Basics of Swing Trading

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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Swing Trading For a Living - 5 Things Not to Expect

Yes, you CAN trade for a living. But you need to know what to expect. Unrealistic expectations can frustrate your efforts and adversely impact results. Here’s what NOT to expect:

1) Do not expect trading to pay your bills.

This is not just dangerous, it is downright suicidal. You are likely to take above average risks if you are under pressure to produce enough by a certain date. If the trade goes against you, you will take even more risk to recover the loss and still make the quota for the month - a process that can easily degenerate into a death spiral. You should have at least 3-6 months of living expenses stashed away in cash/CDs to take the pressure off trading, or find a way to trade part-time while you are going through a learning curve. Some stocks are difficult to own unless you can watch them throughout the day, others are best left alone to do what they set out to do.

2) Do not expect a regular paycheck.

Many traders expect successful trading to generate regular monthly income. This expectation is reinforced and magnified by TV infomercials where dumb looking people “making $1,000 per day by 9 am” day in and day out make you think: “If THEY can do it, I sure can.”

The market is not linear. It typically presents 3-5 great buying opportunities a year, when multiple stocks break out. Fast runners also tend to top out around the same time, when market conditions deteriorate. Your annual income is therefore more likely to come from 3-5 lump sums per year interspersed with many small losses in between.

3) Do not expect to beat the professionals at their own game.

Any stock you touch is likely to be traded by a handful of professionals who know more than you do, have more capital than you do, and have been doing it longer than you. Do not expect to outsmart them. Instead, find a method that will give you an edge. There is more than one way to trade.

4) Do not expect complete clarity.

As a matter of fact, expect the unexpected. No amount of due diligence will protect you against sudden losses and setbacks. No system works 100% of the time. Expect things to go wrong and be prepared to deal with it. Trading is not an exact science. Expect to operate on incomplete information and contradicting signals.

And finally:

5) Do not expect to make a killing.

The amount of money you can take out of the market depends on the amount of time and effort you are willing to put into this business. There are no short cuts. Instead of focusing on “how much you should expect to make,” focus on how good you can get. If you follow a good system and are disciplined, profits will follow, almost as an afterthought.

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/

Article Source: http://EzineArticles.com/?expert=Slav_Fedorov