Swing trading is more art than science and the rules are not always hard and fast. So a swing trader needs to be flexible and adapt to the conditions at hand. So the key is recognizing the current conditions and adapting a strategy for it.
There are only three methods for a swing trader to use. Each swing trading method has appropriate strategies.
The Reversal Trading Method
The first method of swing trading is trading reversals. The big advantage of the reversal method is that it has an excellent risk to reward ratio, meaning you are going to know quickly if you are right and t wont cost you much if you are wrong. If you are right you can hit some real home runs with it.
This is a key part of swing trading, having method of trading that has a high risk to reward ratio. The reversal method is best with stocks, commodities and the market index’s are choppy and not trending.
So what is the best way to trade a reversal? In my trading the Head and Shoulders chart pattern is the best way to look for a reversal. See my article here on how to look for it and use it.
The Retracement Trading Method
The second swing trading method is the retracement method. A retracement by definition is a a stock or commodity is one that is trending strongly and pulls back or retraces. This is an excellent method for getting in a stock when the markets are trending.
The trick to this method is knowing where to get in when the stock is about to continue in its primary direction. The reversal method can be used in bull or bear markets, meaning you can use it to go long or short.
The trick is knowing when a stock is just under going a retracement and not a full fledged reversal. In my opinion the best method is to use moving averages. See my article here on using moving averages.
The Breakout Trading Method
The breakout trading method the swing trader will look for a stock that has been “basing” for a period time. The amount of time the trader is looking for really depends on time frame. The day trader may only be looking for a few hours of basing where as the swing trader is looking for a period of weeks.
When swing trading the trader will look for a stock to “break out” to a new 20 to 30 day high. This method is the most dangerous. See my article here why I am not a big fan of it. It does however offer the best risk to reward ratio because when your right the rewards are phenomenal.
The problem is that you will be wrong more often than not and you will have a “false” breakout. The breakout method typically works best after a bear market in stocks has been going on for a period of months and is about ready to turn into a bull market.
Using the breakout method you would look for the strongest stocks that have stopped going down and are just biding their time waiting for conditions to improve. Here is my article on finding the strongest stocks.
If you are newer swing trader you can do yourself a favor by learning from a professional swing trader like Jason Bond or Microcap millionaires.
You can read all my reviews on stock picking services here: Stock Service Reviews
All of these methods will work on any tradable whether its stocks, index’s or the futures markets. These methods do not work well with options however. The reason being the poor liquidity and its hard to get in and out at a good price.
So keep in mind what the market conditions are before deciding on what method to use. The quickest and easiest is to pull up a chart of the S&P 500 and see where it is in relation to its 50 and 200 day moving average.
If its above both you have a bull trending market. If the S&P is below both moving averages and they are both trending down then you have a bear market. In both cases use the retracement method.
If its in between the averages then you have a choppy market and reversal methods tend to work best.
Please download my free guide: “The 7 Habits of Millionaire Traders” it will help you learn good trading habits.
If you are looking to open a brokerage account or looking for a better one, I wrote some reviews of brokers I have used and currently using.
OptionsHouse Review (Currently Using)
Scottrade Review (Used when I first started)
If you have any questions, feel free to contact me.
– Robert Walsh