An Introduction to Swing Trading

To make money in the stock market it is necessary to have a disciplined approach to
trading.  We also believe that it is also important to keep things simple.  While our
goal is to keep things simple, the trading rules might initially seem a bit complex.
However, once you learn the rules and you trade with discipline, you will make
money in the stock market.
Swing trading allows you to make money when the market is bullish, or bearish, or
just going sideways.  That is why it has a distinct advantage over other approaches
to investing.  The goal is to make money, not to rest one’s hopes on the future of a
stock, a sector, or the economy.

What is Swing Trading 

Everyone is familiar with waves.  A wave alternates from positive to negative, then
to positive and negative, and so on.  Waves are found in nature – you see waves
when you throw a rock into a lake.  Sound is transmitted in waves.  And when stock
prices change, they follow a wave-like pattern.  The wave is rarely as orderly a sine
wave, but they are waves nevertheless, and we use these waves in Swing Trading.

Let’s Look at an Up Trends 

The chart below shows the price movement of Myriad Genetics (MYGN) in an
uptrend.  Notice that after the price moves up, it takes a rest, or pulls back.  When
we swing trade an uptrend, we buy on the pull-back.
An uptrend can be identified by a series of higher highs and higher lows (the bottom
of each pull-back). In other words, an uptrend is a series of successive rallies with
each rally going higher than the previous one and each pull-back stopping above the
previous one.
The price movement looks more like the zig-zag of a saw blade than a sinusoid, but
once an uptrend is established the pattern tends to repeat itself.  In swing trading
we capitalize on the predictability of the pattern.  We buy during the pull-back to
increase our chances of making a profit.


Let’s Look at a Down Trend 

The chart below shows the price movement of Verisign (VRSN) in a downtrend.
Notice that after the price moves down, it takes a rest, or pulls up.  The price
movement follows a zig zag pattern.
A downtrend can be identified by a series of lower lows and lower highs (the peak
of each pull-up).
When we swing trade a downtrend, we sell short during a pull-up.  If you are
unfamiliar with selling short, we discuss it in the next session.