Getting Started in Swing Trading

226 Pages·2007·3.22 MB·English

by  Michael C. Thomsett

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Getting Started in
SWING
TRADING
Michael C. Thomsett
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Getting Started in
SWING
TRADING
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The Getting Started In Series
Getting Started in Online Day Trading by Kassandra Bentley
Getting Started in Asset Allocationby Bill Bresnan and Eric P. Gelb
Getting Started in Online Investingby David L. Brown
and Kassandra Bentley
Getting Started in Investment Clubsby Marsha Bertrand
Getting Started in Stocksby Alvin D. Hall
Getting Started in Mutual Fundsby Alvin D. Hall
Getting Started in Estate Planningby Kerry Hannon
Getting Started in 401(k) Investingby Paul Katzeff
Getting Started in Internet Investingby Paul Katzeff
Getting Started in Security Analysisby Peter J. Klein
Getting Started in Global Investingby Robert P. Kreitler
Getting Started in Futuresby Todd Lofton
Getting Started in Financial Information by Daniel Moreau
and Tracey Longo
Getting Started in Technical Analysis by Jack D. Schwager
Getting Started in Hedge Funds by Daniel A. Strachman
Getting Started in Rental Income by Michael C. Thomsett
Getting Started in Property Flippingby Michael C. Thomsett
Getting Started in Fundamental Analysisby Michael C. Thomsett
Getting Started in Six Sigma by Michael C. Thomsett
Getting Started in Optionsby Michael C. Thomsett
Getting Started in Real Estate Investingby Michael C. Thomsett
and Jean Freestone Thomsett
Getting Started in Annuitiesby Gordon M. Williamson
Getting Started in Bonds by Sharon Saltzgiver Wright
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Getting Started in
SWING
TRADING
Michael C. Thomsett
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Copyright © 2007 by Michael C. Thomsett. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by
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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in
preparing this book, they make no representations or warranties with respect to the accuracy or completeness
of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for
a particular purpose. No warranty may be created or extended by sales representatives or written sales materi-
als. The advice and strategies contained herein may not be suitable for your situation. You should consult
with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit
or any other commercial damages, including but not limited to special, incidental, consequential, or other
damages.
For general information on our other products and services or for technical support, please contact our
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Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may
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www.wiley.com.
Library of Congress Cataloging-in-Publication Data:
Thomsett, Michael C.
Getting started in swing trading / Michael C. Thomsett.
p. cm.
Includes index.
ISBN-13: 978-0-470-08461-8 (pbk.)
ISBN-10: 0-470-08461-8 (pbk.)
1. Investment analysis. 2. Stocks. 3. Speculation—Psychological aspects. I. Title.
HG4529.T488 2007
332.63’2042—dc22
2006033462
Printed in the United States of America.
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CONTENTS
Introduction:Why Swing Trading Makes Sense Today vii
Chapter 1
The Big Picture:How Swing Trading Works 1
Chapter 2
The Basic Technical Rules 23
Chapter 3
Candlestick Charting for Swing Trading 45
Chapter 4
Reaction Swings and the Reaction Cycle 65
Chapter 5
Brokerage Rules and the Pattern Day Trader 87
Chapter 6
Picking Stocks for Swing Trading 103
Chapter 7
Selling Short:Entering a Swing Trade with a Short Order 125
Chapter 8
Options for Swing Trading:the Basics 135
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vi CONTENTS
Chapter 9
Option Strategies for Swing Trading 159
Chapter 10
Swing Trading in Your Investment Portfolio 179
Glossary 197
Index 209
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Introduction
Why Swing Trading
Makes Sense Today
S
wing trading is not a new idea. It has only recently become a viable
strategy for the average investor. Before the Internet opened up
markets to virtually everyone, only the select few with access to an
exchange trading floor could make short-term trades in and out of posi-
tions on a daily basis.
In that pre-Internet era, real-time quotes or online charting services
simply did not exist. To get a quote on a stock, you would have to tele-
phone a stockbroker, leave a message, and hope your call was returned
before the market closed. It was impossible to track stock prices through-
out the day because, again, you needed the stockbroker who had exclu-
sive access to price information. So swing trading—movement in and out
of positions to take advantage of short-term price movements—was just
not possible.
In the 1980s stockbrokers began relying on a primitive version of
automated access to exchange floors. An old system, Quotron, provided
brokers with desktop PCs to get quotes in much faster time than ever be-
fore. This was revolutionary. Those brokers with Quotron machines had
a distinct advantage over those brokers who depended on delayed quotes
and telephone or ticker-based quotes on exchange floors.
Even the revolution of providing stockbrokers with their own direct
access, pales in comparison to today’s environment. Stockbrokers are, es-
sentially, obsolete. Any trader who knows enough about investing and
who knows how to execute a trade is likely to use an online discount bro-
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viii INTRODUCTION
kerage service, which is so incredibly easy that traditional brokerage ser-
vices are of questionable value. The traditional firms have emphasized
the need for professional advice from their “analysts,” but the track
record is dismal. Not only have analysts’ recommendations under-
performed the market; in some cases, investors would have done better
to do the exact opposite of the suggestions offered to them.
Today, the old-style stockbroker has quietly faded away to be re-
placed with the combination of analysts and subscription services. The
claim that these services provide some kind of valuable information is
dubious. In fact, investors now get superior free information from online
brokerage services and do not need to pay for help. For example, the
most successful discount brokerage firm, Charles Schwab, provides its
traders with free access to Standard & Poor’s Stock Reports, Reuters Re-
search Ratings, and Schwab’s own Equity Rating service all for thousands
of publicly listed companies.
Informed investors—those most likely to be attracted to short-term
strategies such as swing trading—are the least likely to depend on advice
from others. Historically, advice from stockbrokers, financial advisors
and analysts has been very poor, and today’s individual investor is more
likely than ever before to want to proceed without help or advice from a
commission-based or subscription-based person or company.
This book is addressed to the investor who recognizes the limita-
tions of depending on others for investment advice; who is willing to
learn the essential steps needed to invest on his or her own; and who
wants to master proven strategies.
No one can show you how to get rich quick and with no risk. Those
kinds of promises are vacant and unfounded. But it is possible to increase
your rate of successes by utilizing strategies that give you an edge and
help to anticipate the next price direction. There is no “sure-fire” method
to achieving 100 percent profits. But swing trading can improve your
rate of success, your timing, and your overall profitability.
This book also answers the question of what products to use in
swing trading. Most people simply assume that you must use stocks to
take long or short positions in stocks as part of a swing trading strategy.
This topic is covered in depth. Realistically, however, buying and selling
shares of stocks is a limited strategy because you are restricted to invest-
ing by a limited pool of capital. Later in this book, you will discover ways
to expand your swing trading potential with less money and lower risk.
You will also see how to take up positions when you expect stock to trend