Swing Trading

Making profits Within The Major Trend

Markets don't trend all the time - there are long periods where they tend to be in channels or consolidating. These are the markets where swing trading works well.

What is Swing Trading?

Swing trading sits in between day trading, and longer term trend following.

Swing trades normally last 2 - 5 days. The swing trader will enter a position one way, and exit with a profit - and enter a possible position the other way; hence the name swing trading.

The Swing Traders Best Market

For a swing trader, it's best to trade, when a market is going nowhere and is consolidating within a range.

Swing trading does not work in strong bull and bear markets, as prices are moving strongly in one direction only - without a swing in the other direction and here of course a swing trader will lose.

The problem with both swing trading, and long-term trend following, is that success is based on identifying what type of trend the market is in - i.e. bull, bear, or a period of consolidation.

Once you've identified a market moving in a sideways channel or consolidating - then it's time to look for swing trading opportunities.

The Best Tool for Swing Traders

The best indicator to time swing trades is - the "stochastic indicator"

The stochastic indicator is a momentum oscillator, which warns short term over bought or oversold scenarios in the market.

The logic of the stochastic is based on the assumption, that when a market is rising, it will tend to close near the high - and when a market falls, it tends to close near its lows. Lets look at the calculation

The Calculation

The stochastic oscillator was developed by Dr. George Lane and is plotted as two lines called %K, a fast line and %D, a slow line.

The following apply to the two lines:

· %K line is more sensitive than %D

· %D line is a moving average of %K

· %D line gives the trading signals

Although this sounds very confusing, it's actually very similar to the plotting of moving averages.

For example, take %K as a fast moving average, and %D as a slow moving average.

The lines are plotted on a 1 to 100 scale. "Trigger" lines are normally drawn on stochastics charts at the 80% and 20% levels and when a market is over 80% it is overbought and below 20% it is oversold.

Using Stochastics

As we have just said the 80 and 20% levels are significant.

The 80% value traditionally is used as an overbought warning signal, while the 20% is used as an oversold warning signal.

The signals are most reliable if you wait until the %K, and %D lines turn upward, below 5% before buying - and in reverse, above 95% before selling.

For swing trading, look to trade when you get a crossover confirmation.

For example, buy when the %K line rises above the %D line, and sell when the %K line falls below the %D line.

Beware of short-term crossovers that may generate false signals.

The best crossover is when the %K line intersects, "after" the peak of the %D line (a right-hand crossover).

This is a visual indicator

Don't worry if the above confuses you - you don't need to understand the logic. When you look at stochastics on a chart, all you're looking for is the visual signals - not the calculation behind them.

You don't need to know how an internal combustion engine works to drive a car and the same logic applies to stochastics.

Trading