A Swing Trading Primer

(eToro Blog) Swing trading is a combination of technical and fundamental analysis, with the goal to grab hold of huge price movements while minimizing idle time. The benefits of swing trading are clear: higher returns and efficient use of trading capital. But swing trading has its drawbacks, too, namely more volatility and if commission-based trading, higher commissions. While the average trader might find swing trading a bit difficult, with a little experience and knowledge, they can often put swing trading to profitable use.

A swing trader’s day typically begins long before the market’s opening bell (in whichever market the trader is trading in, of course). This is the time allotted for doing homework, i.e. get a feel for the market based on newly released fundamental data or the trading activity in a currently open or recently closed market, determining and creating a list of the possible trades based on that, etc.

The first homework assignment is the most important and possibly the most time consuming. The trader must catch up on current events, latest developments and news in the markets; the internet will yield the greatest wealth of up-to-date and relevant information, though cable tv networks are another option.

When getting up to speed, a trader should bear in mind three key things:

1. What is the general market sentiment (i.e. is it bullish or bearish, what key economic reports are markets watching, what is the applicable currency doing, etc.).
2. What sectors are hot based on the news and fundamental data of the day?
3. What is happening with my current holding and what fundamentals might affect them?

The trader must then consider and list possible trades based upon his findings and determine an entry point with the fundamental catalyst as the basis. There are several ways that a trader can find a good fundamental catalyst and one that could potentially yield the highest reward (though with the highest risk, of course) is careful monitoring of legal filings with the U.S. Securities and Exchange Commission. With careful research, IPOs, mergers, bankruptcies, restructuring, etc., often present a unique opportunity for profits, though swing traders often go against the trend to derive the highest benefit.

Playing the sector game is another opportunity; a trader finds a sector that is emerging or hot and buys into the trend and rides it out till a reversal is signaled. The highest reward might be found in more obscure sectors, but of course with that comes higher risk.

Swing trading experts suggest that traders might want to consider creating a watch list rubric on a daily basis, with stock names, fundamental catalysts, possible entry and exit points, and targets and stop loss prices. While swing traders might enter a trade based on a fundamental catalyst, they usually exit one based on some sort of technical analysis, i.e.  resistance levels, volume, price, etc. The exit price is not written in stone of course, and adjustments should be made as and when necessary; in general, a swing trader should never move a stop loss position to take on additional risk, but only to lock in more profits.

The daily watch list review is also an ideal opportunity to monitor (and modify if needed) existing trades for any material data that might negatively affect the position or which may have affected the position in after market trading.

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