Swing Trading For Beginners

Best Advice – Swing Trading For Beginners

I made another list that I think you would find helpful, this particular list summarizes the best tips for swing traders who are just starting out.

I wish someone made a list similar to this one about 18 years ago or so. Unfortunately, most traders who began in the early nineties had to learn by trial and error. Swing Trading was very new back then, day trading just took off a few years prior, so it was a brand new world that no one knew quite well. There were a few swing trading for beginners books and they were not very useful in practicality. There were advertisements for shops all over the city that taught day trading.

The problem with the business model was the owners themselves did not know much about trading and as a result could not teach the students how to trade. So it was loser watching loser and no one made money. These shops quickly went out of business and if you recall one shop went out with a bang when the Atlanta shooting happened. That was the first report of someone targeting traders, which pushed lot’s of publicity in that direction. I don’t remember the exact year this happened, but it was in the 90’s.

Now getting back to today’s topic, and discuss swing trading for beginners.

1. Always go in the direction of the major trend – Yes you have heard this over and over again, but let me give you specifics. Sit across the room and see if you can see which direction the market is moving, only take trades in the direction of that trend. This is an old rule provided by Ed Sekota from Market Wizards book.

There are many other ways to determine if markets are trending one way or another. You could use a simple 50 day moving average and see what side the trend is on, this is usually the side you want to be on.

Don’t swing trade against the main trend, even when trades go against you, they tend to gravitate towards the main trend, so going in that direction from the start can save a bad trade from being a loser and will increase the odds of trades going your way.

If you don’t believe me, take a look at a stock that’s heading down sharply and wait till a positive story comes out. The stock will rally for a few days, act like it’s moving up and then fall once again in the direction of the main trend.

This doesn’t happen every time but it happens often enough where it’s far from random, if it was random there would be very few trends and if you look at most markets there is typically a long term bias or direction that the market tends to favor. That’s the side you want to be one at all times.

2. Don’t trade dead markets – Swing traders and day traders make money when markets are volatile. Trading without volatility is like trying to drive a sports car in bumper to bumper traffic, it doesn’t go anywhere.

Good trading set ups need good volatility, therefore you need to avoid trading during holiday seasons, before earnings announcements, during the lunch session and all other times when markets are dead.

There is an exception to this rule, some swing trading methods rely on short term support and resistance levels. These setups occur specifically when markets are dead and many traders make a career trading these setups. You wait till markets are completely dead and wait till they develop a high low pattern. Then you scalp or short term trade for a few ticks back and forth, this is the only exception to this rule.

To determine if markets are dead or not simply look at the volume and see if the average volume is similar to the volume for the last 5 trading sessions. Don’t forget to check your schedule for news and reports, this is the number one source of short term volatility for swing traders and day traders.

While we are on this topic, make sure your market has a reasonable spread between bid and offer; this will play a vital role, especially if you are quickly jumping in and out of the market several times per week.

Note: no swing trading for beginners guide would be complete if I didn’t warn you that – Many markets such as illiquid stocks and NY commodities have terribly wide spreads and should be avoided like the plaque.

3.Trade both sides of the market – Many swing trading for beginners books recommend that traders only trade the long side till they are comfortable trading both sides of the market. Unfortunately, you will never feel comfortable trading the short side till you actually start doing it. It doesn’t work any other way. You have to trade the short side as often as the long side.

There have been many opportunities when I was starting out when markets would turn on a dime and reverse direction. I would liquidate my long position but would never initiate the short and would lose out on extremely valuable opportunities.

Remember, markets drop 3 times faster they rise, because fear is a stronger emotion than greed, therefore you literally will lose 50 percent of your opportunities by avoiding the short side of the market you trade.

4. Always pay attention to correlation – When I began trading I was following many stocks that were part of the same industry group, mainly tech stocks.

No one ever told me that these stocks have a correlation to the market of about 70 percent and about 80 percent to each other so if you were trading AMAT and KLAC (two big chip makers) you were trading virtually twice your position size, because these two stocks were so highly correlated.

Keep in mind trading highly correlated stocks is the same thing as doubling your position size. Don’t do it, make sure you do simple correlation analysis and make the stocks you trading or the markets you are trading do not have a high degree of correlation to each other.

If you would like more information about swing trading for beginners,  please visit us at Market Geeks.

To read more on similar topic please go to:  Swing Trading Help For Beginners – 10 Rules All Traders Must Follow and Swing Trading Stock Ideas – Screening Stocks

all the best,

Roger Scott
Market Geeks