This is really an important decision you must make. If you get this wrong, you are probably going fail and drive yourself crazy. Many people who buy stocks consider themselves “investors”, you hear that term all the time in the news; investors are worried about the market and it tanks. Etc etc.
But if you look at a list of the really big winners on Wall Street, you will see that most of those who make big money, call themselves “traders.” There are not too many Warren Buffets out there.
What do I mean by “big money” ? I mean doing better than the S&P 500 Index or Nasdaq 100 Index by a wide margin over a three-year period.
“Investors” buy stocks, real estate, etc., under the assumption that over time, the underlying investment will increase in value, and they will make money.
Most investors do not have a plan B as to what to do if the investment does not work out. They hold onto the investment in hopes it will bounce back. I think you probably know how that goes, usually badly.
Investors know that markets do go down as well as up but unfortunately they usually do not plan ahead on how they will respond to it. When faced with a declining (bear) market, they hold their positions and continue to lose and hope it all works out. Click here for my article on when to sell stocks.
We all know investors who were punished by the 2007-08 bear market. It can be devastating to your account, possible your retirement. Anybody who was in the market in that time period realized how dangerous buy-and-hold investing could be.
Most Investors have some knowledge of trading or at least know of it. However all one hears is that you CAN’T time the market and its best to just be in the market all the time. Usually what happens though is investors panic at the bottom and sell everything and then end up re-buying at the top.
And people think “trading” is risky!
On the other hand “swing traders” take a proactive approach to their investing. Traders have a defined plan and invest with one goal, to put their money into the markets for a gain.
They swing trade with a plan that tells them what to do in any situation. When to enter and when to exit AND they never allow large losses to destroy their accounts.
Being a swing trader does not mean you have to jump in and out of the market every day or two. This is a common misconception. A swing trader simply is someone who has a plan for entering and exiting the market(or stock) They know what to do if the trade goes against them, and when their trade is profitable.
Some swing traders will short the market as well. Some are unable to go short (they don’t have a margin account or it’s an IRA), or they find short positions to be uncomfortable. The majority of traders do not take short positions.
Swing traders have a plan and a strategy. This is where they differ from investors. Here are some strategies I use.
Every Swing Trader Needs A Trend
Even if it’s a short term trend, you still need prices to move in one direction for a period of time. No matter what trading strategy is used, be it is chart pattern trading, swing trading, long term buy-and-hold investing, stock splits, it doesn’t matter. If the stock or mutual fund does not trend in the required direction after the trade is made, you cannot be profitable.
Combining the Trader & Trend
There are two major schools of thought when it comes to deciding on how to trade the market. There are those who follow a fundamental analysis approach and those who use technical analysis.
All swing trading services use technical analysis, along with a looking in to fundamentals of the company as confirmation.
If combined with an exit strategy, either can be successful, (with the correct exit strategy and good timing you could throw darts at a board to pick) but debate has been ongoing for 40 years over which is the most successful strategy, as well as whether either method “outperforms” the markets over time.
In my opinion the best approach is to just use price to determine trends. Price does not forecast and it does not predict. Price cannot be wrong, it just is. If prices are moving up, the markets are advancing. Down and the markets are declining, trying to understand why is a complete waste of time. You may never know why and by the time you do, it’s probably too late as the move is most likely over.
As a swing trader we are “trend followers.” The trader responds to what is happening instead of try to predict or forecasting what might happen. We just follow price and allow it to tell us when to enter or exit a position.
Keep in mind using price to determine trend does not allow swing traders to enter at the exact bottom, or to exit at the exact top. In fact, trend traders do not try to forecast the market, but instead let the market tell them when to trade and in what direction.
Swing traders wait patiently for prices to tell them when a new trend has begun, then they jump in. If the trend fails, they exit quickly to keep losses small. Price tells them when to enter and when to exit. If the trend continues, swing traders should not have predetermined profit goal, you never know how far it will go. Best to let the market to tell you when to get out.
Cutting losses quickly and staying with a trend until it ends is how swing traders can realize huge profits in the markets. The stock market is trending roughly 80% of the time. That means trend traders are profitable 80% of the time. During the other 20% trend traders keep losses very small so that they are ready when the next trend starts.
Remember that the current market price is determined by millions of investors and traders. By using price and price alone the swing trader can take advantage of the combined wisdom of millions of traders.
It takes discipline and patience to be a successful swing trader. You cannot be scared to follow the strategy and make the trades, which might go against the prevailing wisdom in the financial pages.
Swing traders who use price to determine trends have been quietly beating the markets by a huge margin and will quietly continue to do so for as long as there are markets to trade.
Until you learn on your own, its a good idea to use a swing trading service to speed up your learning curve.
Here are the two I use for almost all of my trades:
Regardless of which Stock Picking Service you use or if even if you choose to go it alone, please download my free eBook: “The 7 Habits of Millionaire Traders”
You can read all my reviews on stock picking services here:
If you have any questions feel free to contact me.
– Robert Walsh