Ten Simple Rules of Swing Trading

by Walter Johnson

"Swing trading" refers to a set of methods that investors use to determine the beginning and end of "breakouts." A breakout is when a stock or commodity is set to go up beyond its traditional "resistance" level, or its "high" average level. If you can determine this, then buying and selling stock should be an immensely profitable enterprise. No one, however, believes it to be easy.


Reject all emotions. This means ignoring the mentality of the crowd. Markets are rational. People are not. It is emotions that generate false trends and non-market prices. Methods you use to make sense out of this should control for the herd mentality. Investing with the herd, in other words, means the destruction of your portfolio.


Use pivot points. This means you need to take averages of the high, middle and low levels of a stock for a certain period of time. When all indicators point upward, then a breakout is occurring. Pivot points are very simple to use and equally indispensable.

Time Frames

The longer your pivot time period, the more accurate your numbers will be. Focus on the short term, and take high, middle and low averages for the entire term, whether it be a day or a week. This pivot range shows the "traditional" motion of the stock or commodity. When these points no longer seem to be relevant, then it is time for action.


Realize, most of all, that instability is always temporary. Look for trends and regularities in what the market calls "instability." Instability is not chaos. It is communicating important information.


Volatility is your best friend. Volatility ends stability and increases or decreases prices rapidly. Therefore, recognizing the causes of volatility is the key to making large profits quickly.


Volatility is about adjustment, not instability. Your job is to figure out how the market is adjusting, from what, and to what. If you can figure this, then your investment decisions will be rational.


When volatility resolves itself into direction, this is the time to either buy or sell. If the direction seems to be high, then it is time to buy.


There is never a time when markets are not trending. It is just harder to discern this trend when markets are volatile. Volatility is a means of the market working out its rationality in order to show investors the trend more clearly.


Price movement does two things. It can show little. It can just show movement within its pivot range. However, it can also show a trend. Deciding between the two sorts of information is at the root of swing trading.


There is no such thing as chaos in markets. There are only periods of stability with periods of adjustment. Adjustment is the only time to invest. This is what makes the swing trader different from the traditional investor.

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