Swing trading has gained some interest lately because it is a popular strategy used to profit on price volatility. It was coined by Alexander Elder, a New York trader who lives off his trading profits and has written a book on rule-based swing trading.
Swing trading is highly speculative, and a swing trading strategy to invest in everything from stocks, bonds, and ETFs, to currencies and commodities. Swing trading is also very short term by nature: the average position is held for less than a week or two.
Swing trading strategies are about having a defined set of rules for buying and selling. This eliminates the subjectivity and emotional aspects of trading, which so many traders fall victim to. Swing trading is also labor intensive, since it takes a lot of time and effort to due the necessary technical and fundamental research.
It is important to note that trading systems lose their “profit ability” once they become mainstream, so the ideas below are general rules, not specific strategies.
Here is what you need to know about swing trading strategies, and how to profit:
You can profit from swing trading by going long if you have a set of trading rules focused on short term price increases. You can create a trading system around this by looking at both technical analysis and fundamental analysis. Long price movements are typically correlated with positive fundamental news, so it is important to combine both factors.
One of the key technical measures to profit long is to look at the price trend of three moving averages: 30 day, 90 day, and 200 day moving averages. If you want to profit long, the three averages should be aligned in an upward direction.
Don't have a clue what a moving average is? Check out the free guide I created to help you by clicking the button to the right! It is a quick 3 page guide to setting up moving averages using free stock charts, so anyone can do it. There are lots of pictures to walk you through the entire process.
You can also profit from swing trading by selling high and buying low – or taking advantage of a negative price movement. Similar to long swing trading, in short swing trading you develop a trading strategy based on price decreases by looking at technical and fundamental factors. Downward price movements are typically correlated with negative fundamental news, including poor profitability, or external factors, such as economic factors.
One of the key technical measures to profit short is to look at the same three moving averages discussed above. However, instead of being aligned upward, they should be moving downward.
Swing Trading Strategies: Small and Consistent Profit
The hardest part of all swing trading strategies is identifying the perfect top and bottom entry and exit points to maximize profit. However, that isn't always necessary. You can also stick to a strategy of making small consistent profit over time by not worrying about perfect entry and exit timing.
Many swing traders use mathematical models to calculate entry and exit points, and put a margin of safety in to make sure they lock a profit. That way they don't need to get the very bottom or very top of price movements, but instead can trade in the range in between.
Selecting the Right Broker for Your Swing Trading Strategy
Given the swing trading strategies involve a lot of investing based on price movement, it's important that you select a online discount broker that supports price/volume charts, and fast order entry and execution.
We keep an ongoing list of the best online brokerages here: Online Broker Comparison Tool.
Readers, what are your thoughts on swing trading strategies? Is it something you've done or considered?