Ten Rules For Swing Trading
Swing trading is a method of trading trying to capture short-term gains in markets. We identify markets that have the potential to make an immediate move, entering those markets and using strict money management to help protect against major losses and lock in profits. Trades are normally held for one to five days, but there really is no specific time limit. What we are interested in is recent trend whether that's two days or two weeks and we want to ride or "swing" from one price level to a previously shown price level. We want to trade with the trend.
Clearly there are many, many rules to trading, not just ten. That's what training sessions are for because the fact is that whether there are 20 or 200 rules, until you're in the market you won't know which is more significant and at what point is it significant. As mentioned, trading is an art and a science.
1. Limit Losses
You will use a stop loss upon entering your position depending on the time chart you're trading and its support and resistance levels. Different time views will show differing support/resistance. Don't day trade using weekly support/resistance levels. Use the S/R showing on your time chart... whether that's a 5 minute chart, 30 minute chart or whatever.
2. Support and Resistance must be honored.
Swing trading involves identifying short-term support and resistance and where a market will likely re-assert itself. Therefore, wait for follow through before attempting to enter a trade. For longs, this means waiting for the market to turn back up, and for shorts, it means waiting for the market to turn back down. Using Fibonacci retracements can be helpful for this but like everything else is not the ONLY thing you should be watching.
3. Take Partial Profits
This is tricky for most traders. Do you let things ride and risk you current profit? Do you sell some holdings as price moves in your favor? You need to make hard rules of engagement without risking your current profit. For day and swing traders, learn to take some profits especially as price approaches resistance... the more meaningful the resistance the more likely a rollover.
4. Take Fast Money Profits Quicly
You will learn quickly enough that the market can give you a huge gain in minutes and just as quickly take it back. Trailing stop-losses can help here, but generally if you're not in front of your machine you could miss those quick moves.
5. Trade Active Markets
By staying on top of current market action for the week you will be able to identify where the crowd wants to play. The crowd brings money and interest, liquidity and volume, to individual stocks and industries.
6. Are The Odds In Your Favor
Maybe it's momentum or technical patterns or relentless positive or negative headlines driving the action. See chart checklist and off-chart checklist.
7. Money Management and Position Size ....
You can add to your position if you didn't go "all in" according to your trade size as price moves in your direction, all other things being equal. See Money Management
8. Get a Routine Together
Find an approach that works for you and apply it in a consistent manner. The approach that works is the one that allows you to be profitable while minimizing losses. By learning to keep losses small you will always have money to get back in. Carelessness will blow up your account and keep you out of the game. It's about making money, not being right, thus when you're losing admit you're wrong and stop holding a loser.
9. You Don't Have To Trade Every Day
If the odds are not in your favor ala the chart and off-chart checklist mentioned above, why are you trying to force yourself into a trade? The market will be here tomorrow.
10. Preservation of Capital is Rule One at all times.... learn to not lose money as you begin and in fact you are learning to trade. Making money can only follow if you haven't lost your trading capital.