Swing trading, is the buying and selling of a security over a period, typically between two days to a couple weeks.
When someone first starts trading, they will often get interested in technical analysis. While technical analysis is an important factor to trading, it is not the only factor. After all, if you can read a chart and get trade ideas directly from past price information, there is no need to learn any of the ‘difficult’ stuff. Things like GDP reports analyzing 10K reports and even MOA lines can often stump investors and discourage them from the market.
Swing trading is difficult just because there is so many different aspects of it. Many very bright young people will spend their entire lives studying economics and the market and even then, they realize that the field is a very inexact science. Often the market will react the exact opposite of how you would expect it too.
How many times have stocks earning report been positive and beat estimates, but the stock still drops 10 points. Exactly, very often. That’s why many investors recommend closing many volatile positions during earnings season.
“The shortest distance between two points is a straight line”
For most traders that straight line draws directly from technical analysis, for others technical analysis is only one of the lines between their two points.
This is how I trade and is what has made me such a successful investor thus far. The strategy I use to invest incorporates a variety of proprietary indicators which when acting in tandem, gives me curtail information I need to make a successful trading decision.
After selecting a time period and displaying it on a candlestick chart, I often gravitate toward indicators to assist in interpreting that chart information. Trading is difficult enough, but when first encountering a chart, especially charts displaying a lot of data, most traders just see a bunch of squiggly lines. I use the indicators to help to make sense of that madness.
Now seeing the indicators is as simple as putting them on the chart. Knowing how to use the four curtail indicators like the Moving Average, Relative Strength Index (RSI), Slow Stochastic, and Moving Average Convergence & Divergence (MACD) is much more difficult.
When it comes down to it, the fact of the matter is that no tool, whether it’s an advanced technical indicator or something simple – nothing is going to perfectly predict the future. Any trade you place could end up costing you money, but de-risking your investment is what differentiates the sharks from the guppies.
This idea emphasizes the important of risk management: Investments are uncertain regardless of how amazing of a trader you have become, even the big hedge fund managers on Wall Street still make poor investments.
The difference between a professional trader and an amateur trader is that a professional knows what to do when they’re right and most importantly when they’re wrong. Amateur traders don’t always know where they went wrong and how to correct their mistake moving forward.
So, if any trade brings along with it risk, and if the future is uncertain – what does this say about the trader’s pursuit of profit?
We’ll its simple, understanding how much you are willing to risk on a trade before it becomes profitable is key. This should indicate that short term trading is more about probabilities and risk management then it is about a direct prediction. The goal here is to get the probabilities in the trader’s favor, even if it’s just by the slightest amount. This is where technical analysis plays a key role.
Using technical analysis can allow traders to analyze what has happened in the past market in an effort to get an idea for what may happen in the future. Notice that we didn’t say ‘predict’ or ‘will happen. Nothing Is Certain.
Below are two of my favorite indicators to use for this:
The Relative Strength Index
RSI is probably the most discarded indicator used in the market. While moving averages are often the first indicator learned, RSI usually follows closely thereafter. After careful examination, traders will often realize that RSI (like any other indicator) isn’t always right. While its not always right alone, it is undoubtedly a good indicator when used in conjunction with others. Everyone knows two eyes is better than one.
While RSI can be a fantastic way to swing trade, MACD is another you simply can’t leave out.
Many traders love trends, and the reasons are quite logical. If that trend is going to continue, the trader can make a significant amount more than they had to risk upon entering the position. This goes right back to that risk-reward factor that was mentioned previously as being so important.
Put bluntly, it’s not enough to simply go long on a stock because the trend is ‘up.’ Nor would we want to blindly sell just because we’ve determined the trend to be ‘down.’
We want to do this in a manner that can give us the greatest advantage and largest profit potential. We always like to use the idea “buy low” and “sell high.” Now while this sounds extremely logical, the idea of what constitutes ‘low’ and ‘high’ are relative matters that many traders struggle with. This is where the moving average comes in.
A common filter for this is the 200-day moving average; as many investment banks and hedge funds around-the-world use this indicator for the same purpose.
If prices are above the 200-day moving average, traders determine the trend to be ‘up,’ in which case they look for opportunities to buy.
While this is not the only moving average line you should use, it is certainty one of the you should look at.
The big question here is ‘which indicator works best?’ There are a countless number of indicators that can be used; but it just depends on the application.
There are the MACD, RSI, moving average, Bollinger Bands, stochastics, and the list goes on, but unfortunately there is no single indicator that is the best for swing trading. Technical indicators are just tools, they can’t produce profits. Profits require a trader to use their indicators and price analysis skills in the correct way which is the most difficult part of trading…. Luckily, we’re here to help.
Always remember – the future is uncertain.