A Trading Method You Might Not Understand… But Should
Still not clear on the difference between swing trading and day trading?
Let’s clear it up, picking up where we left off yesterday…
While swing trading bears some similarities to day trading, there are several important differences.
One of the biggest differences is timing. In day trading, you hold a stock for a very short period of time; it might be minutes or hours, but never more than a few days. With swing trading, the trader might hold a stock for a few days to a few weeks, or even several months.
Another one of the big differences is trend awareness. In this way, swing trading can be more like trend trading, where you take a long, hard look at the fundamentals that trends play into the value of a stock, and will hold on to a stock based on this.
With swing trading, you examine any trends playing into the stock’s value and will trade based on a combination of fundamental research and examining the stock’s movement and chart patterns.
Best Swing Trading Strategies
What are the best swing trading strategies?
While there are endless variations, there are several tried-and-true setups that are considered traditional swing trading strategies.
Here are some of the important ones you should know.
The breakout strategy is an approach where you take a position on the early side of the uptrend.
Basically, you monitor a stock, and when it has a desired level of movement and volatility and breaks a key point of support or resistance (i.e. it falls within a defined price range), you get into the trade.
Support, resistance and volume are key.
Of course, you’ll also monitor catalysts and other factors that might affect the price of a stock — those are important swing trading strategy facets.
The setup is a key starting point to enter a trade and benefit from future increases in volatility and price swings.
A breakdown is the opposite of a breakout, where the stock price moves below a defined support level. With a breakdown, the chart points toward lower prices. And you monitor the same fundamentals.
Swing trading with options can be a great strategy, particularly if you’re looking for leverage on your investment.
By exercising swing trading options, you’re gaining the ‘option’ to buy or sell later if certain criteria are met within a defined time period. You put in a call option or a put option depending on whether you’re buying or selling, respectively.
You only commit to the trade if your desired levels are met. For this peace of mind, you have to shell out an advance or down payment of sorts. If you don’t exercise your option within the time window specified, you’ll lose this initial payment. However, it’s less of a loss than if you made the full investment.
Setup of a Profitable Swing Trading Chart
What should you look for in a profitable swing trading chart? Let’s break it down.
Moving averages are an important factor in determining support and resistance levels. They can also help you determine the current climate of the market. There are two key types of moving averages.
Simple moving average: Also referred to as SMA, the simple moving average can help you determine the current climate of the market. Is it bullish or bearish? You can also learn support and resistance levels as well as price points, which can help you decide where and when to enter and exit a trade.
Exponential moving averages: Also referred to as EMA, this variation looks at trend signals. It can help you determine your entry and exit points based on trends, which can help further refine your entry and exit points and plot a clear-cut trading plan.
A stock’s float can be influential in helping you decide whether it’s a wise investment for you.
The float is the number of shares that are available for public trading. But don’t confuse it with the shares outstanding — that figure includes restricted shares.
You’re aiming for the Goldilocks zone again here. You don’t want an excessive float, because when a massive float is happening, it’s harder for the stock to move in a way that will make you profits. A stock that has a smaller supply of shares is more likely to show more impressive action and movement.
A too-low float can also inhibit movement. If a stock isn’t highly traded, it may not be able to gain the movement you’d like.
Short interest can help expand your knowledge before making a swing trade. It’s a ratio that compares the number of floating shares to the number of shares short.
Often, short interest is calculated on a monthly basis, but there’s no truly accurate source of data for this so it’s more of a guessing game. It includes all shares that have been sold short.
So why does that matter? Because a high short interest may be an indication that the market is trending toward bearish with this stock. However, if the stock has a low price and a high short interest, this could be a warning sign that a short squeeze is occurring.
If a stock has a relatively high short interest that can be cross-referenced with a positive catalyst, this might give you a sign that short sellers want to cover themselves in this situation. This could affect the stock price.
Looking at volatility is key in determining a swing trade setup. Volatility is the liability to change rapidly and unpredictably, especially for the worse.
In the stock market, volatility generally implies greater risk, which means higher odds of a loss. However, risk can also lead to reward, so it’s important to look at a stock’s volatility in conjunction with other aspects such as catalysts and other fundamental data.
These are the most important terms and examples of what can and will happen that you need to know when it comes to this kind of trading.
Check back tomorrow for your final and completed lesson on this major method for great trade set ups!
Editor, Penny Stock Millionaires