Swing trading is a highly profitable, short term trading strategy based on the idea of making use of the oscillations of a stock price within a recognisable trend. When you have mastered the concept of spotting a trend, you can use this knowledge to get started. The basic strategy 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! This is not a good beginner strategy! If you are new to options trading, you would do better to start with credit spreads
- 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!
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; (TOP TIP: You can analyse up to 10 stocks per day with INO'sTrend Analysis).
- 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:
- Click on this link to learn about Trend Analysis;
- Click on this link to find about the technical analysis that you need to find the Pivot Point, and to determine entry, exit and stop loss;
- Click on this link find out about some swing trading strategies, and some tips for practical application;
- Click on this link to find out about swing trading with options.
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