Introduction to swingtrading

This is part III in a series I’m writing about my trading philosophy. Part I dealt with the psychology of trading and part II with money management techniques. I am now going to begin an introduction to my actual trading strategy - swingtrading.

I can briefly describe swingtrading as taking advantage of brief price swings in stocks lasting anywhere from 1 day to a month and using technical analysis to pinpoint entry and exit points. This is not perilious daytrading or scalp trading. Nor is it buy, hold, and pray. Some people call it momentum investing, because you only hold positions that are making major moves. By rolling your money over rapidly through short term gains you can quickly build up a lot of equity.

Think of your equity as inventory in a retail business. The way retail giants such as Wal-Mart make so much money is by turning over the inventory as rapidly as possible. The magic of compounded gains can produce incredible yearly returns. Thankfully the stock market moves in such a way to make rapid turnover profitable.

Swingtrading is based on the fact that makets do not trend upwards, they burst upwards. Although the DOW and NASDAQ have made large moves in 1999 and 2000 most of those moves took place in a short period of time. During most of the last year the market was not making major moves upwards or downwards, it was moving sideways. Studies have shown that historically, the market generates most of its movement only during 12% of its trading days. Markets do not slowly climb steadily upwards or fall steadily downwards, they make quick bursts up and down punctuated by periods of consolidation. Individual stocks also exhibit similar patterns.

Swingtrading is designed to take advantage of these statistics. It's possible to chalk up enormous gains through short term trading.. I have personally made a gain of 700% year to date for 2000 using this method. My basic strategy is to jump into a stock when it moves out of consolidation periods and breaks through resistance levels. It then often makes a quick move which I can profit off of. I then sell once the move is over and leave the stock behind as it begins a new phase of consolidation or sideways movement. I then take the money and find another stock and repeat over again. I also play the short side by shorting stocks that fall through support levels. In summary, my goal is to capture the quick moves stocks make in their life span, keep the risk low through money management techniques, and keep my money working in only the most active issues.

This FOX news article gives an idea of what it is like to swingtrade stocks:

From FOX MarketWire - Investors Get Into the Swing

http://www.foxmarketwire.com/money/032300/swing.sml

By Robert Bates

Instead of furiously buying and selling stocks by the hour like most day traders, Rhonda Reskin opts for a more laid-back approach to reaping Wall Street riches.

The Louisville, Ky., mother "swing" trades, or holds onto stocks for a few days or a few weeks, instead of clearing her portfolios at the end of each day. Although this strategy still poses high risks, many investors regard swing trading as a good way to make money without the migraines.

"In this market, it can take stocks a week or two to consolidate," Reskin said. "You miss a big portion of their gains if you are day trading." Plus, Reskin added: "It allows me to go pick up my kids at noon."

Online brokerages don't keep track of their swing trading customers, but they have noticed more investors experimenting with this tactic.

"It's without a doubt getting more popular," said Eric Winchell of kinetictrader.com, an investment site. "Most day traders are drawn into it by the thrill and casino-like atmosphere. But when they learn what really moves stocks, they realize that there are also gains to be made at a slower pace."

Insiders say swing trading works well for part-time traders — especially those doing it on the sly at work. While day traders typically have to stay glued to their computers for hours at a time, feverishly watching minute-to-minute changes in Nasdaq Level II quotes, swing trading doesn't require that type of laser focus.

"It's the difference between a sprint and a jog," said Richard V. Rueb, executive director of Day Traders USA, an organization for day traders. "I can only day trade for a couple of hours each day, but I can swing trade all day."

While day traders gamble on stocks popping or falling by fractions of points, swing traders try to ride "swings" in the market. Its advocates say that by buying fewer stocks and aiming for bigger gains, they pay lower fees and, theoretically, have a better chance of earning larger gains.

"With day trading, the only person getting rich is the broker," said Pejman Hamidi, CEO of Egoose.com, which gives tips for swing traders. "Swing traders go for the meat of the move while a day trader just gets scraps."

Unlike day traders, swing traders also tend to rely on long-term technical research when making their stock picks.

"I spend a couple of hours each night looking over different stocks," explained Michael Swanson, editor of Swingtradingonline.com, which offers trading tips. "A day trader might just jump on the computer and see what's active."

Still, swing trading is hardly stress-free. In fact, some believe it's more stressful than day trading because of the stock market's extreme day-to-day volatility.

"With day trading you can watch something second-by-second and adjust your strategy instantly," said Bill Lauderback, spokesman for the Electronic Traders Association.

Steve Burris of Tradewiser.com, a site for day traders, added that day traders sleep better knowing they're not subject to overnight market catastrophes.

"It's not as great a safeguard as going home in cash every night, but it will shelter you from all but the worst downturns," Burris said.

In the next Part I’m going to explain more about technical analysis and charting. Just wanted to give a very brief introduction to the term swingtrading.