When it comes to trading strategies, conventional wisdom says that patience is rewarded. Buy a stock, hold it for years and years, and your long-term “buy and hold” strategy will pay off in multiples. But if you are a speculative trader, committed to riding the swings of the market, buy and hold is not really your thing, and conventional wisdom will not be much help. Making money through short-term strategies is hard, but we’re here to help. We’ve got three hot tips to help you become a successful swing trader.
Become a swing trading expert
So what is swing trading? Swing trading is a speculative trading strategy that stakes out the territory between day trading and buy and hold. Skilled swing traders learn to identify the conditions where prices are likely to move either upward or downward in a short period of time, usually between three and 15 trading periods. The goal is to become adept at entering the market just before a multiday swing occurs. But the knowledge required to successfully execute a swing trading strategy goes beyond that of the adrenaline-fueled desk-jockey day trader. You need to familiarize yourself with arcane statistical anomalies in stock movements, and extrapolate those anomalies into multiday runs. You should read pieces from experts such as Trading Strategy Guides (linked above) thoroughly. If you are used to short-term trading or long-term holds, you do not want to get burned by jumping into a trading strategy that you are not knowledgeable about.
Follow the yellow-brick bands
The financial analyst John Bollinger developed a formulaic method for analyzing the volatility of a financial instrument or commodity in the 1980s that has been a favorite of swing traders ever since: the much-beloved Bollinger Bands. All assets have a central moving average, traceable as a line on a graph, which is just a series of averages of all a subset of an asset’s high and low points for a designated period of time. To create the Bollinger Band, traders then plot two other moving averages onto the graph of the asset’s performance, each one two standard deviations away from the central moving average. When an asset’s price touches the upper or lower Bollinger Band, that means that it has moved into either overbought or oversold territory, respectively. The price is likely to sink or rise over the next few days after the price breaks out of the band. By learning these statistical methods, you can learn to recognize, and profit, from these patterns.
Diversify your time frames
As we mentioned, swing trading hits the sweet spot between day trading and buy and hold. For this reason, no designated period of time exists when you should make trades, or buy or sell. Just as you want to hold a diverse portfolio of stocks to protect yourself from market shocks to one particular sector, you want to have a few different strategies to insulate yourself from daily, weekly, monthly, and yearly market trends. Diversifying your time frames also diversifies the number of trading opportunities available to you. For example, you may want to dip your toe into the Foreign Exchange Markets (Forex), which tend to fluctuate according to the schedules of states, governments, and time zones. You may keep a weekly strategy (and record of Forex volatility) for Forex markets, and a monthly strategy for the US stock market, which will keep your money safer. Forex markets tend to be particularly volatile, which suits swing traders: The greater the number of swings, the greater the number of opportunities to place a swing trade. Still, navigating such volatility requires a combination of skill and luck.