What is Swing Trading?

Swing trading is the sweet spot between active trading and investing.

It’s the perfect opportunity to control a portion of your portfolio and advantage of recent price action, while you let your 401K continue to develop untouched.

The purest definition of swing trading is a technical approach to identifying short term trading opportunities in the direction of the most recent trend. To be clear, it does not reply on a company’s fundamentals. A new trend may result because of a fundamental catalyst, but the swing trade itself is 100% a technical decision.

The market (and stocks) have natural ebbs and flows over time, price action termed by professionals as “momentum,” followed by periods of rest. These momentum type moves can be significant but are short lived. This is the swing trading opportunity, capturing these short term 3-10 day “swings” in the market.

The Swing Trading Opportunity

The prudent swing trader carefully picks his spots to capture the crux of the next market move without long term exposure. This is the core benefit of swing trading, short term gain without long term exposure.

The caveat to this benefit is the need to be prepared to make decisions. A well-educated swing trader understands the window is shorter than investments and must create a plan to be ready for day to day movement. Depending on your current work schedule this can be programmed into your brokerage account as “good til cancel” orders or you can perform them manually when you receive an alert.

Either way you need to be ready!

Dow Theory and Swing Trading

Dow Theory states that there are always three trends in place at the same time;

  1. long term trend
  2. intermediate trend
  3. short term or day-to-day fluctuations

The swing traders’ focus is the intermediate trend. We look for the long term trend for direction, the intermediate trend to confirm the direction and the short term price action to time entries and exits. This is the structure of a well-formed swing trading plan. To see a technical view of how we create this set up using moving averages head over to this lesson.

The majority of profits come from a few trades. Some make money, some break even and some lose. With a strict money management plan you will position yourself  to capture extraordinary market moves.

 

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