11 Commandments of Swing Trading
THE 11 COMMANDMENTS OF SWING TRADING DEFINED
1. Always align your trade with the overall direction of the market, which is best measured by the S&P 500. When trading "industrial' stocks, do not fight the major trends.
A strong stock will typically make little headway in a weak market. Meanwhile, a weak stock will often underperform even in a bullish period. With this in mind, you should always clearly determine the market's primary and intermediate trends before you pick any individual stocks to trade. (And by an "industrial stock," I mean those highly correlated with the S&P, such as manufacturing, financial or retail issues. On the other side of the coin, "resource" stocks such as gold or oil are often inversely correlated with the major averages.)
2. Go long strength. Go short weakness.
Once you know the overall trend, do not fight the tape. Look for long trades during periods of bullishness. Find appropriate short trades when the bear is on the prowl.
3. Always trade in harmony with the trend one time frame above the one you are trading.
Sure, we've all heard the cliche — "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.
4. Never trade only on the short-term chart of the swing-trading time frame. Be sure to SYNTHESIZE the messages that the weekly, daily and even hourly charts are telling you.
Use your telescope as well as your microscope when you look at charts. Too small a lookback period — using the microscope only — can be very deceptive and costly.
5. Strive to enter the trade near the beginning of the trend, not near the end.
It is never too late to hop on the elevator. If the market is headed from the 95th floor down to the 78th, you can still profitability climb on board (short) on floor #83. But the quicker you recognize that a trend has begun, the more profitable your trade will be and the less risk you will assume.
6. Always apply the rule of "multiple indicators." Do not trade on any one technical tool or concept in isolation.
Highly profitable trades usually occur when all available technical tools give the same message. Candlesticks, volume, moving averages, and indicators such as stochastics and MACD occasionally all align to communicate the same message — the stock is about to sharply rise or fall.
7. Keep your eye on the ball. Track a consistent group of stocks.
As a swing trader, it is easy to flit from hot stock to hot stock. Although it's okay to follow the action, you should also have a core group of stocks that you track daily and learn the personality of.
8. Always enter a trade with a clear trading plan. The four key elements of the plan are a target, a limit, a stop loss and an add-on point. 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.
9. Strive to put the odds in your favor. Ask yourself, "Does this trade have a 2:1 risk/reward ratio?"
Don't risk a dollar to try to make a dime. On good trades, your chart analysis should always show more upside possibility than downside risk.
10. Be a "techno-fundamentalist," not just a technician. Integrate fundamentals into your technical analysis.
Day traders in positions for 15 minutes to an hour have little need for fundamentals. Swing traders, on the other hand, may often hold positions for several days to several weeks. As such, they can greatly benefit from a better understanding of each company's fundamental, inherent value.
11. Master the "inner game" of swing trading. Great trading is psychological as well as technical.
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.
Courtesy of [1]http://www.streetauthority.com/ [1]