed the market place allowing the individual retail investor to take control of his or her accounts in a way never imagined before.   This has also opened the door for shorter term strageties in the stock market, the principal one being the concept of Swing Trading.

Swing Trading gets it's name from that fact that stock prices never move in a straight line, but rather thrust higher an often get ahead of themselves, overshooting short term price levels, only to pullback and come back to earth.  This is called the "Swing Cycle".   This short term thrusting, wave-like behavior in stocks can be exploited for quick gains.

A swing trader has one objective in mind, and that is to catch and exploit the short term movement of a stock's price for a profit.

Swing Trading can be thought of employing a series of "surgical strikes" in the market to take advantage of a stocks rapid price movement, versus the older fashion buy and hold concept of investing.   A swing trader might be able to capture the same percentage gain in a stock price during 2 weeks, that a longer term investor might experience by holding for as long as an entire year.

The savy Swing Trader can make a decent living trading just one pattern that repeats itself over and over or by employing an arsenal of different patterns that present themselves in different market conditions.

Swing Traders may use a combination of Fundamental and Technical analysis, but the majority of the time, the technical analysis of a stock's current price is more important.

There 3 basic types of Swing Trade Plays. The Swing Cycle Play. The Range Breakout Play, and the Trend Pullback Play.

Swing Cycles in a Range.  Sometimes stocks will cycle up and down within a well defined range for long periods of time, i.e. weeks to months. High probability trading setups may present themselves as the stock moves down into a major support level where it will get a bounce in price and head back up to zones of overhead resistance. The distance in between the 2 zones could be 5%, 10%, 15% or more.

Range Breakout Plays.  Many times a stock will become stuck in a tight range for a period of time only to "break out" and make a major move to higher ground. When the stock price is able to break out, it frees itself of the price congestion which acted as a trap. Eager traders will spot this and jump on board, taking long positions in the hopes of a move higher. This sudden buying pressure can send the price sky rocketing and immediate and substantial gains can be realized in a matter of days.

Trend Pullback Trades.  Once a stock is able to break out of congestion zones, it many times will go into steep up trend for a period of time.   When a strongly trending stock surges and then pulls back to the primary trend zone, this can make for an excellent swing trade entry.

What is a trend and how can your tell if your stock is trending?

An uptrend can be defined as a series of higher highes and higher lows over time.   If you can look at a 2 month chart of your stock and the price is higher on the right side of the chart than it is on the left side of the chart it is probably in an uptrend.   Another way of spotting a trend is by using various short term moving averages such as a 30-day or 50-day SMA.  If your stock is trading ABOVE the moving averages and they are sloping up, then your stock is probably in an uptrend.  Finally, if you can draw an upward sloping TREND SUPPORT LINE under the price lows over a several month period, then your stock is considered to be in an uptrend.

Duration of The Typical Swing Trade

The typical swing trade lasts between 5-8 days but could be as short as 2-3 days.. or as long as 2-3 weeks.   A Swing Trader may be able to do 2-5 Swing Trades on average per month depending on account size.

Basic Components of a Swing Trade

A swing trade consists of the initial entry, the initial protective stop loss, a first target where the trader my cut the position in half, a trailing stop on the remainder, and a final target price if not closed out of the trade by the trailing stop. The timing of the entry and the exit is extremely important. Swing Traders employ a variety of reliable patterns or "setups" to alert them when to enter into a swing trade. Swing Trading can be thought of as employing a series of "surgical strikes" to take advantage of a stocks rapid price movement, versus the older fashion buy and hold concept of investing.

Cost of commissions, account size, position size, Swing Trade setups can present themselves to the LONG or SHORT side regardless of a stocks current trend. To be a successful swing trader you must develop a basic system to help you "anticipate" the markets next move. Steps must be taken to "minimize risk" and maximize profit in each trade. Trade Management. Entry, Stop placement, Scaling out or cutting the position in half at a first target, trailing a stop loss, and final exit. Swing Traders must learn prober money management, i.e. proper position sizes, protection of original capital and prevention of large drawdowns to the account. Consistant profits in swing trading are not made by just good market calls.. it also requires proper money management.

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The Importance of using a Stop Loss on in Swing Trading

A good until canceled sell order, or what is commenly called a HARD STOP should always be used in a Swing Trade.  Stop losses, although not perfect, are essential in helping to prevent catastrophic losses to your account.  Using a protective stop loss order on each trade is essential in swing trading to avoid what is called the "frozen rabbit syndrome" or the "deer caught in the headlights syndrome" this is where a trader fails to take action and close out a trade that is not working, allowing hope and emotions to enter the picture.

Stop losses are used to prevent catastrophic losses to your account.

A fixed stop in place helps you avoid second guessing the paremeters of your trade once you are in it. As the short term trader Josh Lukeman wrote, "Successful trading is first and foremost about survival through financial preservation and consistency, not about hitting home-run trades with huge positions."

Major Advantages To Swing Trading

Swing Trading offers many advantages over other forms of market particiption such as Long Term Investing or Day Trading.   First, Swing Trading allows the trader to be flexible, either in grabbing decent short term profits when they present themselves or by going to cash quickly in order to protect capital and avoid long term drawdowns in the account.  Swing Trading allows you to trade individual stocks regardless of whether the market is going up, down or stuck in a sideways range.  Also there is the intellectual stimulation and pleasure and sense of accomplishment that comes from actively trading the market, versus just buying a stock and sitting on it for the long term with your fingers crossed.

Swing Trading also has several advantages over day trading.   One is that you don't have to be seated in front of a computer all day long during market hours and another is that that larger percentage gains can be realized by holding a stock position over several days versus closing your positions out before the end of each trading day as strict day traders must do.  Of course, there still are challenges to Swing Trading. You must develop the skill to be able to time the market correctly and be able to perform proper money management and trade management and there is more accounting involved. Swing trading can be work but in the end it can be fun.

Swing Trading Odds Over The Series

Not every swing trade will be a winner. Some stop outs are to be expected as a normal part of the process.  Over a series of trades, the swing trader will have a combination of small losses when getting stopped out, small winners when trades move in your favor for a few days, and finally some BIG WINNERS when you hit the jackpot and a stock price makes a parabolic run and hits your final targets.  In the end, when everything is averaged out, a profit can be acheived from the Swing Trading process.  When you analzye the results, the small winners cancel out the small losers and the real money can be made from your bigger winners.  This is why it is so important to never allow a BIG loss on a single trade, as this one loser can wipe out hard earned gains on several of your bigger winners.  The Swing Trader is a lot like a baseball player.  You will have some base hits, some doubles and occasional home runs as well as occasional strike outs, but you don't want to kill anybody in the stands with a foul ball.


The practice of Swing Trading can offer a new or seasoned traders nice financial payoffs, but requires attention and strict aherance to a well defined trading plan.  The Swing Trading process allows the individual trader to develop his or her personal skill level employing High Probability Short Term Trading Strategies to profit from short term movement.

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