<s> Getting Started in
SWINGTRADINGMichael C. Thomsett
Getting Started in
SWINGTRADING
The Getting Started In SeriesGetting Started in Online Day Trading by Kassandra BentleyGetting Started in Asset Allocation by Bill Bresnan and Eric P. GelbGetting Started in Online Investing by David L. Brownand Kassandra BentleyGetting Started in Investment Clubs by Marsha BertrandGetting Started in Stocks by Alvin D. HallGetting Started in Mutual Funds by Alvin D. HallGetting Started in Estate Planning by Kerry HannonGetting Started in 401(k) Investing by Paul KatzeffGetting Started in Internet Investing by Paul KatzeffGetting Started in Security Analysis by Peter J. KleinGetting Started in Global Investing by Robert P. KreitlerGetting Started in Futures by Todd LoftonGetting Started in Financial Information by Daniel Moreauand Tracey LongoGetting Started in Technical Analysis by Jack D. SchwagerGetting Started in Hedge Funds by Daniel A. StrachmanGetting Started in Rental Income by Michael C. ThomsettGetting Started in Property Flipping by Michael C. ThomsettGetting Started in Fundamental Analysis by Michael C. ThomsettGetting Started in Six Sigma by Michael C. ThomsettGetting Started in Options by Michael C. ThomsettGetting Started in Real Estate Investing by Michael C. Thomsettand Jean Freestone ThomsettGetting Started in Annuities by Gordon M. WilliamsonGetting Started in Bonds by Sharon Saltzgiver Wright
Getting Started in
SWINGTRADINGMichael C. Thomsett
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 byany means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permissionof the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or onthe web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax(201) 748-6008, or online at http://www.wiley.com/go/permissions.Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts inpreparing this book, they make no representations or warranties with respect to the accuracy or completenessof the contents of this book and specifically disclaim any implied warranties of merchantability or fitness fora particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consultwith a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profitor any other commercial damages, including but not limited to special, incidental, consequential, or otherdamages.For general information on our other products and services or for technical support, please contact ourCustomer Care Department within the United States at (800) 762-2974, outside the United States at (317)572-3993 or fax (317) 572-4002.Wiley also publishes its books in a variety of electronic formats. Some content that appears in print maynot be available in electronic books. For more information about Wiley products, visit our website atwww.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 2007332.63’2042—dc222006033462Printed in the United States of America.10 9 8 7 6 5 4 3 2 1
CONTENTS
Introduction: Why Swing Trading Makes Sense Today
vii
Chapter 1The Big Picture: How Swing Trading Works
1
Chapter 2The Basic Technical Rules
23
Chapter 3Candlestick Charting for Swing Trading
45
Chapter 4Reaction Swings and the Reaction Cycle
65
Chapter 5Brokerage Rules and the Pattern Day Trader
87
Chapter 6Picking Stocks for Swing Trading
103
Chapter 7Selling Short: Entering a Swing Trade with a Short Order
125
Chapter 8Options for Swing Trading: the Basics
v
135
CONTENTS
vi
Chapter 9Option Strategies for Swing Trading
159
Chapter 10Swing Trading in Your Investment Portfolio
179
Glossary
197
Index
209
Introduction
Why Swing TradingMakes Sense Todaywing trading is not a new idea. It has only recently become a viablestrategy for the average investor. Before the Internet opened upmarkets to virtually everyone, only the select few with access to anexchange trading floor could make short-term trades in and out of positions on a daily basis.In that pre-Internet era, real-time quotes or online charting servicessimply did not exist. To get a quote on a stock, you would have to telephone a stockbroker, leave a message, and hope your call was returnedbefore the market closed. It was impossible to track stock prices throughout the day because, again, you needed the stockbroker who had exclusive access to price information. So swing trading—movement in and outof positions to take advantage of short-term price movements—was justnot possible.In the 1980s stockbrokers began relying on a primitive version ofautomated access to exchange floors. An old system, Quotron, providedbrokers with desktop PCs to get quotes in much faster time than ever before. This was revolutionary. Those brokers with Quotron machines hada distinct advantage over those brokers who depended on delayed quotesand telephone or ticker-based quotes on exchange floors.Even the revolution of providing stockbrokers with their own directaccess, pales in comparison to today’s environment. Stockbrokers are, essentially, obsolete. Any trader who knows enough about investing andwho knows how to execute a trade is likely to use an online discount bro-
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INTRODUCTION
kerage service, which is so incredibly easy that traditional brokerage services are of questionable value. The traditional firms have emphasizedthe need for professional advice from their “analysts,” but the trackrecord is dismal. Not only have analysts’ recommendations underperformed the market; in some cases, investors would have done betterto do the exact opposite of the suggestions offered to them.Today, the old-style stockbroker has quietly faded away to be replaced with the combination of analysts and subscription services. Theclaim that these services provide some kind of valuable information isdubious. In fact, investors now get superior free information from onlinebrokerage services and do not need to pay for help. For example, themost successful discount brokerage firm, Charles Schwab, provides itstraders with free access to Standard & Poor’s Stock Reports, Reuters Research Ratings, and Schwab’s own Equity Rating service all for thousandsof publicly listed companies.Informed investors—those most likely to be attracted to short-termstrategies such as swing trading—are the least likely to depend on advicefrom others. Historically, advice from stockbrokers, financial advisorsand analysts has been very poor, and today’s individual investor is morelikely than ever before to want to proceed without help or advice from acommission-based or subscription-based person or company.This book is addressed to the investor who recognizes the limitations of depending on others for investment advice; who is willing tolearn the essential steps needed to invest on his or her own; and whowants to master proven strategies.No one can show you how to get rich quick and with no risk. Thosekinds of promises are vacant and unfounded. But it is possible to increaseyour rate of successes by utilizing strategies that give you an edge andhelp to anticipate the next price direction. There is no “sure-fire” methodto achieving 100 percent profits. But swing trading can improve yourrate of success, your timing, and your overall profitability.This book also answers the question of what products to use inswing trading. Most people simply assume that you must use stocks totake long or short positions in stocks as part of a swing trading strategy.This topic is covered in depth. Realistically, however, buying and sellingshares of stocks is a limited strategy because you are restricted to investing by a limited pool of capital. Later in this book, you will discover waysto 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
Introduction
ix
downward but without having to sell stock short. This high-risk strategyis not the only way, or even the best or most affordable way, to play abear market.So while you learn about swing trading, you will also expand yourunderstanding of market risk, gaining insight into alternative ways to invest, and improving your knowledge base in the market. Swing trading isa short-term technical strategy. That does not mean it has to be high-riskor appropriate only for the most experienced or wealthiest investors. It isa strategy that can be useful to anyone as long as the basic realities of risk,timing, and methods of investing are mastered and observed.
1Chapter
The Big PictureHow Swing Trading Works
veryone knows that big institutional investors such as mutual fundshave a tremendous advantage over the individual investor—moremoney, better research, broad diversification. In some respects,however, you have an advantage over the big institutions. They cannotmake decisions quickly in the market; pay attention to the subtle, shortterm price gyrations that characterize market cycles; or watch only a fewkey stocks. The big institutions have to take a shotgun approach to investing, just because of their size.You probably don’t have millions of dollars inyour portfolio and you don’t have to answer to anyone else. This flexibility and mobility is your adswing tradinga strategy thatvantage; and this is where you can benefit frominvolves two- toswing trading strategies. With swing trading, youfive-day marketoperate within a very limited window, two to fivecycles and identifies high and lowdays worth of activity in most cases.points in shortYou will observe that stock price movement interm cycles; andflags key pointsthe short term tends to react (or more specifically,for moving in andto overreact) to each and every market event. Thisout of stock posirange of events includes trading volume, broadertions based onspecific chartmarket activity, and all financial, economic and popattern signals.litical news. Later in this chapter, this tendency of
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2
THE BIG PICTURE
stock prices is explained in the context of the threedominant emotions that literally rule the market:efficientgreed, fear and uncertainty.marketShort-term price movement can be definedhypothesisandanticipatedin terms of these three emotions,the theory thatpricing of stocksand this is where you gain your swing trading adreflects all inforvantage. Rather than making decisions based ofmation currentlygreed, fear and uncertainty, swing trading is a techknown byinvestors at anynique based on logic and analysis rather than ongiven time, resultemotion. An old adage about the market statesing in the conclusion that all stockthat “bull and bears can make profits, but pigs andprices are fairchickens cannot.” This is entirely true. You canand reasonable.make profits in all types of markets, but only if youare able to see past the emotional reactions thatgovern the thinking of the majority.random walkIn fact, those emotions largely determine andtheorycause those short-term price changes in the market.a belief that allThe fact that short-term pricing is chaotic dispricing of stocksproves the efficient market hypothesis, the belief thatis random, andthat at any timeall pricing of stocks reflects everything that is pubthere is a 50/50licly known at any given time. The reality proveschance that astock’s price willthat this is untrue.either rise or fall.The efficient market might exist on a differentThis theory dislevel. For example, the long-term averages of pricecounts the valueof fundamentalmovement may occur on some level of efficiency,analysis and asbut the two- to five-day movement of price is virtusumes that stockpricing is a battleally caused completely by those three troublingbetween buyersemotions and their domination of market thinking.and sellers forSo it is reasonable to believe that the efficientpurely technicalreasons.market hypothesis might be a valid theory over thelong-term, but not in the short-term. The oppositeis true of another market concept, the random walk theory. This is a morefatalistic view of the market. The random walk is a belief that at anygiven time, there is a 50/50 chance that a stock’s price will rise or fall.The whole pricing of stocks is believed to be completely random.The random walk accurately describes the two- to five-day tendencyof stocks. Short-term pricing is obviously responsive to emotional overreaction and illogic. However, over the long term, an analysis of stock pricing
An Overview: The Basic Definitions
3
Key PointSwing traders observe how emotions affect price, and act whenthose emotions exaggerate a trend to present a profit opportunity.
demonstrates a clear connection between strong fundamentals and strongprice growth (or, on the other hand, weak fundamentals leading to pricedeterioration). So the two major theories can be quite instructive in understanding both short-term and long-term stock pricing:1. The efficient market hypothesis makes sense but only over thelong term. For the short-term pricing of stocks, there is no apparent efficiency involved; stock pricing changes due to emotionaleffects.2. The random walk theory makes perfect sense in the two- to fiveday window and perfectly describes the way that stocks behave.However, it is not so much a random event, but the outcome of astruggle between the greed and fear of investors (with uncertaintyrepresenting a stalemate between the two). However, over thelong term, the random walk theory falls apart.
An Overview: The Basic DefinitionsAny approach you take in the market will determine your success, ofcourse. But there is a tendency among investors to believe that some systems are effective in ensuring consistent profits, and this is simply nottrue. Timing is the key to profits. While picking fundamentally strongstocks is essential, of course, it is timing more than anything else that determines whether your decisions create profits or losses.Most people who buy shares of stock automatically assume that theprice they pay is a “starting point” or the “zero base” of their investment.From that zero base price the stock is supposed to rise. But as everyonewho has put money into stocks already knows, the stock’s price sometimes falls.
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THE BIG PICTUREKey PointEveryone tends to believe that their purchase price is the starting point in a stock’s price. Realistically, though, it might bemidway through a trend or at the trend’s very peak.
The system you employ to pick stocks mayserve as your real starting point; the strategy youfundamentalemploy controls the timing for putting your stratanalysisegy into place. This is the primary difference. Itthe valuation ofdoes not matter whether you are a believer in funstocks based on acompany’s finandamental analysis or technical analysis. The rule recial strength,mains the same: the method is used to isolate thoseearnings, andtrends, includingstocks you want to trade, and the strategy controlsassessment ofthe timing of your decision. Swing trading providesworking capital,you with one effective strategy.equity and debtcapitalization,Swing traders use the timing of short-termand operatingtradingpatterns to take advantage of the tendenciesresults.of stock prices. These tendencies are to trade inbrief waves (thus, the importance of the two- tofive-day time span) in which stock prices rise andfall. After specific patterns and signals occur, a retechnicalversal often takes place and this is where swinganalysistrading becomes a powerful timing strategy.the study of stockprice and volumeThe swing trader recognizes these patterns.trends, charts,Aftera stock’s price has risen in a specific patternand trading patterns, for the(in the movement of the price, the price distance inpurpose of anticia day’s trading range, and the volume), the swingpating short-termtrader recognizes a sell signal. After the price falls inprice movementto time trades.a specific pattern, the swing trader moves in andbuys. This timing goes in opposition to the mostrecent price pattern, and is aimed at anticipating a reversal. The naturaltendency for pricing is to operate in these short-term back-and-forth cycles. Because swing trading involves timing a trade in anticipation thatprices are going to go the opposite, way, swing trading is a short-termform of contrarian investing.
An Overview: The Basic Definitions
5
Key PointWhen investors respond to greed and fear, they tend to buy highand sell how. Swing traders are able to respond unemotionally,and achieve the opposite: Buy low and sell high.
Typically, traders tend to be reactive ratherthan contrarian. So when people see a stock movcontrarianing up, they want to buy; and when they see itinvestingmoving down, they want to sell. Swing traders, inan approach tocomparison, are faithful to the best-known marketinvesting basedon the assumpadvice: Buy low and sell high. The unfortunate truthtion that the mais that the majority of investors do exactly the opjority is moreoften wrong thanposite. They buy when prices have moved higherright in its buyout of greed, and they sell when prices fall, out ofand sell decisions,fear. Swing trading is a strategy for short-term tradand that timingwill be improveding that puts the concept of “buy low and sell high”by taking actionsinto effect.opposite the market as a whole.Contrarian investing in practice is far morecomplex than the timing of trades. The contrarianinterprets both fundamental and technical signalsin ways dissimilar to the common thinking seen in the market. Timing isonly one aspect to the contrarian point of view; but for swing traders it isa critical point.The struggle between “crowd mentality” of the market and the contrarian view extends as well to philosophies about which kind of data toemploy for decisions. The fundamental view (adherence to recent historical financial results as the basis for making trades) and the technical view(based on price movement and patterns to anticipate the next move orseries of moves) are not always at odds. Although swing trading is apurely technical strategy, it can be employed in a manner that combinesboth fundamental and technical indicators. The distinction should bekept clear: picking specific stocks is not the same as timing buy and selldecisions. With that in mind, you may consider using the fundamentalsto pick a range of stocks you want to trade; and then use swing tradingand other technical tools to actually time your decisions.
THE BIG PICTURE
6
Too often, investors are asked to choose between fundamental andtechnical schools of thought. It makes more sense to use both. Both approaches may limit your view of what is occurring in the market; andboth sides contain flows. Fundamentals are strictly historical and may beoutdated by the time you need to make a decision. Technical indicatorsare invariably short-term in nature and short-term indicators are historically unreliable for long-term investing.The lesson to learn from this is that both fundamental and technical sides are going to contain flaws, but both contain useful aspects. Either theory should be dependent on a study of trends, both short-termand long-term. The trend is the key to picking stocks and to timing buyand sell decisions.
Swing Trading, Day Trading, and Long-TermHold Strategies
speculatorsindividuals willingto take greaterthan average risksin exchange forthe opportunityfor higher thanaverage profits.
long-termholddescription of astrategy for portfolio management, involvingselection ofstocks with theintention of holding shares formany years inorder to build asecure base forlong-term growth.
There are many ways to invest in the market. Themost conservative investors want low volatility andslow but steady growth; speculators welcomevolatile stocks and the unsure future because suchstocks exhibit broader price swings. A speculatorwelcomes higher risk in recognition of the inescapable relationship between risk and profit.With few exceptions, risk and profit are two sidesof the same market coin.The most conservative position within themarket is selection of a company perceived to besafe. This normally means that capitalization ishigh; the company has been in business for manydecades; and the company dominates its sector.Such companies have grown over the long term butonly slowly and steadily. The conservative longterm hold is far from exciting, but it does create asolid, safe base for your portfolio.On the opposite side of the risk spectrum is thehighly speculative approach. People in this part of themarket buy penny stocks, IPOs, and highly-volatileissues; trade options to achieve leverage; and may even
Swing Trading, Day Trading, and Long-Term Hold Strategies
7
Key PointConservative investing is safer than high-risk; but it also offersfar lower opportunities for profit. The elements of risk andprofit are directly related and cannot be separated.
combine high-risk stock trades with index investments, commodities trading, and stock futures. These are very exotic forms of risk, and only thosewho thoroughly understand the market and the risks themselves should beinvolved. To a degree, swing traders may want to employ options as part of their strategy (this is exploredin later chapters). But options can be employed in relday traderatively safe ways to leverage money without exposingan individual whoexecutes tradesyourself to the possibility of huge losses. That is thewithin a singledistinction between a swing trader’s use of instruday or over thements like options, versus pure speculation. A speculashortest possibletime, often movtor intentionally exposes capital to the risk of loss, buting in and out ofa swing trader uses options to limit losses and to leverpositions within amatter of hoursage capital.and employing aSomewhere in between these extremes is thehigh volume ofday trader. This is a trader who intentionally movestrading activity.capital in and out of stock positions in the extremeshort-term, usually within a single trading day. Daytraders are also usually high-volume traders, executpattern daying numerous daily trades in more than one stock; ortradermany trades in the same stock. If an individual buysas defined by theSEC, any traderand sells the same stock on very high volume (fourwho buys or sellstimes or more within five consecutive days), they area single stockclassified as a pattern day trader by the Securities andfour or moretimes within fiveExchange Commission (SEC) and are subject to spedays; a patterncial rules for cash held in a trading account.day trader mustmaintain no lessThe swing trader is likely to belong closer tothan $25,000the side of the speculator than that of the conservaaccount equitytive investor. This does not mean that swing tradbefore a highvolume of tradinging is necessarily high-risk in comparison to otheris permitted.strategies. You can limit your capital exposure to
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THE BIG PICTURE
swing trading, your volume of trades, and the number of stocks youswing trade—all to reduce overall risk or to limit your exposure. But inthe spectrum of investing, everyone should be able to identify where aspecific strategy belongs.Any strategy may also be used in combination with other strategieswith dissimilar risk characteristics. Diversifying by risk is a wise and effective way to manage your portfolio. For example, you may have themajority of your capital invested in your own home, certificates of deposit, and Blue Chip stocks; and use a relatively small portion of yourcapital for swing trading and other strategies.
The Swing Trade Approach: The Strategyin a NutshellThe precise method of swing trading is going to vary among individuals.Everyone has their favorite variation on any strategy. If you have observed how people behave in the market, you also know that investors areat times ingenious, at other times irrational, emotional, or unrealisticallyhopeful. The “what if ” factor is always present.Swing trading is a process of fixing a series of “rules” that trigger atrade decision. It is based on the study of stock price patterns over a shortperiod of time, the two- to five-day window. Because swing traders recognize that short-term price swings reflect investor emotions, they tradein a unique manner. Rather than trading the stock, swing traders timetheir decisions to trade the emotions that dominate the market. Thisdoes not mean that the stock’s fundamentals are unimportant. In fact, astarting point should be to narrow a list of stocks you will swing trade,based on both fundamental and technical analysis. These may be at conflict to a degree. The purpose of using the fundamentals is not to find thesafest stocks because these will not be good candidates for swing trading.
Key PointThe market is characterized by prevailing myths. The beliefs ofmany investors and traders are provably irrational in manycases, but continue to be widely believed. For example, therereally is no “system” for creating 100% profits.
The Swing Trade Approach: The Strategy in a Nutshell
9
Key PointIt makes sense to be flexible. You might start out swing tradingonly to realize that a stock is a solid long-term hold. In thatcase, buying the stock makes sense ... and does not prevent youfrom continuing to swing trade in the stock as well.
The “ideal” stock is one with strong fundamentals (excellent management, long-term growth history, etc.) but with short-term volatile technical signals. This means, of course, that the trading range (the distancebetween typical high and low prices) is broader than the average stocks.So swing traders need well managed companies whose stocks aresomewhat volatile. This is a middle ground; many well managed companies experience short-term volatility because they are in the news; earnings are uncertain; or product news may cause the stock to rise or fall, orto do both in turn. So if you must define the ideal stock for swing trading, it would be one with strong long-term fundamentals and veryvolatile short-term technical signals.The majority of investors are not well informed; and this is whereyou have the advantage as a swing trader. In the environment wheregreed and fear dominate decision-making, you are matched up againstpeople who will be willing to buy stock from you at too high a price; orwho will sell stock to you at a bargain price. You recognize these tendencies by tracking the daily chart patterns and identifying the turningpoints and reacting to the reversal signals you find through swing trading. As a swing trader, you benefit from the way that most people makedecisions—impulsively, emotionally, and at the wrong time.Most people buy when they should sell and sell when they shouldbuy. Swing trading may be thought of a technique for trading emotions(or even trading people and their tendency to react with the emotions ofgreed and fear). In some respects, this means that it doesn’t really matterwhich stocks you trade, because the technique applies to all stocks and toall short-term price trends. But because stocks are different, it remains awise idea to identify a range of stocks by attribute that are best suited for(a) short-term swing trading based on an appropriate volatility level and(b) long-term safety based on strong fundamentals. This is sound advicebecause some swing traders decide to hold onto their stocks even when
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THE BIG PICTURE
the original plan was to swing trade. If you are going to end up keepingsome of the stock you buy, it should be high-quality stock from a longterm perspective.Using the swing trading technique, you identify some very specificshort-term trends. While day traders watch price movement moment tomoment, swing traders normally base their timing decisions on end-ofday chart patterns. The two-to five-day window is based on the theorythat a day’s trends are revealing. This means that the opening and closingprice, the trading range and the breadth of that range (distance from topto bottom price) are all important in executing a swing trade. For example, one day might have an opening and closing price close to the day’shighest and lowest price levels; and another day might have very littlegap between opening and closing price, but demonstrate a lot of actionin between, with prices moving far above and below the actual open andclose price levels.A “swing” is a change in direction. So a stockthat has been trending upward will swing to thedownward, and vice versa. A swing trader uses theuptrendcharting techniques involving open, close, anda movement in astock’s price totrading range to recognize when such swings arethe upside; formost likely to occur. Daily volume is also signifiswing traders, anuptrend is definedcant in the mix of signals that you will come to deas three or morepend on in developing your swing trading strategy.consecutive daysWithin this short-term daily trend watching,in which the closing price wasthe direction of each day’s price movement is alsohigher than theimportant. By definition, a swing is most likely toopening price.occur when the open and close of the stock hasbeen occurring in the same direction. This meansthat in an existing uptrend, the day’s close shoulddowntrendbe higher than the open for at least three consecua movement in ative days before the trend can be relied upon to putstock’s price tothe downside; fora trade into action. And when the price trend isswing traders, adownward, by definition, a downtrend requires thatdowntrend isdefined as threefor at least three days in a row, the closing price wasor more conseculower than the opening price. So the overall pricetive days in whichrange of a day’s history is not enough; the directionthe closing pricewas lower thanof price movement must confirm the apparentthe opening price.trend as well.
The Swing Trade Approach: The Strategy in a Nutshell
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Key PointThere is a distinct difference between traditional market primary and secondary trends on the one hand, and very shorttern price trends on the other. Swing traders limit their analysisto a two- to five-day window.
The uptrend and downtrend used by swingtraders are not the same as the more universally recprice rangeognized market trends. Technicians track trends inthe overall rangestocks as well as various indices and these are wellof a stock’s priceknown. They also use moving averages of variouswithin a singleday, from highestconfigurations to signal or anticipate major uptrendsprice attainedand downtrends. The short-term trends describeddown to lowestprice, and distinctabove and used in swing trading are entirely different.from opening andThis explains as well why swing traders usuclosing prices.ally stick to the complete trend of a single tradingday. When you first consider this guideline, it doesnot appear to make sense. A valid question may be, “Shouldn’t the decision be made when trading patterns are met rather than at the end of atrading day?” The answer, of course, is that any strategy should be as flexible as you need it to be. There is no hard-and-fast requirement that trading occur only when a day’s trading has been completed. However, swingtraders have discovered that while their timing of trades may be flexible,the complete day is most revealing. Patterns emerge during a trading daybased on the time of day and overall direction of the market. Many technicians, for example, give great importance to trends established in thefirst hour, or the first two hours. A specific stock’s final hours of tradingmay be largely influenced by overall market trends on the day.In order to establish the trend for purposes of swing trading, the fullday is considered the template and also makes comparisons uniform.This is always useful in any type of price analysis. In addition, anotherimportant type of signal may be found between the close of one day andthe open of the next day. Swing traders, like many other