In response to the many questions I’ve received about how to begin swing trading, I offer a simple explanation- swing trading in one chart.
My concept of swing trading is to only hold a position that is appreciating. A simple method to determine appreciation is to ask yourself this question: Is my stock worth more today than it was in the past? Depending on your trading timeframe- the “past” can be yesterday, last week, last month, last year, etc.
A simple moving average can help you quantify the value of your stock during the reference time period. In the below chart, I illustrate this concept using a 20 week simple moving average (representing approximately 100 trading sessions over a 5 month period).
The blue line represents the weekly closing price of the S&P500 and the red line is the 20 week simple moving average. When blue is above red, the S&P500 is appreciating- because on average, it’s worth more than it had been over the previous 20 weeks.
Remember, your objective is to own appreciating assets. A very rudimentary method for swing trading would be to buy the index when blue crosses UP above red, and to sell the position when blue crosses DOWN below red.
A moving average chart serves as an “early warning” during times of market correction. Notice the market tops during the Dotcom and Housing bubbles. Selling when blue crossed down under red would have prevented a catastrophic loss during both bubbles.
This is a very simple illustration of the concept. If you decide to swing trade, you’ll have to develop your own techniques and methodologies. More complex isn’t necessarily more effective.
[NOTE to those who don’t know how to calculate a simple moving average: perhaps you’re not yet prepared for swing trading.]
As always, trade with caution.
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