Swing Trading takes advantage of brief price swings in strongly trending
stocks to ride the momentum in the direction of the trend. Swing traders
hold stocks for days or weeks playing the general upward or downward trends.
By rolling your money over rapidly through short term gains you can quickly
build up your equity.
The basic strategy of Swing Trading is to jump into a strongly trending
stock after its period of consolidation or correction is complete. Strongly
trending stocks often make a quick move after completing its correction
which one can profit from. One then sells the stock after 1 to 5 days for a
5-25% move. This process can be repeated over and over again. One can also
play the short side by shorting stocks that fall through support levels.
In brief a Swing Trader's goal is to make money by capturing the quick moves
that stocks make in their life span, and at the same time controlling their
risk by proper money management techniques.
*Swing Trading combines the best of two worlds* -- the slower pace of
investing and the increased potential gains of day trading. Swing Trading
works well for part-time traders — especially those doing it while at work.
While day traders typically have to stay glued to their computers for hours
at a time, feverishly watching minute-to-minute changes in quotes, swing
trading doesn't require that type of focus and dedication.
Our investment methodology
*SWING trading + momentum trading using a combination of crossovers and
price/volume breakouts.*
In addition, we also look at prior support/ resistance areas as well as
oversold conditions.
In the chart above, the "first" buy is placed once it crosses "above" the
red line. The red line is the trailing stoploss and keeps on moving in
"steps" in direction of the stock price. The horizontal blue lines represent
suppport and resistance. "Buy" areas are circled in green and represent
"subsequent" buying opportunities.
The sell or exit signal is generated when the stock prices intercepts the
trailing stoploss.
*An important filter* is for volumes / liquidity. The condition here is that
the average 50 days trading turnover should be atleast Rs.5 crores per day.
This filter ensures that the stocks we recommend have sufficient liquidity.
Bar charts and reversals
*Remember:*
- A trend is in force till it has reversed
- A trend has ended ONLY if there are clear signals that the opposite
trend has started
- Stronger the trend, stronger the trend reversal signal (and vice
versa)
Basic bar charts
Bar chart reversals
Identifying trends and reversals
*Moving averages provide an excellent way to identify trends or confirm
reversals.*
Moving averages are not "predictive" but are "lagging" indicators as a time
delay is always present.
Moving averages are an extremely simple and convenient way to trade. They
are excellent in strongly trending markets but are practically useless in
sideways markets as they tend to generate too many whipsaws.
Using supports and resistance
An alternative to moving averages is using recent support and resistance
levels as entry and exit points. As a stock rallies, it makes higher highs
and higher lows. The "lows" form the support and as long as this holds, one
can stay invested. When the support breaks, one can consider exiting a
position.
When a support is broken and the stock is in a down trend, one should enter
a long position only if the resistance is taken out convincingly.
Support and Resistance
*A security's price represents the fair market value as agreed between
buyers (bulls) and sellers (bears). Changes in price are the result of
changes in investor expectations of the security's future price.*
What is support
Support is the price level at which demand is thought to be strong enough to
prevent the price from declining further. The logic dictates that as the
price declines towards support and gets cheaper, buyers become more inclined
to buy and sellers become less inclined to sell. By the time the price
reaches the support level, it is believed that demand will overcome supply
and prevent the price from falling below support.
Support does not always hold and a break below support signals that the
bears have won out over the bulls. A decline below support indicates a new
willingness to sell and/or a lack of incentive to buy. Support breaks and
new lows signal that sellers have reduced their expectations and are willing
sell at even lower prices. In addition, buyers could not be coerced into
buying until prices declined below support or below the previous low. Once
support is broken, another support level will have to be established at a
lower level.
What is resistance
Resistance is the price level at which selling is thought to be strong
enough to prevent the price from rising further. The logic dictates that as
the price advances towards resistance, sellers become more inclined to sell
and buyers become less inclined to buy. By the time the price reaches the
resistance level, it is believed that supply will overcome demand and
prevent the price from rising above resistance.
Resistance does not always hold and a break above resistance signals that
the bulls have won out over the bears. A break above resistance shows a new
willingness to buy and/or a lack of incentive to sell. Resistance breaks and
new highs indicate buyers have increased their expectations and are willing
to buy at even higher prices. In addition, sellers could not be coerced into
selling until prices rose above resistance or above the previous high. Once
resistance is broken, another resistance level will have to be established
at a higher level.
Support becomes resistance (and vice versa)
Another principle of technical analysis stipulates that support can turn
into resistance and visa versa. Once the price breaks below a support level,
the broken support level can turn into resistance. The break of support
signals that the forces of supply have overcome the forces of demand.
Therefore, if the price returns to this level, there is likely to be an
increase in supply, and hence resistance.
The other turn of the coin is resistance turning into support. As the price
advances above resistance, it signals changes in supply and demand. The
breakout above resistance proves that the forces of demand have overwhelmed
the forces of supply. If the price returns to this level, there is likely to
be an increase in demand and support will be found.
Conclusion
Identification of key support and resistance levels is an essential
ingredient to successful technical analysis. Even though it is sometimes
difficult to establish exact support and resistance levels, being aware of
their existence and location can greatly enhance analysis and forecasting
abilities. If a security is approaching an important support level, it can
serve as an alert to be extra vigilant in looking for signs of increased
buying pressure and a potential reversal. If a security is approaching a
resistance level, it can act as an alert to look for signs of increased
selling pressure and potential reversal. If a support or resistance level is
broken, it signals that the relationship between supply and demand has
changed. A resistance breakout signals that demand (bulls) has gained the
upper hand and a support break signals that supply (bears) has won the
battle.
About trailing stop losses
*Trailing stop losses help you ride the trend and exit when trend reverses*
The red line is the trailing stop loss. As the stock price moves, the
trailing stop loss follows in "steps". At some time, the trailing stop loss
will converge with the stock price and result in a "sell" signal. The
trailing stop loss will stay above the stock price and will offer
resistance. One should buy the stock only if it breaks above this line.
Importance of stop losses
Protective stops are important and help you exit potentially loss making
situations early and thus minimize losses.
When you decide to invest in a stock, it is based on certain fundamental or
technical reasons. Many times, this justification itself can be flawed and
the market can go against your action. Protective stops force an exit and
thus help protect capital.
Stoplosses vary depending on your timeframe. The same stock will have vastly
different stoploss levels for a day trader, futures trader, swing trader,
short term or long term investor.
Incidentally, the word long term means different things to different people.
For some people, it could be 6 months whereas for someone else it could be 5
years. On the other hand, many investors become long term investors because
they have no choice!
Defining stoplosses is not easy as many people have seen a stoploss gets
triggered and the stock subsequently rallies. There is no quick fix solution
for this but a thorough knowledge of charts and daily study does help
substantially.
In general, shorter the time frame, more "tight" will be the stoploss and
higher the chances of this getting triggered.
*Setting stoplosses:* Short term investors can use the 10 day or 20 day
lowest close as the trailing stoploss. Where a stock rallies extremely fast,
one can even use a 5 day lowest close as the stoploss.
Long term investors can use the 50 day lowest close as the trailing stoploss.
This will get triggered once or twice a year.
I use the most recent "significant" support or resistance as the stoploss.
The keyword here is the word "significant" . For example, for short term
trades I use a 5% change for determining peaks and troughs (you need
sophisticated charting software for this). This is highly accurate and
extremely reliable.
*NOTE* as long as the trend is up, you will always make money. Sometime or
the other, the broader trend must and will reverse. No one knows when the
trend will reverse and hence the stoploss is important.
Never make the mistake of dreaming that sometime or the other, the stock
will rally and you will recover your investment. This may take years or a
lifetime. Just to remind, there are people who have bought ACC at Rs.8000/-
or HIMACHALFUT at Rs.2000/-... they are still holding this in the fond hope
that they will recoup their losses!
Follow the trend for profitable trading
*Advantages: * By following the trend, you will not be affected by:
- Performance of companies
- EPS, PE, RONW and other ratios
- Elections, budgets, GDP
- FII inflows, crude oil prices
- Interest rates and inflation
- Newspaper reports and analyst talks
- Intra-day fluctuations and volatility
- Support and resistance levels
*The easiest and safest way to earn excellent profits consistently is to
simply follow the trend and trade.*
By following the trend, you will always be on the "right" side of the
market.
Trend analysis helps distinguish emotional decisions ("I think it's time to
sell...") from analytical decisions ("I will hold until the current rising
trend is broken"). Trend analysis will also discourage you from going short
in a bullish market or going long in a bearish market.
What is a trend
A trend is simply, the persistence of a security's price to move in a
particular direction. A trend can be bullish, bearish or flat. Also, a trend
is in effect till it is reversed.
Markets are either bullish, bearish or flat. However markets never go up or
down in a straight line. There are always corrections (in bullish markets)
and pullbacks or relief rallies (in bearish markets). By identifying trends
and reversals, you can enter and exit trends at the correct time and earn
excellent profits with minimum risks.
A simple chart
*A picture is worth a thousand words...and this is true of any chart.*
Take the following chart of Hindustan Lever (HLL).
A simple look at the chart shows that HLL was bearish in the first half of
2004. Then somewhere in Oct, the stock started moving up.
Interestingly, it does not matter why the price of HLL was going up or down.
There can be many reasons and analysts are experts at coming out with new
reasons everyday. From the technical perspective, "what is happening" is
more important than "why it is happening".
The red line is the 50-day moving average (50 DMA).
Technical analysis
*Technical analysis is the study of historical prices, with charts being the
primary tool.*
Since everything about a stock is reflected in the price, it makes sense to
study price movements. In other words, "what is happening" is more important
than "why it is happening".
Sentiment drives the market
The price at which an investor is willing to buy or sell depends primarily
on his expectations. If he expects the security's price to rise, he will buy
it; if the investor expects the price to fall, he will sell it.
The collective majority of market participants ultimately decides the
direction of the stock price and the market. Finally, whichever you look at
it, price is matter of demand and supply and nothing else.
Fundamentals don't matter
Greed and fear is what moves the market up or down. If the markets are
bullish, even a stock with no fundamentals (penny stocks) will rise and give
good returns. But if markets turn bearish, then even stock with good
fundamentals will crash.
Everything about a stock is reflected in the price
The price of a stock reflects everything what is known (and unknown) about
the stock. The key word here is "known" or information about the stock /
company. Different people have varying degrees of access to this information
and form their own perception (rightly or wrongly) - this ultimately decides
the current price of the stock.
Since everything about a stock is reflected in the price, it makes sense to
study price movements. In other words, "what is happening" is more important
than "why it is happening".
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