Monday, October 03, 2005

When to Adopt a Swing Trading Strategy

In evaluating trading strategies, we have seen that personality plays its part, and we’ve taken a close look at when day trading can be effective. Now let’s take a look at swing trading as a way for traders with a longer timeframe to achieve their profit expectations.

Swing trading allows the trader to take a position in a stock and look for an intermediate-term move of a few days to a few weeks before their profit objective is met. I feel it is no more or less risky than day trading, but rather a different way of finding stock market profits. The swing trader takes smaller positions and is therefore less exposed from a dollar standpoint intraday, but faces overnight exposure and the inherent gap risk associated with holding stocks overnight. Not all gaps are bad, it should be noted. Sometimes a swing trade meets its profit objective faster than anticipated due to a favorable overnight gap, but the opposite can also be true. It’s important to adjust trading size appropriately when considering holding a stock overnight.

When determining if conditions are proper for swing trading, take into consideration whether the overall market is trending or not. This observation alone can be helpful when deciding if stocks are likely to see follow-through for multi-day moves or if they will instead reverse course and not trend at all. Also, look at the price history for the stock in question. Does it have a history of large price gaps? Does it seem to trend well when it breaks out from chart patterns? Does the stock move for several days in a row when it breaks out or does it go for one day and soon after reverse course? Questions like these will help you decide if a swing trading approach is best for the stock you are looking to trade.

Another important consideration is scheduled news. Is the market on hold awaiting a big announcement or event such as a decision on interest rates or an unemployment number? Does your stock have an earnings announcement or conference call scheduled to take place soon? While there are definitely many unknowns in the market, one can be sure that scheduled events will command respect from traders who know their importance. This means your stock with a great setup may simply not move much ahead of such an event, with the deep-pocket traders waiting to take a large position until after the unknowns have seen the light of day. During such times, a day trading strategy is often a better approach.

Swing trading certainly has its advantages. When the market is moving well and volume is strong, swing trading can offer great rewards. Stocks and markets with momentum will often see follow-through in the form of favorable gaps. A swing trade allows the trader to participate in these gaps, which adds to your profit in the trade literally overnight. This is an opportunity cost of day trading. Swing trading also has the potential to generate big returns in short amounts of time, as breakout stocks can find momentum and move quickly to a profit target. Swing trading also allows a trader to enter positions and follow-up stop-loss and profit-taking orders and simply let the trades go. Swing trades require little maintenance once exit orders are entered, with trailing stop-loss orders being the only dynamic element of the trade. The part-time trader can enter a position, set a limit sell and a stop-loss order, and then walk away. This can be far less stressful than watching every tick on the edge of your seat.

If you’re a part-time trader or a full-time trader with patience, the right market conditions can mean great profits with the right swing trading strategy. Always be evaluating your approach and the market conditions, and then stick to your game plan as your trades develop.

The Stock Bandit


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