Swing Trading...

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.

The Steps in Swing Trading

First, restrict your selection to the universe of stocks that fulfill certain criteria.

Choose stocks that …

Have a price of at least $12

Have an average daily volume of at least 500,000 shares

Then …

STEP 1 – Identify a stock that is in an uptrend or a downtrend.

STEP 2 – 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.

STEP 3 – Once an appropriate candidate is identified, place a limit order to buy (uptrend) or sell short (downtrend) the stock based on the Master Plan.

STEP 4 – 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 OCO (One Cancels Other) order; this is sometimes called an OCA (One Cancels All) order.

STEP 5 – At the end of each day, adjust the stop loss prices based on the Master Plan.

What Can You Expect.

First – only a portion of your trades will be executed. The Master Plan is designed to only trade stocks that initially move in the anticipated direction. If the price moves in the opposite direction (continues pulling back or pulling up), the trade is not placed.

Second – you will be holding positions for a limited amount of time. While swing trading is not day trading, you are only holding positions until targets are met.

Third – some of your trades will result in losses, however losses are minimized by the Master Plan which raises the stops as the stock price rises; this is known as trailing stops. Being disciplined, and following the Master Plan will insure that profits exceed losses which means you will make money.

How To Identify Stocks that are Appropriate for Swing Trading.

All of the methods that are used to identify stocks that are appropriate for swing trading are based on technical analysis. Technical analysis is a way of using historical price/volume patterns to predict future behavior. It is not necessary to have a detailed understanding of technical analysis in order to swing trade. There are tools available that can assist investors at every level – from novice to Expert.