Swing trading is a short-term trading technique where traders are usually in a position for a total of a few days to a few weeks. Swing trading is based on a phenomenom that occurs in the stock market where stocks tend to make equally distanced moves up or down. Swing trading is based on three moves. For the long side you would start off with an up move (A), then a retracement (B) which usually retraces 1/3 to 1/2 of (A), then another up move (C) usually a similar distance as the (A) move. See below for example:
Swing trading is also useful for going short in the attempt to profit from downward moves. For the short side you would start off with a down move (A), then a retracement (B) which usually retraces 1/3 to 1/2 of (A), then another down move (C) usually a similar distance as the (A) move. See below for example:
Now that we know what a swing move looks like let’s look at how to apply a swing trade. First let’s look at the long side. You need to look for a strong upward move followed by a retracement that retraces 1/3 to 1/2 of the previous move. Then, once the retracement appears that it is reversing and going back higher place a buy order. Once you’re in the postion place a sell stop below the previous lows of the retracement to protect yourself on the down-side. Look at the following illistration:
For a short trade you need to look for a strong downward move followed by a retracement that retraces 1/3 to 1/2 of the previous move. Then, once the retracement appears that it is reversing and going back lower place a sell short order. Once you’re in the postion place a buy stop above the previous highs of the retracement to protect yourself on the up-side. Look at the following illistration:
Swing trading is simple and effective! You can also use swing moves to come up with up or down price targets for the next move in the stock (reference the previous blog titled “Dertmining Price Targets”).
For professional investment advice on this topic contact: Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com www.allgenfinancial.com
When the market goes into a bear phase investors can have a difficult time making money on the long side. I have seen stats that say in a bear market 3 out of every 4 stocks go down. As an investor that means that the odds are stacked against you if you’re only buying stocks. In a bear market the longside of the market is difficult to navigate, but on the flip side shorting opportunities become abundant. Many people are scared to short a stock or index in the belief that there is unlimited upside risk, but by applying a buy stop for protection you have almost completely capped your upside. Why almost you ask? There are times when stocks gap up (or down) past your stop price and you can get filled at a much higher (or lower) price from your stop order was placed. These cases are rare but, it is something you need to be aware of.
When looking to enter a short position I look for three things a down-trending market, a negative sector and a stock that has formed a base (consolidation area) near it’s lows, then I wait for a breakdown of that base at which time I would enter my short position. If you missed the breakdown and the stock makes a sharp move downward, then DO NOT chase the stock and short it when it is extended to the downside this would leave you with an extremely risky postion. Rather, wait for a move back up to the breakout point or at least a move back up into a short-term moving average. Then, look to enter your short once it bounces off that area and starts to head back down. Once you place your short position look to place your buy stop (for protection) above a near by resistance area which usually means the most recent high or you could use a moving average, better yet, place your stop above a high and above a moving average, but make sure it’s not too far above where you entered the postion. My personal limit is 10% away from my entry price. Click the example below to see how the strategy works. The initial short and stop is where I initially entered the position from a breakdown of a base and where I initially placed the stop. The secondary stops are where I moved my stops down, once the position moved down, in order to protect my gains. “Covered” is where I exited the position because my buy stop was triggered.
For professional investment advice on this topic contact: Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com www.allgenfinancial.com
There are a number of technical patterns that you can use to determine price targets. In my experience there are four patterns that work really well: Head and Shoulders, Triangles, Rectangle Bases and Swing Trades. All of the following examples will give you examples of upside targets for going long, but the inverse is true if you’re trying to calculate downside targets when going short.
Let’s start with the Head & Shoulders Pattern: To be precise a bullish Head & Shoulders pattern is called a bottom-reversal Head & Shoulders and is inverted from the top reversal head and shoulders. To calculate your price target you take the difference between the bottom of the head and the neck line. Once you come up with that number you add it to the neckline to come up with an upside price target.
The next set of patterns you can use to determine price targets are triangles. There are three types of triangles; Ascending, Descending and Symetrical triangles. The way you determine the price targets are the same for each triangle. You take the distance of the apex of the triangles and add it to the breakout point from the traingle to determine your targets. For shorts you would subtract the distance of the apex to the breakdown. To study further click on the links above as stockcharts.com gives great examples.
The third pattern I want to discuss on how to determine price targets is the Rectangle. Determining the price target for the rectangle is relatively simple. You take the difference between the top and bottom trendlines and add to the breakout for longs or subtract from the breakdown for shorts.
The last targeting method is the swing trade or sometimes called an A,B,C pattern because there are three parts to the pattern. I will only focus on the long side and on how to use this pattern to come up with a target, as I could write an entire blog on swing trading alone. The basic pattern includes the first up move (A), followed by a pullback (B) (this pullback can not go lower than the start of A), then a second leg higher (C). To come up with the upside target you would take the distance of the (A) move and add it to the bottom of the pullback (B). See example as it is better understood visually…
For professional investment advice on this topic contact: Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com www.allgenfinancial.com
When entering a position you should know what your attempting to make on the upside (reward) versus how much you can lose on the down side (risk). My personal minimum reward-to-risk-ratio is 3 to 1. Which means I’m attempting to make three times as much as I’m willing to risk. Theoretically, all variables aside, if you are to implement a 3 to 1 reward-to-risk-ratio you can be wrong 75% of the time and still break even. Some of the best traders in the world are wrong more than they are right. However, when they are right they are right big and when they are wrong they keep there losses small.
How do you figure out your risk-reward when going into a trade? Your risk is the easier of the two to see. You look for nearby support where you can place a sell-stop below, the diferrence between the current price and the sell-stop is your risk. Trying to figure out your upside potential (reward) takes some knowledge of technical anlaysis. You have to know how to calculate your upside targets bases on chart patterns, which I will discuss in the next blog. Once you know your upside target you subtract that from the current price and that is your reward. Then, take the reward figure and divide by the risk number and you will have your reward-to-risk-ratio. My rule of thumb is a ratio over 3 is worth considering, below 3 look else where. Stay tuned to the next blog to calculate upside targets…
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