Swing Trading Fundamentals

One of the better Swing Trading System we can recommend is the Reactive Template from the Trading Trainer website: www.tradingtrainer.com.

These systems makes options trading easier as they shortcut a lot of the technical processes.

As a result, we are able to spend about 30 minutes a day doing options trading.

We can also create our own Swing Trading Systems. 

There are certain basic principles involved. Let's create a Swing Trading System called the "Super Swing Template" for practice purposes only.

Swing Trading Systems consist of 3 fundamental items:
1. Trend – is there a pre-existing trend?
2. Trigger – is there a temporary fall out from the trend?
3. Confirmation – yes, it fell out of the trend for a while, but is it about to kick into the trend again?
 
#1: Trend

Is there a pre-existing trend? To determine the existence of a trend, we arbitarily decide to use the 20-day moving average. Let us define our trend by saying that if the 20-day moving average today is higher than the 20-day moving average 20 days ago, then a trend exists.

#2: Trigger

Is there a temporary fall out from the trend?

Here, it is useful to use leading indicators, especially overbought and oversold indicators. Let’s decide to use the Stochastic Indicator. Here, we define fallout by saying that if the slow stochastic fall below 30% at anytime during a Trending action, then the stock is considered oversold. As it is oversold in an upward trending motion, this may be a good time to buy.

#3: Confirmation

Here, we are looking for some confirmation that the stock is rebounding from its oversold position and returning to it's Trending Movement.

For practice purposes, let's use the V Pivot Pattern as our confirmation pattern. Such V Pivot Patterns are quite nice patterns to see as they indicate that the selling pressure is over and that the buying pressure is stepping up. For our V Pivot Pattern, we want a 3 day “V” formation, whereby:
• today’s high (H) is higher than yesterday’s high (H1) and
• yesterday’s high (H1) is lower than the previous day’s high (H2), and
• today’s low (L) is higher than yesterday’s low (L2) and
• yesterday’s low is lower (L1) than the previous day’s low (L2), and
• today’s close (C) is higher than yesterday’s close (C1).

Applying our Super Swing Template

Let's apply our "Super Swing Template" to our AAPL Chart. We observe that on the 15 April 2008:
1. The Trend was met (20MA sloping up), and
2. The Trigger was present (Stochastic < 30%), and
3. The Confirmation V Pivot Pattern was present.

The system told us a swing was imminent. Our system prompted us to enter a position the following day (see Entries later).

Now, there are thousands of stocks in the market. How do we determine which stock is "has confirmed" and is ready to rejoin their Trending Movement? Is there a faster way rather than to eyeball 1,000 over charts? This is where Scanning come in handy ...

Next: Scanning ...