Basic Concepts
Swing Trading refers to buying a stock and holding that position for a several day to several week period in order to capture short term gains by taking advantage of the cyclical nature of stock price movement.
A Swing Trade Is Composed Of 6 Basic Elements
The Anatomy Of A Swing Trade
1.) Trade Trigger and Entry Zone
A trade trigger price is computed by the system on a daily basis. When you see a stock close above the trigger price it is a potential buy for the next day.
2.) Initial Protective Stop Loss
When a stock is triggered into a trade an Initial Trailing Stop will be generated. This is a hard GTC (Good Till Canceled) stop loss that protects against catastrophic loss by a failed trade and a runaway price move to the downside. Think of this as your main non-negotiable line of defense for each trade.
3.) System Trailing Stop
When a stock begins to move in your favor past the trigger price – the system will begin to compute a trailing stop. The trailing stop is designed to keep you in a trade during the swing cycle and at the same time designed to tighten under an upward moving price over time to lock in and protect gains that are achieved.
4.) Delta Target
For each stock that triggers an entry the system will compute a Delta Target. Think of this as a high probability 1st target where you have the option to take half or all of your position off the table. The Delta Target is 3.5 times the stocks average daily range computed above the trigger price.
5.) Trend Runner
When a stock hits the Delta Target and continues to move to the upside in your favor it becomes a Trend Runner. A stock can continue as a Trend Runner as long as it moves higher and does not hit the system trailing stop. Many trend runners can achieve gains 3-4 greater than the system Delta Target during the course of an extended swing trade.
6.) Parabolic Stop
As a stock price really takes off in your favor you will often see price momentum and trajectory accelerate quickly to extremely overbought and unsustainable short term levels. The system will detect this and compute a much tightened Parabolic Stop. A trader can use the parabolic stop to squeeze out final profits after a good run or use it as a protection level on a portion of the trade holding the remainder with the normal trailing stop.
Variations On The Swing Trading Theme
The basic concept of swing trading is to buy low and sell high within the context of the short term price cycle which is typically 2-3 weeks in duration. Only the strongest and smoothest stocks within a confirmed uptrend are chosen to trade so that the price continuation and upside potential is maximized in your favor.
The system locates these just as the stock is nearing a potential “buy low” zone in the current swing cycle above that stocks strong upward momentum. At this point a trigger price for trade entry is computed. You should think of this as a price trade barrier and not take action until you see price move above the trigger price. Think of the trigger price as a BARRIER to taking a trade and not the exact price you have to enter at.
The Trigger level is adaptive and may change on a daily basis.
As the setup develops over a few days you will see trigger level and the stock price get closer together. A buy signal is generated when a closing day price is ABOVE the currently posted trigger price. You can buy the stock the following day as long as the price is trading at or above the trigger price.
Stocks that perform after entry can also be held for longer term positions of up to several weeks or longer as long as stock price stays above the system generated trailing stop levels posted in the open trades list.