An Introduction to Swing Trading([18)

 

      An Introduction to Swing Trading

To make money in the stock market it is necessary to have a disciplined approach to trading. We also believe that it is also important to keep things simple. While our goal is to keep things simple, the trading rules might initially seem a bit complex.

However, once you learn the rules and you trade with discipline, you will make money in the stock market.

Swing trading allows you to make money when the market is bullish, or bearish, or just going sideways. That is why it has a distinct advantage over other approaches to investing. The goal is to make money, not to rest one’s hopes on the future of a stock, a sector, or the economy.

1.1     What is Swing Trading

Everyone is familiar with waves. A wave alternates from positive to negative, then to positive and negative, and so on. Waves are found in nature – you see waves when you throw a rock into a lake. Sound is transmitted in waves. And when stock prices change, they follow a wave-like pattern. The wave is rarely as orderly a sine wave, but they are waves nevertheless, and we use these waves in Swing Trading.

1.2     Let’s Look at an Up Trends

The chart below shows the price movement of Myriad Genetics (MYGN) in an uptrend. Notice that after the price moves up, it takes a rest, or pulls back. When we swing trade an uptrend, we buy on the pull-back.

An uptrend can be identified by a series of higher highs and higher lows (the bottom of each pull-back). In other words, an uptrend is a series of successive rallies with each rally going higher than the previous one and each pull-back stopping above the previous one.

The price movement looks more like the zig-zag of a saw blade than a sinusoid, but once an uptrend is established the pattern tends to repeat itself. In swing trading we capitalize on the predictability of the pattern. We buy during the pull-back to increase our chances of making a profit.

1.1        Let’s Look at a Down Trend

The chart below shows the price movement of Verisign (VRSN) in a downtrend. Notice that after the price moves down, it takes a rest, or pulls up. The price movement follows a zig zag pattern.

A downtrend can be identified by a series of lower lows and lower highs (the peak of each pull-up).

When we swing trade a downtrend, we sell short during a pull-up. If you are unfamiliar with selling short, we discuss it in the next session.