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Definition

Swing trading falls somewhere between daytrading and long-term investing. I have seen several definitions, but in a nutshell it’s buying and holding a stock for the duration of an intermediate advance - anywhere from several days or weeks to several months.

Goal

Stocks don’t advance in a straight line. They move up in a series of spurts and consolidations approximating a staircase. The goal of a swing trader is to capture the bulk of those advances while freeing up capital during consolidations (bases).

Basing

A base is a period when buyers and sellers are roughly equal in strength and arguing, which results in the stock’s stalling, churning, and/or sagging. A base can last anywhere from a few weeks to several months (sometimes years - when the public loses interest altogether). While there are traders who can successfully trade the stock while it’s in the base, in swing trading buying/holding a basing stock is not a prudent deployment of capital.

Breakouts and Pivots

There are two possible outcomes for a basing stock: it will eventually move lower or higher depending on who (buyers or sellers) gains the upper hand. The moment it leaves the base is called a breakout. The goal of a swing trader is to buy a stock breaking out of a base as close to the pivot as possible. A pivot is a point of long-term resistance that the stock finally overcomes.

For example, a stock advances from $10.00 to $15.00. At $15.00 the buyers run out of steam and the stock stalls, then reverses - starts building a base. Each time it comes close to the previous high - $15.00 - it sells off. $15.00 becomes the pivot point. When the stock finally takes it out in a strong move, it is indicating that something has changed fundamentally, that old assumptions no longer apply and it wants to go higher.

A prudent employ of capital is to find situations with as many variables as possible in your favor. A breakout is one of those situations - when the stock is most likely to go higher after you buy it.

Breakouts are not foolproof. A stock may still fail and fall back into the base. Taking your losses as you move on is part of doing business. You just need to make sure that over time your gains exceed your losses.

Stock selection

It takes time to learn how to spot the breakouts with the most upside potential. A breakout simply indicates that a stock is likely to go higher - but you still don’t know how high. You have to look at multiple factors: growth, story, valuation, volume, ownership, float, industry/sector, sentiment, and technical condition to identify winning combinations.

Slav Fedorov is a full time stock trader and founder and managing member of TradingZoom, LLC - a provider of proprietary trading data that swing traders can put to work right away. http://www.tradingzoom.com

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