| The swing trading system takes advantage of the | | | | overshoots up or down yet again. |
| human emotions bound up with trading the financial | | | | It's these "overshoots" that swing traders watch out |
| markets by identifying overbought and oversold | | | | for. When a stock is moving up fast towards the |
| positions. The traditional tools for doing this are | | | | resistance level, or moving down fast towards |
| charts, but I believe charts on their own are not | | | | support, it's most likely (though not always) going to |
| enough to identify the stocks or other securities that | | | | break through, temporarily, and then it's only a |
| are becoming potential trades. Something else is | | | | matter of time before it comes back towards its |
| needed for that. | | | | proper level and then overshoots that as well. Those |
| Before we work out what it is, we have to | | | | are the price movements that successful swing |
| acknowledge that swing trading is based on different | | | | traders profit from. |
| criteria from the "trend" method of trading, even | | | | So how do you identify stocks that are about to |
| though both cash in on the human factor. "The trend | | | | perform like this? By leaving your charts for a while |
| is your friend", and traders following this method | | | | and paying attention to what is happening in the real |
| identify a definite up or down trend that is in place | | | | world. You can't do this for every single stock, or |
| before they hitch their wagon to it. | | | | even for every single sector, unless you have |
| The drawback to this is that so often by the time a | | | | massive resources at your disposal. As an individual |
| trend is identified it is already finished, or nearly so. | | | | trader you have to specialise to a degree. |
| Even when the trader manages to ride the tail end | | | | Choose your segment of the market so as to ensure |
| of it he often loses out when the trend reverses and | | | | a fair degree of volatility (though not too much). Get |
| he closes his trade too late to save his profits. Swing | | | | to know what is going on in that sector, what the |
| traders seek to avoid that fate by identifying in | | | | seasonal patterns are, what the problems and |
| advance when a particular stock is likely to become | | | | challenges are. Keep abreast of the news relating to |
| overbought or oversold. | | | | stocks in that sector. This is pure fundamental |
| It can be summarised like this. Take any stock. If | | | | analysis, of course, and many technical analysts (and |
| something happens that makes it more desirable it | | | | swing traders are often technical analysts) would |
| increases in price. But usually it doesn't simply move | | | | frown on it. |
| up smoothly to the new price level that it should now | | | | Nevertheless, I believe using the two stock market |
| occupy. It "overshoots" and goes above what you | | | | trading systems together is a far better way to |
| might term the correct market price. | | | | swing trade. Use your knowledge of your particular |
| At some stage traders realise that it's gone up too | | | | market sector to gauge which stocks are likely to be |
| much, so it comes down, but, again, not to the | | | | at or near an overbought or oversold position in the |
| correct level. It overshoots again and is now | | | | near future, and only then study your charts to |
| undervalued once more. So it starts to move up | | | | identify the right times to enter and close your |
| again. This up-and-down movement continues until | | | | trades. This "fine tuning" of your swing trading |
| either it stabilises at the new price level or something | | | | system should increase your profit taking |
| else happens to affect the market price and it | | | | considerably. |