Getting Started In Momentum-Based Swing Trading

I would like start with a brief definition and then I'll be happy to answer any questions. Swing trading is simply short-term trading, where positions are held for two to seven days -- longer when the market cooperates, shorter when it doesn't. "Momentum" is the key word. It is not about fading the market -- the trend is your friend.

Why swing trade?

As Mark Boucher said, "70% of a market's moves occurs in 20% of the time." The idea is to be in the market for that 20%, and out the rest of time. Momentum-based swing trading is not about picking tops/bottoms! Trends last longer than most are willing to believe.

Who should swing trade?

I think everyone should. Daytraders can gain an edge by placing a bigger-picture pattern ( say, one good for two to seven days) behind them, so they can improve their odds.

Risk can be defined, and you know fairly soon whether you are right or not. Longer-term traders can "trade around" positions, e.g., say you are long 1,000 shares, you might add to your position when a setup occurs and take off some when profits present themselves. I know of some longer-term traders who beat their colleagues with this strategy.

Look at the (INSP) chart below. Notice the trend went a long ways but eventually ended -- and a new (tradable) downtrend emerged.

Swing trading

How do you identify momentum?

There are computerized methods like ADX and RS -- these help when scanning, but I mostly like to eyeball charts.

Trends leave behind "clues." I have dubbed these clues "Trend Qualifiers." Notice in the chart that the stock started with a base breakout, hit new highs, had strong closes, wide-range bars, gaps, etc. Notice how the stock "acts" after each pullback, it resumes its trend.

swing trading system

Another way to determine trend is to use moving averages, I like a 10-day SMA, 20-day EMA and 30-day EMA.

I look for the slope of the moving average to be up for uptrends, and for the averages to be in "Proper" order -- faster above slower (i.e., 10 > 20 > 30) and for daylight.

Daylight is simply lows greater than the moving average for uptrends, i.e., there is "daylight" between the low and the moving average. This is illustrated in the following figure and graph.

Identifying trends is not rocket science. If you can't figure it out, it's probably not a trend. And of course, my favorite technique: Ask a six-year-old kid!

Trading with the trend does not mean blinding jumping on a trend. I like to wait for a pullback to occur. Refer to the figure below: The pullback consists of a trend (a) and a correction (b). You enter if and only if the trend begins to re-assert itself (c). You have to place a protective stop on ALL trades just in case you are wrong...this normally goes below the low of the setup (d).

(MENT), mentioned recently in my column, is a good real-world example.

Money management is crucial to any style of trading

As George Soros said, "In order to make money, you must first not lose money."

You must use protective stops.

You must take partial profits, usually when your risk = profits.

You must then trail your stops to hopefully capture a home run.

Finally, you must put together a game plan when trading

Ask yourself, "What is the market doing?" I have market timing systems I follow: Look at the 3-day average TRIN readings, the CHADTP, VIX systems, oscillator swing system -- and the charts themselves.

Next, you must be in the strongest sectors -- and the strongest, best setups in the stocks in that sector. Finally, you must be focused, free of distraction, and ready to trade.

And remember, PROTECTIVE STOPS ON EVERY TRADE!