I've really enjoyed my first month with the RealMoney.com community. Your intense interest in swing trading has been overwhelming. I'll try to return the favor by delivering the goods in every column I write.
This seems like a perfect time to take a break and answer a few of your questions. Hopefully, they'll make my trading style a little easier to understand. If they don't, feel free to
write me a note.
I'm a beginner with no experience in swing trading. What do you suggest I read, besides
Don't read my book first if you're new to trading. It's tough to understand until you have a foundation in the basics of technical analysis and the markets. I recommend you start with the Big Three:
Trading for A Living
by Dr. Alexander Elder,
Technical Analysis of the Financial Markets
by John Murphy, and
Technical Analysis of Stock Trends
by Edward and McGee.
Isn't the difference between a day trader and a swing trader simply one of time horizon?
Swing trading is actually independent of time frame. It revolves around the price chart from which you draw the setup, rather than any specific holding period. In this column, I focus on overnight positions you might hold for one to three days, or even one to three weeks. But many daytraders are really swing traders, as long as they use support and resistance to make their decisions.
How long should I hold on to stocks when I trade them?
That decision depends your lifestyle. How much time can you devote to the markets? If you watch every tick, you can trade in and out of positions very quickly. But if you have a full-time job doing something else, you need to hold on longer and use passive management tools, such as mechanical stops, to protect yourself.
What charting programs do you recommend?
I've used Worden's TC2000 for years and love it. But keep in mind that it's a database program rather than a charting program. If you can afford it, add software that shows you the markets in multiple time frames. Two great choices are eSignal and qCharts. There are also great Web-based charting resources. My favorite is StockCharts.com. If all you need is a handy tool to calculate Fibonacci retracement, try the Fib Calc at
Do you think swing trading can be systematic, or is it always more subjective?
I am a diehard discretionary trader. That means I pick all of my entry and exit points myself, rather than having a computer do it for me. But most folks don't realize all of my pattern stuff and market tools tie together into a series of filters that keep me out of the market unless I really want to be in it. That's one definition of a trading system.
Is there any way a beginner can actually swing trade and not risk too much money?
Beginners can open equity accounts with very little capital and take small positions in less volatile stocks. That lets you apply what you've learned so far to enter, manage and exit swing trades. You won't make much money, but you won't lose much either.
At some point, you'll need to draw a little more blood to speed your learning curve. Losses are far more important to building knowledge than all the trading books in the world. But move at your own pace. It takes years to do it right unless you can sit in an office with professionals all day, and most of us don't have that luxury.
Can you explain how you pick your reference points for the placement of Fibonacci grids?
A Fibonacci grid looks back and tries to enclose an entire price wave, which is any segment of a larger rally or selloff. The problem is, there is always a series of highs and lows from which to choose. You learn tricks over the years to place these extensions where they belong. Stay tuned to this column and I'll pass along a few of them as we go along.
What is your favorite trading pattern?
My all-time favorite setup is the cup-and-handle breakout or breakdown.
Can you recommend a methodology for establishing stops on one- to three-day swing trades?
I place stops based upon support-resistance breaks, rather than flat percentages or dollars. I find that flat stop-loss undermines my performance. Stops need to match the price action of the stocks being traded; for example, volatile stocks require a lot of wriggle room.
Trailing stops are a different issue. At first you need a break-even stop. Next, move your stop up or down, relying on support-resistance within a lower time frame. For example, say you're up three points and the stock congests into a flag. Place your trailing stop under the low of the bottom flag channel.
Do you follow the fundamentals of the stocks you're trading?
Some people can mix technicals and fundamentals, but definitely not me. Very often price action conflicts with what you think you know about a stock. I believe the chart is smarter than the fundamentals. The whole point is to make money, so I try to keep personal bias out of the equation. The markets set up opportunities that go against the grain of common opinion.
I don't trade the news at all. If news happens to create a nice setup, I'll trade that like anything else.
Shouldn't I let my winners run?
You can only let your winners run when the markets are running. The rest of the time, you'll get whipsawed. You have to shift with the times. Don't overplay your hand in a weak market, but go for it when conditions are ripe. Telling the difference between the two is a major skill.
Alan Farley is a professional trader and author of
The Master Swing Trader. Farley also runs a Web site called
HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley held no positions in any of the stocks mentioned in this column. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to
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