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Swing Trading refers to taking trades that traders intend to hold for two to five days. Their intent is to capture the meat or a move in a short period of time. It is not unusual to capture in a few days the same percentage gain that the stock might make all year long. Stocks frequently rally, and then give back all their gains, leaving the long-term investor with nothing to show for the move, or even a loss.
We typically look to the daily chart to find patterns that would allow for low risk entries. Sometimes, we can use an hourly chart. We tend to seek stocks that are in strong trends, staying in or breaking out of bases (consolidations), or occasionally extremely over bought/oversold.
Once we find a favorable pattern, the usual entry involves buying the stock over the prior day’s high, or shorting under the prior day’s low. This is because the prior day’s high or low involves a resistance or support area, and breaking this area is a sign of strength or weakness that a trader wants to see before taking a trade. It is the line in the sand that must be crossed. This entry criterion often will keep you out of trades that never perform and will increase the success rate of those trades that are entered.
For someone who is trading part time, this may be the only position. If a trader works another job full time or is occupied during trading hours trades can be entered by placing buy and sell stop orders with a broker, and calling to adjust the buy and sell stops once the trade is entered. However, if you sit with the market all day, there are other entries that you can use. Some are necessary alternatives that come into play when the stock gaps. Some are used to enhance the possible reward-to-risk ratio.
First is the situation that happens when a stock gaps up excessively. Because a large gap up may bring in selling, purchasing the stock immediately just because it is over the entry price (yesterday’s high of the day) may be unwise. You may be buying the high of the day. There may be a better entry later. I consider any gap of 50 cents or more (on average priced stocks) above the proposed entry (or prior day’s high, whichever is higher) as excessive and the entry invalid. However, you may still have a play. As long as the stock does not rally hard for the first 30 minutes, you can use the 30-minute high as an alternate entry. Let the stock trade for 30 minutes, and mark off the high. That is your new entry.
Those with more experience intraday may look at another option. Stocks that gap up often pullback and sell off for 20 - 60 minutes. They sometimes come back to the prior day’s closing price. We call this “filling the gap”. Buying the stock on a 5-minute buy set-up after the gap fill can be a low-risk way to play the stock long.
Sometimes a guerrilla tactic may provide an entry to a swing trade. Guerrilla tactics are very specific tactics that are often based on just a one- or two-bar set up. They sometimes involve gaps (when a stock opens at a higher or lower price than it closed at the prior day). The chart below is an example.
MNST gapped down on the last bar on this daily chart. This play on MNST will show us three ways to play this chart other than waiting for the low of the prior day, which is a wide bar. First, this gap was actually a bearish gap surprise; the entry is either an immediate entry or a 5-minute low, which would have you in very early. While the holding time for the guerilla tactic is shorter, the trade eventually does trade under the prior day’s low and a swing portion of the position could then be held. This entry would be the easiest of them all.
If you did not play that entry, there is another alternative. Sometimes, the prior day’s high is so far away that waiting for this entry will cause the stop to be so wide that the reward-to-risk ratio becomes too low to take the trade. If the stock is otherwise in the area we want to play, we will look at a 30-minute entry as being an alternative, even if the stock does not gap up. This is because it takes a good measure of strength to trade over the high of the day after 30 minutes. While this entry is not as reliable as the prior day’s high, when you consider the increased reward-to-risk aspects, it is an excellent alternative.
Sometimes intraday analysis and patterns can give you a similar entry, other than the 30-minute high. For example, if a bullish base sets up, but is under the high of the day, you can use it as a substitute entry. At this point, the swing entry is almost anticipatory, and you will want to see the real entry hit to stay with the position as a swing. Your reward-to-risk can be greatly enhanced on these plays, which will make up for the fact that the entries are not as reliable.
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