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We sure have come a long way since our first trading lesson!
Save Thousands On Your
I'd like to thank you for giving me the opportunity to teach you a bit Home Insurance With
more about my swing trading (/dictionary/s/swing-trading) These 3 Easy Fixes
(/articles/save-thousands-your-
methodologies and the technical analysis I use to practice it. After I
home-insurance-these-3-easy-fixes)
recap Lessons 1 through 4, I will (/dictionary/w/will) provide you with a
final lesson that should prove to be the most comprehensive and
How Do I Calculate the
valuable yet -- The 11 Commandments Of Swing Trading. PEG Ratio and Why Is It
Important? (/articles/ask-
expert-how-do-i-calculate-peg-
ratio-and-why-it-important)
These trends provide the context in which every trader must make short-
term trading decisions. If you focus only on the short term
(/dictionary/t/term), even if your trade is successful for a limited time
period, the larger trends are apt to reassert themselves. At best, your
profit (/dictionary/p/profit) potential will be limited. As such, you need to
identify the longer-term trends to make sure you go with the flow and
not against it.
Note how except for very brief periods of time, the long-term trend (as
measured by the 30- and 40-week moving averages) and the
intermediate trend (as measured by the 10-week moving average
(/dictionary/m/moving-average)) remains a downward one.
When possible incorporate Price Relative to the S&P 500 ($SPX) into
your chart analysis. This indicator will tell you how the individual stock
(/dictionary/s/stock) is performing in relation to the overall market.
During bear markets you should seek out stocks whose relative strength
line (/dictionary/r/relative-strength-line) is trending downward in relation
to the S&P. Do the opposite during bull (/dictionary/b/bull) markets.
3. Trade in Harmony
Sure, we've all heard the cliché- "the trend is your friend." But which
trend are people referring to? Use moving averages to be in tune with
both the short- and intermediate-term trends, even through as a swing
trader you are only trading for the short term.
On the other hand, you should not focus exclusively on the primary
trend when swing trading. Even in a bear market (/dictionary/b/bear-
market), there are periods where the intermediate trend turns positive
and stocks soar. These bear market rallies (/dictionary/r/rally) can be
enormously profitable. Fueled by short-covering, the S&P 500 and other
major averages can climb 20% or more in a period of just several weeks.
Meanwhile, volatile stocks with high "betas" can move much, much
more than this.
Even though you are a short-term trader, it is vital to know when the
intermediate-term trend is changing and a countertrend rally
(/dictionary/r/rally) is taking hold.
Use your telescope as well as your microscope when you look at charts.
Too small a look-back period -- using the microscope only -- can be
deceptive and costly.
Next, I focus on the 6-month daily chart. Here, I can see finer details
that the weekly chart obscures. I use much shorter-term moving
averages to ascertain the stock's short-term trend.
Finally, I often hone in on the hourly chart to discern the prevailing trend
over the last couple of weeks. Again, moving averages are extremely
helpful here.
The earlier you pick up on the change in trend, the less risk you will
take and the greater your profits will be. The most important step here
is to pay close attention to the overall market averages. When they are
overbought or oversold, they are usually prone to reversal.
You should now have learned enough about technical analysis to better
appreciate this opportunity. The October $2.20 low occurred as the
market turned violently upward. The bottom candle was a long-legged
doji and occurred at a very oversold level.
The next large, white candle dramatically confirmed the trend had
reversed. Volume picked up on the rally and declined on the pullback.
CCI (/dictionary/c/consumer-confidence-index-cci), RSI and stochastics all
gave buy signals. In five trading days, the downtrend line was broken.
Even buying later in the trend, on the break of the downtrend line at
about $4.25, yielded a spectacular return if you held on to the peak
above $7.
This is what I mean by applying the rule of "multiple indicators." This
trade was not signaled by applying any one tool. Instead, many, many
tools confirmed the same underlying message.
One of the first things I do when I check the market in the morning is
focus on the financial news. I go to a variety of websites to look up
analyst upgrades and downgrades, earnings reports and guidance
(/dictionary/g/guidance), what is happening in the overseas markets and
with the price of oil, gold and the U.S. dollar. I also look eagerly to see
which stocks are active in pre-market trading (/dictionary/p/pre-market-
trading) and usually add several of these to my regular tracking screen. I
LOVE volatile, heavily-traded stocks.
And when you sell, you should immediately determine a re-entry level.
Swing trading can lead to impulse buying. Sometimes your impulses can
turn out to be profitable, but other times they may not be. Remember:
without a clear plan you are merely gambling, not trading.
For most of my trades, I use market orders and normally trade very
liquid (/dictionary/l/liquid) issues (/dictionary/i/issuer). And if I am
watching the market, my order size is not large enough for it to be
worth my while to fight over a few pennies in either direction. On the
other hand, if I am not watching the market and want to enter a trade
based on overnight analysis, then a limit order (/dictionary/l/limit-order)
is vital. Of course, if the market gaps, then I don't want to pay too
much and be behind the eight-ball from the start.
You'll often come across times when a trade is going beautifully. You are
watching the trade closely and have a very good instinct for the trading
action. You can almost feel the next price, you are that attuned to the
shares. In those circumstances, why not add to your position? If you
originally bought 1,000 shares, then you might want to add between
200 and 500 more. When you add on, don't pyramid, though.
Remember: a sudden decline in the stock can quickly turn a healthy
profit into a loss.
When you enter a trade you should always have a target price in mind.
Do not pluck this target out of the ai though. It should be based on
your technical analysis, using tools such as the measuring principle
(/dictionary/m/measuring-principle).
On the other hand, you could have set a stop at $4.00, just under the
highs of the consolidation immediately before the breakout. In that case
your maximum loss would be about 5%. If you can find trades where
you have at least 1.6:1 odds, then you will greatly increase your chance
of swing trading success.
Normally, technicians and fundamentalists are like the boys and girls at a
sixth-grade dance: they seldom speak to one another. Yet both forms of
analysis can help one make more effective stock market decisions. After
all, you'd be hard-pressed to find a technical analyst who isn't in awe of
legendary value investor Warren Buffett (/dictionary/w/warren-buffett)'s
incredible track record of success.
If both forms of analysis are good, then why on earth would anyone
believe that a combination of both isn't better? After all, when used
correctly they do not contradict each other. Rather, they are
supplemental. In my analyses, you get both.
Always keep a positive mental attitude about your trading. Do not let
bad trades affect you longer than necessary. Learn from your mistakes;
poise yourself to make your next trade.
Making a trading mistake can be painful. Not only does it often result in
a loss of trading capital, but it also hurts one's self-esteem. When this
happens to me, I literally think of it as a form of "grief." The most
productive response I can have is to experience the feelings of
disappointment or hurt and then move on. After all, I need to get
mentally prepared to make my next trade.
The feat is nearly 70 years old. He hit "only" .406. Put another way, he
made an out .594, or almost a full 60% of the time. The lesson to learn
here is that no one is perfect. Everyone makes mistakes. As I said in my
first lesson, technical analysis can only increase the probability that you
will make correct decisions.
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