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The Swing Trading Strategy


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Swing Trading Basics

The Swing Trading StrategySwing Trading is a similar strategy to momentum day trading, but differs since swing trading involves trading the full intermediate up or down swing in stocks and other financial instruments until the intermediate price swing reaches a level where it is likely to reverse, which can take several days or weeks to play out.  Swing trading has a much shorter term outlook than a buy and hold investing strategy, because swing trading is only concerned with intermediate price swing trends, not the long term fundamentals.

Swing traders use a variety of objective rules and proprietary trading systems to determine the best time to enter and exit swing trades.  Using these rules and proprietary trading systems to set swing trading buy and sell limits is the key to swing trading because swing trading requires trading that is not affected by emotions and other external factors.  Successful swing traders follow their rules and proprietary trading systems to set the limits of a swing trade and determine when to close out the trade, which also makes swing trading less time consuming since the parameters of swing trading are clearly laid out without the need for extensive research into fundamentals of a particular stock or financial instrument that a trader is considering for a swing trade.  Trading capital used to swing trade is protected with stop losses.

Swing trading is such an effective trading method that many large brokerage companies and trading firms spend a great deal of money developing well researched swing trading computer algorithms to take advantage of swing trading opportunities via computer trading.  The swing trading parameters are set by a list of well defined instructions known as an algorithm, and the swing trade is executed based purely on the computer algorithm, without the intervention of the emotional human mind.  This is the essence of swing trading; trading based on set parameters rather than long term fundamentals and emotions.

Computer algorithms that instruct computers when to enter and exit swing trades have increased market volatility over the past few decades.  As stocks and financial instruments reach levels identified by swing trading computer algorithms as entry or exit points, thousands of computers may enter or exit swing trades at the same time due to similar swing trading algorithms.  This causes a spike in buy and sell orders, which in turn causes the stock market indexes to spike sharply higher and lower.

Swing Trading Example

While there are many different swing trading rules and trading systems, a basic swing trading method is to identify a stock or financial instrument, such as an Exchange Traded Fund (ETF), that appears to be trading within a channel.  A channel is a trading term for a stock or financial instrument that is trading within a range that it consistently stays within as the price of the stock or financial instrument fluctuates within the range.  The channel could include a stock or financial instrument that is trading sideways or in an up or downtrend.  A swing trade would be initiated on the long side as the stock or financial instrument reaches the bottom of the channel and then sold as the stock or financial instrument reaches the top of the channel.  This channel swing trading method can also be played from the short side by shorting at the top of the channel and covering at the bottom.  A stop loss order would be set just outside the channel to protect the swing trade from losses, should the stock or financial instrument break out below or above the channel (depending upon whether it whether it is a short or long swing trade).

There are plentiful opportunities for swing trading in the stock market.  Most of the time required to be successful at swing trading involves the time necessary to develop a swing trading method and rules that work, and then finding stocks and financial instruments that are suitable for implementing the swing trading method and rules.

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