About Swing Trading Systems
Swing trading is a stock trading strategy with the goal of obtaining profit from short-term trades, typically lasting between two to five days. Swing trading systems can provide a profitable method for the person who cannot be at the computer all day, but who wants to trade more actively than the long-term investor.
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Identification
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Mechanical swing trading systems allow people to trade without having to constantly monitor their trades and make split-second decisions. In mechanical systems, traders enter and exit the market at predetermined points they have decided on ahead of time, often placing automatic buy and sell orders to handle the process for them.
Function
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Stock prices tend to oscillate, either within trends or when there is no directional movement. Swing traders watch for a price pullback, where they enter and then ride the next swing upward. For instance, for a stock which is oscillating between $12 and $15 with no discernible trend, the trader might enter a buy order for $12. After the stock has been purchased, the trader enters a sell order called a stop, placed just underneath the purchase price, in order to minimize loss in case the trade is unsuccessful. If the price reverses and heads back toward $15, the trader will move the stop along with it, commonly called a trailing stop. He will likely plan to sell once the price reaches $15 or close to it.
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Types
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The easiest swing trading system in an up trending stock is to buy as soon as a retracement ends and the price begins to move back upward, and follow the price with a trailing stop. This can be a purely mechanical swing trading system, with the stop trailing by a certain price such as .50, or by a percentage such as 5 percent.
Features
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Swing traders often use oscillators and other indicators as signals to buy and sell. One type of mechanical system uses Bollinger Bands, which identify overbought and oversold conditions, and can pinpoint excellent entries and exits. Many charting websites show Bollinger Bands in their Active Charts or Interactive Charts areas. See the Resources section below for a link to an extensive charting site.
Considerations
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Swing traders also look for certain chart patterns, such as triangles, where they draw a line over the top and under the bottom of constricting price activity, watching for a breakout. Each day the trader might place a buy order which will trigger if the price swings upward out of that constricted pattern. Once the stock is purchased, traders implement the trailing stop exit strategy.
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