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Monday, December 17, 2007

Swing Trading . . .

Note: It should be noted that the following discusses TRADING. Not long term investing. Trading is short term speculation. Investing is long term, and much less speculative.

Swing trading, I have found, to be the style of trading that best fits my personality if I'm looking for a short-term trade. I'm not a hyper trader (the day trader) but on the other hand, when it comes to a trade I don't want to wait around for 6 months. Swing trading is more speculative (and thus, a little more risky). When it comes to trading? It's the style that I really love. Anywhere from 3 days to 14 days? And you're out of the trade. You really have to have your money management strategy nailed down in order to be a successful swing trader. But in my opinion, I believe it's very possible, and for myself? Less stressful.

A typical swing trade typically takes between a few days to two or three weeks. My average is around 7 days. Sometimes less, sometimes more.

The following was mentioned at Wikipedia's "Swing Trading" and I think, bears repeating:

"It should be noted that in either of the two market extremes, the bear-market environment or bull market, swing trading proves to be a rather different challenge than in a market that is between these two extremes. In these extremes, even the most active stocks will not exhibit the same up-and-down oscillations that they would when indices are relatively stable for a few weeks or months. In a bear market or a bull market, momentum will generally carry stocks for a long period of time in one direction only, thereby ensuring that the best strategy will be to trade on the basis of the longer-term directional trend.

The swing trader, therefore, is best positioned when markets are going nowhere—when indices rise for a couple of days and then decline for the next few days, only to repeat the same general pattern again and again. A couple of months might pass with major stocks and indices roughly the same as their original levels, but the swing trader has had many opportunities to catch the short terms movements up and down (sometimes within a channel).

Of course, the problem with both swing trading and long-term trend following is that success is based on correctly identifying what type of market is currently being experienced. Looking back over the past few years, trend following would have been the ideal strategy for the raging bull market of the last half of the 1990s, while swing trading probably would have been best for 2000 and 2001. With the 2002 bear market, the best strategy would have been to follow the trend and short everything in sight. As economists and traders would agree, the most accurate insight into trends is viewed in retrospect."

In other words, identify the right market for a swing trade, or even the right stock. The market lately? Has been extremely volatile. ALL over the place. This way and that. Just bouncing like a cat running through hot coals. Some swing traders, such as myself, find it difficult to profitably trade in such a market.

I prefer finding nice quiet times, when I can just look for the nice up, down, up down. Just oscillating, fairly predictable stocks and markets.

Swing trading is a game of catching the 'swing' of momentum. Thus, it's a matter of following moving averages.

AVERAGES! Yes, that's right. This time in your life has arrived that they warned you about in High School. The time when making money would depend on math.


Seriously, all moving averages do? Is average together the closing price of X number of days together in one price. A 3 day moving average? Averages the closing price of 3 days? Into one number. So today's 3 day moving average? Would average the last 3 days closing price - into the average number. Let's say 3 days ago, XYZ closed at 1. Yesterday, XYZ closed at 3. Today, XYZ closed at 5. Then what's the 3 day moving average for the day? That's right. 3. (3+5+1)/3 You can create a moving average for however many days. 3. 5. 7. 12. 2000. And when you look into EMA's (Exponential Moving Average), you find an even better friend. How does these averages help?

It allows the market to not seem so jumbled, and for you to get a better handle on what the actual 3, 5, 7 or however many days - the trend is. Remember the motto: The Trend? Is your friend. Trade with the trend.

What a swing trader does? Is try to find out when two trends collide, and then trade with the larger trend as it has the most momentum.

That's key.

Also, I talk alot about Dividends in my investing portfolio? But in swing-trading, dividends is sort of a non-issue - except that it makes the stock more attractive to investors, and thus can be a variable to help buoy the price, and you can swing trade. But if Dividends are vital to my investment portfolio? For my swing trading? Their impact is there? But negligible.

So what is my methodology? I'll discuss that tommorow . . .

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