Swing Trading Techniques and Strategies

Swing trading techniques and strategies are similar in that both use two or more different time frames to identify buy or sell points as well as protective "stop loss" points. While swing trading rely on a daily chart to establish these trading parameters, day trading relies on a "minute" chart such as a 10 or 15-minute bar chart. Just as we can see 40 bars on a 2-month "daily" chart, (ie, about 20 trading days in a month), a 10-minute chart for one day shows 39 bars, (3 bars for the first half hour and 6 bars for each hour during the next 6 hours.) This is seen below as swing-trading-chart-A is comparable to day-trading-chart-B.

When a stock with bullish news opens down below the previous day's high, the first assumption is that it is no longer bullish. This is true because if prices do not go higher, how bullish is the news? Swing trading requires using this as a setup requirement on the buy side since this "news" catalyst could be turned around. How many times do companies release "rosy" quarterly earnings after the close to see it sink. The stock would usually open down but as all have seen in the past, after the big down gap opening, it sometimes climbs back up to positive territory that very day with the daily low at the opening! Illustrated below is how consistent swing trading techniques would capitalize on this type of entry as long as he has the right set of tools to work with.

The key for swing trading is to set buy or sell signals before the reporting day, whether it is a much awaited earnings report or a government number such as 'non-farm payrolls' so that he or she would know what to do if the stock continues in the same direction of the opening or stages a reversal. Don't ask "What are the earnings per share? or What is the consumer price index?" or rely on your own interpretation but instead ask yourself, "How is the stock reacting to this news and is the stock moving up or down?" The trader has to know that it is not up to him to figure out that the earnings were good or bad but to follow the market in the same direction in order to make money.

If you trade for glory, then say "earnings were great...it came out at $4.29 and all the analysts were expecting $2.81...plus Merrill, Goldman, and First Boston all upgraded the stock to Aggressive Buy or reiterates their Buy recommendations." Then the stock falls $3.00 and nobody knows why! That is glory, not money and not for the short-term swing trader.

If you don't know much about charts one of the best swing trading technique to focus on are huge volume days. A huge volume day is defined as that day which the volume sticks out like a sore thumb. It is usually over two to three times the average daily volume for the past year. This day should tell you that a new direction has just begun for the stock. Reversals for an uptrend or the end of a downtrend are signaled this way. Where else can you go to find out if the stock is starting a decline or commencing an advance ? This is the day all investors, analysts, and portfolio managers go to the polls to vote on the direction...that is why there is so much volume! It doesn't matter what kind of news triggered this volume nor if the earnings were good or bad; everybody is out there voting the same way by "buying" or "selling." And at the end of the day, a new trend would have started. Take any yearly chart you want and just look at the volume; the larger the company the better the signal. Take a recent example: Merck. For the last 52 weeks from today, May 1, 1997., a reading of 5 to 6 million shares was big volume. On April 9th it had a huge volume day of over 10 million shares, the largest day in a year ! Merck was already falling from $100 on Feb. 13 to $80 on this huge volume day, April 9th. From this day on, Merck subsequently started to trade higher and moved up over 12 % in a couple of weeks. Look at IBM. On January 22, IBM had a huge volume day of over 12 million shares, double the average daily volume. It fell from 160 on that day to 129 on April 4th and one would say that IBM was in a severe downtrend. On April 24, IBM had another huge volume day of over 10 million shares and it closed around 154. Today on May 1, 1997, IBM is at 161. Look at any chart and you will see that these huge volume days really clue you in on the new direction. Sometimes it doesn't work and the direction may not change but when it works, especially on a "news" day, it really works well.

A large index and a good mutual fund is very similar. Doyou know why indices keep going up year after year? It is because they keep getting rid of their dogs or they add on the next strongest company. If the S&P 500 has to add a new stock because one of their companies just merged with another, they will pick the best and strongest stock at that point intime. As such, the index just got better and stronger. When a good mutual fund sells their losers and replace them with stronger stocks, the results are similar to that of large indices. That is why indices outperform "Buy and Hold" portfolios most of the time when compared side by side. It is not because the "Buy and Hold" portfolio is bad, it is because the portfolio is static while indices are dynamic. Contrary to popular belief, indices always change and 'upgrade' to a better level whenever one of their components change. Swing traders understand this and their techniques should be the stronger stocks like the Googles or Apples in 2006/2007 instead of the stocks that are moving sideways.

As said above, swing trading requires buying and selling strong or weak stocks respectively. There are no excuses like, "too expensive, too high in price, went up too fast, we don't have enough money to trade them, etc." Google is a good example. You may think that $600.00 for a stock is expensive and too high. But swing trading is by "dollar amount" and not the number of shares. If you trade in lots of $6000.00, you can buy 10 shares. You might say ten shares is so little and how could you make any decent money even to offset the commission? But if it goes to 750.00 from October to November in 2007, the gain is enormous at $150 points times 10 shares or $1500.00 or 25% in a month! It is not the number of shares that you buy but it is the percentage gain with the money invested that you want. If your $6000 could bring you 25% in one month at a bank, then let me know which one. And if you want to put it in a mutual fund, go ahead. So calculate your percentage gains or losses on the monies you've invested and not the number of shares you've traded.

Swing trading requires trading in dollar amounts as this manages the diversification as well as capping the risk of losing monies.For example, if the portfolio was worth $100,000, we would buy 5%, or $5000.00, of any new position, rounded to the closest 50 or 100 shares. Proper money management is essential for trading and ranks up there with stop losses and precise targets. Always remember not to over-trade! For a recap on money management, click here for examples: For Beginners