3 SWING TRADING EXAMPLES, WITH CHARTS, INSTRUCTIONS AND DEFINITIONS TO GET YOU STARTED
By Alan Farley
The following examples cover common areas of swing trading that will provide insight into the mechanics of this discipline. Following the three examples, you’ll find a glossary of terms that are essential to understanding swing trading basics.
I hope the combination will set you on the road to success in the financial markets.
Amazon.com (AMZN:Nasdaq): Using the Edges of Support and Resistance
Net stock rallies have come and gone over the past decade. But even during the bear market, they were still setting up profitable swing trades. After getting pummeled for months, many of these stocks started to bounce off multiyear lows. Driven by optimism that things wouldn’t get any worse, market players returned to the volatile sector in force.
But long-side traders need to be very careful after secular declines. With few exceptions, beaten- down stocks face an extraordinary burden of overhead supply. Legions of investors and institutions hold positions at considerable losses during bear markets, and this can generate selling pressure on stocks for years to come.
The good news for traders as Amazon pressed back toward $10 a share was its massive liquidity and small spread. This high-float issue traded with a 1- or 2-cent spread that marked the difference between the buying and selling prices. The small transaction cost offered a major advantage: It let traders enter and exit several times to catch the best possible price for a longer- term position.
Swing traders play bear-market rallies, but they keep their stops tight and take what the market gives them. Fortunately, that can be double-digit gains when stocks are trading at discount prices. Just keep in mind that overhead supply will eventually extinguish the progress of these profitable bounces, and that real uptrends require extended basing periods.