For Not-So-Hardcore Traders Who Need a Bathroom Break: Swingtrading

You want in on the action of momentum trading, but you don't have the time, knowledge or stress tolerance to handle the daily roller coaster of daytrading. Try what some call "daytrading lite" -- swingtrading.

With the explosion of online trading and the growing interest in highflying stocks like Qualcomm (QCOM Quote) and Rambus (RMBS Quote), you may be ready to abandon traditional long-term investment strategies. You may have seen phenomenal gains made by shorter-term traders who play the momentum in these stocks and you want a piece of it.

But you would never consider daytrading. Like me, you may have a job and maybe even a life, and have no desire to learn the minutiae of trading by the second. But trading every few days -- now that sounds more like it.

So how does swingtrading work?

Swingtrading combines the best of two worlds -- the slower pace of investing and the increased potential gains of daytrading. Swingtraders hold stocks for days or weeks vs. the minutes or hours that daytraders do. I typically ignore intraday oscillations, playing the general upward or downward trends over days or weeks. There's much less pressure to buy and sell at precisely the right moments than there is with daytrading. I can go the bathroom and even go out and pick up a hot cappuccino at the local Starbucks. Furthermore, to swingtrade, I don't need sophisticated computer hook-ups or lightning quick execution services and I don't have to play extremely volatile stocks.

The swingtrading techniques I use revolve around the naturally recurring cycles of the market. Even in strong daily uptrends, stocks have days and even weeks when they pull back before moving higher. They then trend back up, become overbought and pull back again only to repeat the cycle. I take advantage of these oscillations, looking to buy off support levels and short off resistance levels.

Here's an example of a play I call "core pullbacks." Its focus is on buying pullbacks from 52-week highs.

The first criterion is a strong uptrend. It's simply easier to paddle with the current than against. With any uptrend you will see a series of higher moves, followed by pullbacks and then new higher moves. This is simply the cycle of the market and my goal is to take advantage of it. A typical cycle can last several days to several weeks. To exploit these cycles I watch for pullbacks, looking for three to five days of lower lows and lower highs as the stock moves into support, resulting in less-steep drops.

In buying pullbacks, support is very important. There are several types of support that you should become familiar with: price support, moving average support and trend line support. Moving averages are used in technical analysis to show trends. As each new variable is included in calculating the average, the last variable is deleted. The most common moving averages are 20-, 50- and 200-day moving averages.

Take a look at the chart on BioSource (BIOI Quote). Each time BioSource pulled back, it found support at the 20-day moving average. The second time was the better setup of the two as it allowed for the trend to develop more. We then had a series of higher highs (that day's high was higher than the previous day's high) and higher lows (that day's low was higher than the previous day's low) to allow us to draw a trend line. You can also see price support from the previous peak back in late December.

To enter this setup, you simply buy above the previous day's high on the pullback (upper horizontal line) with a stop under the low of the pullback (lower horizontal line), which is typically the previous day's low when the stock sets up. I set my stops on a sliding scale, but for a $10 stock, I set the stop 1/16 under the low of the pullback.

I exit the trade if one of two things occur: if the stock breaks under the previous day's low or if it breaks under the low of the first 30 minutes of the trading day.

The core pullbacks play is a very simple concept that is overlooked by many traders. This setup may not always work, but over time it provides very consistent profits.

I know this may sound confusing, but with a little education it's easy to do. What's great is that when I'm watching a stock, I can set my computer to alert me when it hits my price so I can saunter over, make my trade and go back to running on the treadmill or eating lunch. You can see why this is a growing trading trend. Swingtrading is for traders with a life.

Just remember to step away from the computer every now and then. Watch a bad old B-movie. Take the dog for a walk. Have fun and be profitable.