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Sunday, April 13, 2008

Guide Lines for Swing Trading Strategy

If your trade timeframe supports swing trading, here is the strategy we follows. Ofcourse this may not be the exact way you wish to swing trade, but it is intended as a guide to help you determine a trading strategy that suits not only your timeframe, but also your personality as a trader. If your timeframe is shorter, please see the day trading strategy page for more information.

Swing Trading Strategy:

When swing trading, your position size will usually be smaller than when day trading due to the fact that you are looking for a larger move. Your stop loss orders should be placed wider than when day trading for this reason. Naturally, your profit targets are farther away, so patience is a necessity.

Stocks often gap, so here are some guidelines for swing trading:

  • If a stock gaps 1-2%, enter 1/2 of the intended position size and monitor the stock's behavior before adding to the position.
  • If a stock gaps 2-3%, only enter 1/4 of the intended position size.
  • If a stock gaps over 3%, it may be best to pass on the trade entirely, as the risk/reward profile of the trade is no longer the same.

Here are a few rules of thumb to help determine exits when swing trading:

  • If the prior day's low is taken out on the breakout day (or high for shorts), exit the trade.
  • Once a trade is held overnight, place a stop-loss order no further away than below the recent consolidation area, as a move beneath it would signal a failure.
  • Once a trade is profitable by at least 10%, never give back more than half of the open profit. This helps to avoid the frustration of letting winning trades turn into losing trades.
  • Once a trade is profitable by at least 5%, move the stop-loss order to breakeven on a closing basis.
  • Partial buys and sells can be very helpful. If a stock breaks out in a sluggish fashion, consider entering only a partial position. If a trade is exhibiting little follow-through after the breakout, decrease the position size.
  • Always monitor the health of the overall market, and the health of your positions. When things aren't acting right, either lighten up or go to cash entirely to preserve capital. It's easy to get back in.

These are some general guidelines for any trader with a swing trading strategy to determine exits that fit their timeframe, and are intended for educational purposes as you seek to define a swing trading strategy that suits your needs.

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