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SWING
TRADING
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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.
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.
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The
chart 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).
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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.
Let’s
Look at a Down Trend
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The
chart 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.
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The
Steps in Swing Trading
| STEP
1 |
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Identify
a stock that is in an uptrend or a downtrend. |
| STEP
2 |
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For stocks in an uptrend, identify those
that are experiencing a pull-back. For stocks
in a downtrend, identify those that are
experiencing a pull-up.
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| STEP
3 |
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Once
an appropriate candidate is identified,
place a limit order to buy (uptrend) or
sell short (downtrend) the stock based on
the Master Plan.
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| STEP
4 |
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Once
a stock has been traded (a position opened),
place a stop-loss order to limit downside
risk and place a limit order to identify
the price at which you will take profits.
(Ideally, these two orders are placed together
as an
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| STEP
5 |
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At the end of each day, adjust the stop
loss prices based on the Master Plan.
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