Swing Trading Basics

To really profit in the stock market, whether its penny stocks or blue chips, it’s essential to adopt a strict, disciplined approach to stock trading. It is also just as important to keep things simple. Well, while trying to keep things simple, stock trading rules may, at first, seem a bit complicated. Once you learn and adopt the rules and trade with discipline, you will profit higher than before in the stock market.

Have you ever noticed how stocks tend to move up and down, almost like a wave?  Stocks move up or down to price areas in the past and then trend upwards before falling back. These are known as support and resistance levels.  Why do stocks move in predictable patterns over and over again?  They do because it is humans that are trading them. As much as we hate to admit, humans are quite predictable. So, you need to understand the psychology behind these movements.  In swing trading, investors capitalize on the predictability of this pattern. You try and time you buy during the pull-back to enhance your chances of making a profit.

Lets take a further look at swing trading uptrends and downtrends:

Uptrend

You may notice after researching a particular stock that after the price moves up, it seems to take a dip, or pull back. When you swing trade an uptrend. the goal is to time the buy on a pull-back. An uptrend can be recognized with a series of higher highs and higher lows. Basically, an uptrend is a series of rallies with each individual rally within the series going higher than the previous one and each pull-back stopping above the last dip. The stock price movement looks most similar to a zig-zag pattern. Once an uptrend is established, the pattern tends to repeat itself.

Example of a Stock in a classic uptrend:

Downtrend

Again, you can notice on any stock that you research after the price moves down, it seems to takes a break, or swings back up. The price movement again follows a zig-zag pattern. A downtrend can be recognized by the reverse of an uptrend; a series of lower lows and lower highs. When you place a swing trade during a downtrend, you sell short during a pull-up. In doing so you are betting that it will fall back after testing its resistance level.

Now these concepts may be simple in theory, but the number of traders out there that pay no attention to trends never ceases to amaze us.  Even if you dont get into swing trading it is useful to study these simple trends prior to buying any penny stock .  If a stock you want is near its weekly high, be patient it will drop at some point.

Beginner Swing Trade Strategies

As a beginner, learn to swing trade a single small position. Hold some of your money back and add to your position on pullbacks.  Your goal as a swing trader is to position yourself in the direction of the market tide and use the smaller waves that go against that tide to add to your initial position.

Once you see a new trend, get in! New trends, popping out of trading ranges, are very fast, with few or no pullbacks. If you think you have identified a new trend, jump aboard. You can always reduce your risk by trading a smaller size, but do not wait for a deep pullback. Those pullbacks or retracements will come later at which time you can add to your position. Jumping aboard a new trend feels risky and counter intuitive.

Place your initial stop just under the breakout level where the new trend busted out of the trading range. If your profit thesis was correct, that this is a new trend, the stock should not fall back into the trading range. Wait for a retraction. If the breakout of the trading range holds, the stock will take the next leg up. Move your stop up just below the retraction low. Stay with the trend until your trailing stop is broke. Many beginners often sell out of trends much too early because they try and pick the end of a trend—a nearly impossible task.