Swing Trading - A style of trading that attempts to capture gains in a stock within one to four days. To find situations in which a stock has this extraordinary potential to move in such a short time frame, the trader must act quickly. This is mainly used by at-home and day traders. Large institutions trade in sizes too big to move in and out of stocks quickly. The individual trader is able to exploit the short-term stock movements without the competition of major traders. Swing traders use technical analysis to look for stocks with short-term price momentum. These traders aren't interested in the fundamental or intrinsic value of stocks but rather in their price trends and patterns.

Introduction To Types Of Trading: Swing Traders
October 16, 2002 | By Jason Van Bergen

But this description of swing trading is a simplification. In reality, swing trading sits in the middle of the continuum between day trading to trend trading. A day trader will hold a stock anywhere from a few seconds to a few hours but never more than a day; a trend trader examines the long-term fundamental trends of a stock or index and may hold the stock for a few weeks or months. Swing traders hold a particular stock for a period of time, generally a few days or two or three weeks, which is between those extremes, and they will trade the stock on the basis of its intra-week or intra-month oscillations between optimism and pessimism.

Reviewing Different Types of Traders
Before we focus on swing trading, let's review all the other major styles of equity trading:

Scalping - The scalper is an individual who makes dozens or hundreds of trades per day, trying to "scalp" a small profit from each trade by exploiting the bid-ask spread. (You can read about scalping in Introduction to Types of Trading: Scalpers)
Momentum Trading - Momentum traders look to find stocks that are moving significantly in one direction on high volume and try to jump on board to ride the momentum train to a desired profit. (You can read about momentum trading in Introduction to Types of Trading: Momentum Traders.)
Technical Trading - Technical traders are obsessed with charts and graphs, watching lines on stock or index graphs for signs of convergence or divergence that might indicate buy or sell signals. (You can read about technical trading in Introduction to Types of Trading: Technical Traders.)
Fundamental Trading - Fundamentalists trade companies based on fundamental analysis, which examines things like corporate events such as actual or anticipated earnings reports, stock splits, reorganizations or acquisitions. (You can read about fundamental trading in Introduction to Types of Trading: Fundamental Traders.)
The Right Stock
The first key to successful swing trading is picking the right stocks. The best candidates are large-cap stocks that are among the most actively traded stocks on the major exchanges: Intel, Microsoft and Cisco, for example. In an active market, these stocks will swing between broadly defined high and low extremes, and the swing trader will ride the wave in one direction for a couple of days or weeks only to switch to the opposite side of the trade when the stock reverses direction.

The Right Market
It should be noted that in either of the two market extremes, the bear-market environment or raging bull market, swing trading proves to be a rather different challenge than in a market that is between these two extremes. In these extremes, even the most active stocks will not exhibit the same up-and-down oscillations that they would when indexes are relatively stable for a few weeks or months. In a bear market or a raging bull market, momentum will generally carry stocks for a long period of time in one direction only, thereby confirming that the best strategy is to trade on the basis of the longer-term directional trend.

The swing trader, therefore, is best positioned when markets are going nowhere - when indexes rise for a couple of days and then decline for the next few days only to repeat the same general pattern again and again. A couple of months might pass with major stocks and indexes roughly the same as their original levels, but the swing trader has had many opportunities to catch the short-term movements up and down (sometimes within a channel).

Of course, the problem with both swing trading and long-term trend trading is that success is based on correctly identifying what type of market is currently being experienced. Trend trading would have been the ideal strategy for the raging bull market of the last half of the 1990s, while swing trading probably would have been best for 2000 and 2001. With the 2002 bear market, the best strategy would have been to follow the trend and short everything in sight. As economists and traders would agree, the most accurate insight into trends is viewed in retrospect.

The Baseline
Much research on historical data has proven that in a market conducive to swing trading liquid stocks tend to trade above and below a baseline value, which is portrayed on a chart with an exponential moving average (EMA). In his book "Come Into My Trading Room: A Complete Guide To Trading" (2002), Dr. Alexander Elder uses his understanding of a stock's behavior above and below the baseline to describe the swing trader's strategy of 'buying normalcy and selling mania' or 'shorting normalcy and covering depression'. Once the swing trader has used the EMA to identify the typical baseline on the stock chart, he or she goes long at the baseline when the stock is heading up and short at the baseline when the stock is on its way down.

So swing traders are not looking to hit the home run with a single trade - they are not concerned about perfect timing to buy a stock exactly at its bottom and sell exactly at its top (or vice versa). In a perfect trading environment, they wait for the stock to hit its baseline and confirm its direction before they make their moves. The story gets more complicated when a stronger uptrend or downtrend is at play: the trader may paradoxically go long when the stock jumps below its EMA and wait for the stock to go back up in an uptrend, or he or she may short a stock that has stabbed above the EMA and wait for it to drop if the longer trend is down.

Taking Profits
When it comes time to take profits, the swing trader will want to exit the trade as close as possible to the upper or lower channel line without being overly precise, which may cause the risk of missing the best opportunity. In a strong market when a stock is exhibiting a strong directional trend, traders can wait for the channel line to be reached before taking their profit, but in a weaker market they may take their profits before the line is hit (in the event that the direction changes and the line does not get hit on that particular swing).

Conclusion
Swing trading is actually one of the best trading styles for the beginning trader to get his or her feet wet, but it still offers significant profit potential for intermediate and advanced traders. Swing traders receive sufficient feedback on their trades after a couple of days to keep them motivated, but their long and short positions of several days are of the duration that does not lead to distraction. By contrast, trend trading offers greater profit potential if a trader is able to catch a major market trend of weeks or months, but few are the traders with sufficient discipline to hold a position for that period of time without getting distracted. On the other hand, trading dozens of stocks per day (day trading) may just prove too great a white-knuckle ride for some, making swing trading the perfect medium between the extremes.

For more detailed information on swing trading, I recommend another highly-rated book called "The Master Swing Trader: Tools And Techniques To Profit From Outstanding Short-Term Trading Opportunities" (2000) by Alan Farley. Farley's 'pattern cycles' provide intricate methodology and easy-to-understand examples that will enable you to quickly get into the swing of things.

By Jason Van Bergen

The Dual Reality
Traders come to the marketplace with pre-conceived ideas about how and why the markets move. While some of these ideas are valid, most are based on untrue assumptions . Many of these assumptions are found within the un-moderated areas of bulletin boards and trading threads. Most of these assumptions, while seem logical and true, are simply dead wrong. This leads traders down a road of failure without offering a trader an explanation to why he was unable to make the trading plan work effectively. This early failure leads to disgust and negativity towards trading for living. Many turn this emotional state to blame of the market and its participants in a manner that the trader is not able to apply what happened in their trading plan to lead to a positive result. This lack of accountability moves traders away from profitability over the long term and does not give the trader a solid foundation to build his or her portfolio. All this stems from initial misinformation that was presented to a trader and accepted blindly.

There is a true reality and a reality that traders create for themselves from such misinformation that is accepted blindly. Unfortunately, these two realities are never the same. However, the more a trader is a detached and objective observer rather than an opinionated and emotional follower, the closer his reality to real market reality becomes.

The RealityTrader Tape Reading Philosophy
This provides a solid foundation for a better possible outcome in his trading plan. Our philosophy is that the only reality of the market has to do with the price/volume action of a specific stock. All other factors are either hints or distortions. A seasoned trader distinguishes himself from a naïve follower by his ability to see the true reality through all the curtains provided by those with less than adequate knowledge or misguided intentions. The stock market moves in its own manner. Stocks themselves move not because financial circumstances of the company dictate its direction. Otherwise, it would be too easy. Traders would simply buy what has strong fundamentals and sell what has weak fundamentals. Obviously this is not the case. Instead, interests of players in the stock and their emotions move the price. This philosophy can be confirmed by strong moves in stocks with questionable fundamentals. It can also be confirmed by a stock with great news that declines in price following the release.

Furthermore, we can not possibly know all the circumstances surrounding stock movements, all the shares accumulated or distributed, and what owners plan to do with them. They might want to sell for reasons that have nothing to do with current company situation. For instance, a fund needs free money for another operation and we see selling when nobody expected it by trading from straight fundamentals. That's why a seasoned trader will only look at what is going on in a stock, from a price/volume action view, in a form he chooses, that lets him be closer to reality. Our preferred way to read stock market is tape reading. This is also why only a detached and unemotional state of mind allows us to make our decisions objectively, with no emotions distorting the picture. The link from your mechanical approach to the enhancement of your mental approach will develop your winning and confident attitude each trading day. Reality defines what is happening before you as you read it. There are no predictions or false expectations for what a market or stock will do. There is just what you see that demands the response to enter and exit a trade with as much profit or as little loss as the trade allows. There is no ego to block that response nor is there a lack of accountability when the trade moves against you. Trading resides within you and develops from a reality learned.

The RealityTrader Tape Reading Method
RealityTrader uses the RT method to teach traders our unique approach to the market. It leads you through all the stages from the general outlook right down to the exact moment of responding to the trade and execution technique.

Pure T&S/Level 2 reading is NOT Tape Reading
Many new subscribers are confused about what Tape Reading is. Tape Reading to us goes into much deeper understandings of the information presented on a Time and Sales (T/S) screen. Simple staring at T&S/Level 2, trying to gauge the strength at this very moment leads to pure scalping for cents, while true tape reading is capable of much more. Principles of tape reading allow to distinguish the smart money action from that of the majority. Original tape readers of times of Jesse Livermore used those principles, and they work today just as fine. They are applicable in any time frame, and longer time frames would require looking at the chart, from intraday and higher depending of trader's objectives.

Pure T&S/Level 2 reading narrows this method to very small time frame and tiny profit objectives. While this style is valid, this understanding is just too narrow and gives tape reading bad name among those that try to work for more than several cents.

RT stands for Read and Trade.

READ means two things:

1. Forget the Aristotle logic, which in essence is trying to establish a firm link between a reason and an outcome. Obviously this does not work in the market. Learn to see what is hidden under the surface. Ignore what is being offered to you by those that want you to see things at face value. Look at what is shown to you as bait for you to go in a certain direction. Then ask who wants you there and for what reason.

2. Learn to read what is really going on. We will provide you with the method to this reading. Being truly universal, this method will serve you no matter what kind of data presentation of choice you use: chart, technical analysis, particular set of technical indicators or something else. You will see how tape reading helps you to understand what the majority of market participants fails to comprehend. You will learn how to weigh market action in terms of price and volume. Then you will realize how to read the emotions that drive the market.

TRADE means:

1. Be in the right state of mind that successful trading requires. Be ready to execute your decision flawlessly, in an automated unemotional manner when the moment demands the response. Learn to control yourself and become the master of your emotions. Only when you are in full control of yourself will problems like keeping stops or hesitation to enter the trade cease to exist. From this, no external influences can impact your performance. We will train you to reach this wonderful inner state when trading becomes the source of joy as well as income.

2. Learn to execute your trading decisions in a manner that maximizes the probability of your orders to get filled. It's really frustrating to see great opportunities pass by just because your execution skill was not refined enough to get the amount of shares desired or to route your sell order incorrectly. We will provide unique real-time execution classes that will put a solid foundation under your trading.

When your training is done, R and T are being put together. That's when you become a RealityTrader. A RealityTrader is one that is able to see what lies beneath the surface and to execute his decisions without hesitation. They are traders that trade the reality of the market, not their opinion that is impacted by his position in the market or from a neighbor's hot stock tip. They are traders that trade what they see, not what they thinks. Reaching this state of trading is our ultimate desire for you and will make us most proud of the hard work devoted. We want traders who are in control.

Read and Trade.
Read the Tape and be Ready to Trade.
Become RealityTrader

Tape Reading 101
Tape Reading is one of the oldest methods of market movement interpretation. Like any other methods applied by market players, it's intended to show "what's behind the ticker". There is no tape itself anymore. It has been replaced by a scrolling Times Of Sales Window and Electronic Tickers. But the term, and more importantly, the principles are alive and are as useful as ever. They are based on aspects that never change. These are human psychology and major accumulation/distribution rules.

We prefer Tape Reading as our major method. There are plenty of technical indicators used by traders in different combinations. Many of them are very sophisticated and computers make it easy to watch them in real time. However, Tape Reading is a truly universal method that can be combined with any technical study, and we suggest it as a base for any other method traders like. Sophisticated indicators based on complicated calculations tend to somewhat mask the reality of a scenario happening. Tape Reading goes right to the roots of the stock’s action. This is necessary for newer traders.

Like no other method, Tape Reading deals with reality itself allowing traders to see market moving forces in action and to judge which one prevails at that moment. It provides us with a look into what other players try to hide and then allows us to separate reality from our perception. The best example of this is as old as the Wall Street situation of “selling on news”. There are numerous examples of “XYZ is selling on such a great news.” Tape Reading shows why and how it happens. This tells you when you should expect non-conventional action on the stock and how to exploit it.

Tape Reading deals with two major categories of market players. They are the Smart Money and the Public. You can replace these old terms with any pair you like (big guys and small time traders, insiders and online traders, institutions and retail traders, etc). However, the core of market events is the same. Tape Reading is a method of analyzing which side is doing what at that moment. Analysis is done by observing the only, and ultimately, truthful indicators of Price and Volume Action.

Tape Reading does not always answer all our questions. In the stock market, nothing does. The stock market has no single ultimate answer. Otherwise this answer would already have been discovered and the market would have ceased to exist. There is no way price would ever change if traders knew the exact situation. Furthermore, any absolute method, once discovered by someone, could not be kept a secret for others. What Tape Reading does is:

1. It puts probability on your side as it allows you to read the truth to the extent it can be read, putting as few "interpreters" between you and reality as possible.

2. It allows you to develop a detached state of mind that a side observer possesses. The state of mind that traders want to experience is when they look at market action with no emotions, seeing clearly what happens. This is in direct conflict with cloudy judgement of emotionally involved traders with formed opinions that could be right or wrong, but in any case has nothing to do with reality.

Mental State
A positive mental state is an extremely important factor for successful trading. A trader's inner state of mind directly impacts his performance. In short-term trading, the right mindset plays an even bigger role. It ultimately defines whether a trader's technical knowledge and mechanical skills will lead to success. Almost all the top traders in this industry acknowledge the fact that the understanding of how the market functions is just a foundation for success. Self-control is what eventually makes a winner out of a trader.

One of the most difficult shifts in thinking that a trader has to develop is the switch from “Prediction" to “Response". Instead of a trader always trying to predict or expect an event to happen, they simply respond to the event that is before them. The wrong assumption that is made by a trader is that he knows what the market will do at a certain moment. No one ever knows with 100% accuracy what will happen. The trader needs to shift his thinking in a manner that he will not try to predict, but rather respond, to whatever the market decides to do. This type of thinking requires that a trader develop a sense of absolute self-reliance. To achieve this state, a trader must take full responsibility for any outcome of his actions (or lack of actions). Any loss has to become a learning point. This is only possible if the trader is willing to take undivided responsibility.

In order to read undistorted reality, the trader needs to read the market with no emotions, as a detached observer. It's not easy to get rid of emotions but it's doable. Accepting the fact that nobody can be always right, willingness to admit mistake fast and thinking of trading capital as of tool rather than money are some of steps in right direction. The trader can't progress unemotionally if every uptick puts him in a euphoric state and every downtick scares him. A trader that experiences strong emotions loses the ability to see the reality of the trade. From this, the trader goes from hope to fear. These emotions dictate his actions and leads to almost certain failure over time. A seasoned trader lets only one entity dictate his actions, the market. Self-confidence, self-reliance, cold blooded reading of reality and keeping emotions in check are the traits of successful trader. Our room provides a powerful educational program devoted to development of a correct state of mind that members can build their confidence upon everyday.

Morning Preparation Guide
Come to each day without preconceived ideas about what you think "should" happen.

If you are watching stocks from the day before, determine support and resistance levels that you may be able to derive and "IF/THEN" scenario. If the stock holds "x" support, then I will enter long with a stop on the break of support.

Determine market sentiment or pre-market mood, mainly using futures figures. However, do not feel that what the futures show, will be necessarily how the morning or afternoon trading session continues.

Read news stories. Do not try to assess value to the news as we are not experts in this field. We are traders that are simply interested in possible interest derived from the news stories. Look for a gap up or down and volume. If stories are negative to an extreme, use caution as the stock may become dangerous for trading. When a stock receives interest shown in the gap or volume or both, place this stock on the Level 1 screen for monitoring.

If you have access to a stock scanner or list of pre-market movers, place ones of interest onto your Level 1 screen for monitoring. Together with news stories, try to have 10 to 15 stocks during the pre-market session on the screen. Remember that you don’t need to try and monitor "all" the stocks with activity. Try to narrow your focus for the open.

Near 9:00 EST, begin to take stocks from the Level 1 screen and place them on the Level 2 screen for risk evaluation. On the Level 2 screen, look for levels between prices to be tight, preferably 1/16 to 1/8. Also begin to look for larger sizes from participants at each level. Showing 100 shares each doesn’t show big sizes. Showing 500 to 1000 shares is better. The idea is to find stocks that will not be hard to execute and read when the market opens. Also, near 9:20 EST, stocks become more clear on risk evaluation.

In the last 10 minutes of pre-market, narrow your focus for the open to 3 to 5 stocks. Place 3 to 5 stocks on a Level 2 screen that have moderate risk and looks readable from the open. During the last 10 minutes of the pre-market session, try to develop possible if/then scenarios on those stocks. If you do not have any developed for the open, wait for the stock to define a range and trade from that. Make sure volume is good enough and there is no risk for halt candidates. Often we see stocks gapping up or down excessively on no news. Use caution on these activity stocks as they are more apt to halt.

Calm yourself. Prepare for the open with a clear mind and readiness to trade. Do not pressure yourself to trade however. Instead, let a trade setup occur and be ready to take it if it shows. Even if a ½ hour goes by and you haven’t made a trade, do not feel like you need to force a trade. Many times I’ve waited hours for my first trade. Don’t feel as if you ‘have’ to trade. But be prepared to do so if a trade setup presents itself. Some use meditation, breathing techniques or other "tricks" to keep the clear mind for the open.