Swing trading is a short-term trading method that can be used when trading stocks & options. Whereas day trading positions last less than one day, swing trading position typically last two to six days, but may last as long as two week or month.
Swing trading is a short-term strategy used by traders to buy & sell stocks whose technical indicator suggest an upward or downward trend in the near future generally one day or two weeks.
Swing trading uses technical analysis to determine whether or not particular stocks will go up or down in the very hear term. By examining technical indicators, day traders look for stocks whose price movement have momentum signaling the best times to buy or sell. Swing traders are not concerned with the long-term value of a given stock.
TWO KEYS OF SWING TRADING STRATEGIES
1. OOPS
2. MEAN REVERSION
1. OOPS
- Object Oriented Programming Strategy.
- Simple OOPS trades developed by Larry Williams at least 30 years ago.
RULES
- SE TUP – Any opening gap, whether up or down offers a potential signal.
- LONG – On a gap down, place a buy – stop at yesterday’s low.
- SHORT – On a gap up, place a sell – stop at yesterday’s high.
EXIT ON THE ‘FIRST PROFITABLE OPENING’ (FPO)
- FPO stop exit the trade the first time a position opens with a profit.
- Testing shows this consistently makes money by holding a position overnight.
- Exit on 20% stop loss.
- The stop loss is below the low of the same day.
ITS VERY EASY TO IDENTIFY OOPS PATTERN IN THE CHART:
- OOPS BUY
- If you are watching daily charts, the first condition is that there has to be a SUSTAINED downtrend for a few trading sessions. I mean few RED CANDLES on daily charts.
- On the last day of downtrend, the OOPS buy occurs, there is a gap down, which open well below the previous day’s low.
- During the course of trading the stock rises & goes above the previous day’s low & also the previous day’s close.
- OOPS SELL
- If you are watching daily charts, the first condition is that there has to be a SUSTAINED uptrend for a few trading sessions. I mean WHITE CANDLE on daily charts.
- On the last day of uptrend when the OOPS sell occurs, there is a gap up opening, which opens well above the previous day’s high.
- During the course of trading the stock corrects & goes below the previous day’s high, & also the pervious day,s close.
2. MEAN REVERSION
Mean reversion is a theory used in finance that suggests that assets price & historical returns eventually return back to the long run mean or average level of the entire data set. This mean or average can be the historical average of the price or return,or another relevant average such as the growth in the economy or the average return of an industry.
The idea of mean reversion is rooted in a well known concept called regression to the mean.
This is a theory first observed by statistician francis gallon.
The two most popular types of trading strategies are momentum & mean reversion. A mean reversion trading strategy involves betting that prices will revert back toward the mean or average.
When the market is moving sideways or consolidating, a particular asset might exhibit mean reversion in the short run & trend following strategies will not work.. prices & returns eventually move back to their mean or average stance this concept forms the basis of many successful strategies.
How do we identify the underlying trend? That’s the essence of this strategy! Consider the dummy example below:
We calculate the 90-day Moving Average(90d MA) of the stock price and treat that as the underlying stable trend. We also calculate the 30-day Moving Average(30d MA) and can see that it zig-zags around the 90d trend. Now we can build the following strategy:
- When the value of 30d MA falls below 90d MA we expect it to revert back to the 90d line. That is, the current price is too low and likely to increase. Hence this is a signal to buy
- Similarly, if the value of 30d MA rises above 90d MA we expect it to fall back to the 90d line. Hence the current price is too high and is a signal to sell
