Importance of Developing a Swing Trading Strategy

Swing trading is beginning to gain more an more acceptance in those that were generally known as buy an hold investors.  Many felt that they could buy virtually any stock and if they held on long enough they would profit.  However, the market events of a couple of years ago laid that thought to rest.  Years of gains can be wiped out in a few short months.  As a result of this, many have turned to swing trading to hopefully give a boost to their investment accounts.  However, many of these same people are making the transition without a viable swing trading strategy in place.  This could have terrible results.

Unlike buy and hold which is primarily based on fundamental analysis swing trading is driven by technical analysis.  Buy and hold usually involves one entry point and years later it involves one exit point.  Swing trading on the other hand involves many trades held for short durations of time.  Your success is dependent on trading in the right direction.  If you buy in the middle of a downtrend you will consistently lose money.  It is therefore important to implement a swing trading strategy to give you a discipline to follow that will help protect both your profit and protect you from losses.

Every swing trading strategy should contain at least four sections.  First, there should be clearly defined rules for money management.  In this section you will address such questions as:  How much you will commit to any one trade?  Will you stay fully invested?  Will you enter or exit trades in parts or will you go all in all the time? 

Secondly, you need an entry strategy that will lay out exactly what it will take for you to enter a trade.  Swing trading cannot be done successfully if you are trading on a whim.  You need to have concrete indicators that let you know when to stake a new position. 

Thirdly, you need a exit strategy.  Please understand this part.  Before you enter the trade you must know what is going to cause you to close the position.  If you make a certain profit will you close the trade?  How much do you have to lose before you close the position?  Are you using trend lines on moving averages to help trigger your exit?  There are many questions to ask yourself when forming your exit strategy.

Fourthly, every swing trading strategy should include a regular review period.  You need to track your progress and ask yourself how you are doing.  I have found that the best way to do this is by keeping a trading journal.  Record the details of every trading but also record why you got into the trade in the first place and what caused you to exit.  Then give yourself a grade for the trade.  Did you follow your system?  How much profit did you leave on the table?  Did you risk too much?  Be honest with yourself.  When you review this later you will begin to see patterns develop that might be able to help improve your trading.  It is an eye opening experience.

Some will define what products they will use in their swing trading strategy.  I do not do this but you may do so if you wish.  I use more than one product.  You can do swing trading with multiple products.  I use stock primarily.  I would further break that down into penny stocks and higher priced stocks.  I do swing trading with penny stocks because their moves can be so explosive.  However, because of this you need to be careful because explosive profits can be turned into explosive losses if you are not careful when you are trading penny stocks.

I also swing trade Exchange Traded Funds (ETF).  I enjoy these because they allow you to get specific to a sector, an index or even commodities.

I have not participated in swing trading futures, currencies or options.  I would shy away from swing trading options since the spread is wider and it makes it more difficult to turn a profit.  If I was trading options it would be more of a momentum or trend trading mindset where the time frame would be longer than just a few days.