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When you have mastered the concept of spotting a trend,
you can use this knowledge to start swing trading within the broad band
of a trend. The basic strategy of swing trading in
itself is very profitable, but using options to do it will take your
profits to a whole new level! It is important that you grasp this
concept using stocks (it is much cheaper this way!), and then you can
apply the methods to buying calls and puts for outrageous profits.
Remember: Master the trade
strategy on the underlying stock before venturing into option trading!
Remember: Swing trades last
for 2-10 days, which is the ideal time period for options trading. This
way, the effect of Time Decay is
minimised. Your enemy is rendered toothless by this strategy!
Basic
Concept: As
the price of a stock tracks its way in the broad band of a trend,
either up or down, the stock will oscillate back and forth within the
band of this trend. When trading this strategy, you will want to catch
each of the oscillations at one extreme, and collect your profit as the
stock moves back to the other extreme. If you are trading stocks, you
would buy at the bottom part of the swing in a positive trend, and sell
as it reaches the top. You can do the equivalent with options by buying
calls, and selling them for a profit. If the trend is downwards, you
would short sell stocks, and cover them at a lower price, thus locking
in your profits. You can do this with options by buying puts, and
selling them at a profit as their value increases.
Why does it work like this?
Stock Trading is more of an emotional business than a logical one. If
the price of a stock is gradually moving up because of good news (good
profits, expansion of the business etc.) then traders will start buying
up the stock, driven by greed. As this buying activity increases, the
price rises above what can be reasonably attributed to the good news.
At this point, fear sets in, and there can be a sell-off, which
generally drops the price below the reasonable value of the stock. As
this back swing reaches its full extent, greed kicks in again as
opportunists see the potential, and so the cycle continues. This
repeated cycle of over reaction in the markets allows us to make profit
on both the up swing AND the down swing.
How do you get started with swing trading?
- Spot the Trend -
Identify when the price of a stock has become set in the broad band of
a trend;
- Watch the price swings within the band of the
trend, and identify the moment when the stock enters approaches a Pivot
Point (also called a swing point);
- Use technical analysis such as candlestick
patterns and trading volume to identify entry and exit points;
- Confirm these using support and
resistance lines.
- Set up your trade, making sure to set up a stop
loss and a profit target!
How about
some more detail?
Here is how you can do it, step by step:
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