• First For Trading

What is Swing Trading?


When it comes down to it, there are three main ways to trade and invest in the stock market:


  • Buy and Hold

  • Day Trading

  • Swing Trading


Buy and hold is the way we used to invest - or more likely, the way your parents invest their money. The good news is that buy and hold is perfect for investors who want to invest sensibly and leave their funds to grow. The bad news is that buy and hold doesn't work in the short term: Buy and hold can trap your money during times when the market as a whole is going nowhere. Even worse, if the market really starts falling, buy and hold could result in serious investment losses.


At the other extreme is day trading where many positions are taken for short periods of time - a few minutes to a few hours - to speculate on market prices. And while the pros can make a lot of money day trading, this is a game the average trader or investor struggles to make profitable because trading costs are higher and limitations of trading platforms.


That leaves swing trading - the sweet spot between buy and hold investing and day trading. Swing trading is ideal for self-directed traders because unlike day trading you don't have to be glued to your screen all day making hundreds of trades.


With just a few trades a week, a few minutes a day, swing trading only puts your money to work when there are real opportunities in the market. The rest of the time your capital is safely in cash, earning interest and waiting for the next chance to strike.


The fact that swing trading means not just leaving your money sitting in the market all the time is worth repeating. The truth of the matter is that stocks never move in a straight line. Any one who's been watching the stock market over the past few years knows that. But what you might not know is that this fact is what makes swing trading work. Swing trading allows you to trade stocks whether the market is moving up, moving down, or moving side to side.


Why does swing trading work?

This approach to swing trading is based on decades of research into stock price behavior, research that goes back to the early 1990s. What this research said then - and continues to say - is that short term trading strategies that buy stocks after they have pulled back outperform short term trading strategies that buy stocks after they have rallied.


This insight may surprise you. Most traders have been educated to believe that buying strength is good and that buying stocks after they have pulled back is dangerous.

But this is why we prefer quantitative analysis and a cold, hard look at the data over stock market myths and folktales. And the data is clear: in the short term, stocks that have pulled back outperform stocks that have rallied.


You can read all about this research in books like Short Term Trading Strategies That Work: A Quantified Guide to Trading Stocks and ETFs by Larry Connors and Cesar Alvarez. First published during the financial crisis of 2008, this swing trading classic is also available as a paperback.


As always in trading, the challenge is to learn how to find the stocks that are pulling back and the stocks that have rallied "too far too fast". Swing traders use a variety of tools, but more important than the individual tools a swing trader chooses are some of the fundamental concepts swing traders must keep in mind. These are not folktales or "common sense notions" handed down from trader to trader. These are basic key principles of swing trading that have been statistically quantified and tested. They have stood the test of time, and have been at the core of our success and that of thousands of professional and independent swing traders for decades.


1. Buy New Lows, Not New Highs!

2. Buy After Pullbacks, Not After Rallies!

3. Buy Stocks Above Their 200-Day Moving Average!

4. Only Sell Stocks Short Below Their 200-Day Moving Average!

5. Use the VIX -- It Works!

6. Reduce Corporate Risk, Trade ETFs

7. If You Buy Stocks, Buy Established Companies

8. The Relative Strength Index: A Short Term Trader's Best Friend

9. Use the ADX to Time and Trade Trending Markets

10. Good Times, Bad Times: Trade the News Like a Pro


Sounds like hard work? Take a trial of our US swing trading product where we do the research to find trading opportunities and you enjoy the results.


3 views0 comments

Recent Posts

See All