How to Successfully Swing Trade – Part 1
One of the fundamental ideas we base our research around is the relatively static nature of the ‘human factor’, or more simply that human behavior rarely changes. What changes are the markets, and we are buying and selling at extreme moments of either fear (we’re buying) or greed (we’re selling).
There are two extremes on the spectrum of trading that many people choose to follow: buying and holding and day trading. While buying and holding may be preferential for long-term investors who are inactive in the market on a daily or even regular basis, in reality it ties up your money and can trap you in a bad situation if the market starts to significantly decline. On the other end is day trading, and for the average trader outside of the professional trading desks this can an incredibly competitive arena. Without those extensive resources at your disposal it makes it all the more harder to secure consistent gains if you’re managing your own money
What we focus on, and what we believe is the perfect middle ground, is swing trading. Between inactivity and constant activity, swing trading enables you to allocate your money into several trades a week to take advantage of current opportunities in the market without ensnaring all of your capital and without chaining you to your computer.
Learn more about swing trading by clicking here. Discover the strategies and tools necessary to quantitatively swing trade like professional money managers.
Beyond the advantages of flexibility and maneuverability, swing trading stands out because it allows you to trade the market regardless of whether it’s up, down, or even sideways.
For the first part of this series, we’ll start with one of the core rules surrounding our swing trading philosophy: buying above the 200-day simple moving average. The most common of moving averages, the simple MA is the arithmetic mean of the most recent series of data – in this case the last 200 closing prices.
The 200-day moving average is a quantified long-term indicator of trending markets. In this long-term view markets that are currently below their 200-day MA are more often than not in a long-term downtrend, while those above their 200-day MA are usually in a long-term uptrend. Some people think they’re taking advantage of a good opportunity by buying a stock that’s plummeted and continues to drop below its 200-day MA on the hopes of a reversion. Historically, once a stock crosses below its 200-day moving average the edges all but disappear. We’d rather be buying stocks in a long-term uptrend, wouldn’t you?
As with stocks, our research has shown through historical back-testing that greater edges exist selling or shorting ETFs below their 200-day MA, and buying above it. As these securities approach the 200-day MA in trading, the only thing that increases is the volatility of the returns, while the average gain per trade or percentage of winning trades sees little upside.
We strive to statistically-quantify any edge that may exist out there as we investigate behavior patterns out in the markets. The 200-day simple moving average is a steady indicator of whether a trading vehicle or market is in a bear market or a bull market. From the largest banks to hedge funds and investment advisors, the 200-day MA is one of the most regularly used technical indicators available. This massive backing from all these influential areas of the markets, portfolio managers, analysts – the list goes on – is at root an established behavioral pattern. And because of this, we can take advantage of that edge as a swing trader.
Buying stocks above their 200-day MA and selling below is a key rule to ground your swing trading foundation. Trading with this indicator as a starting point can help you maximize your gains and, just as importantly, retain your capital. In the next installment of this series we’ll start to dive into the strategies you need to know to successfully swing trade. We’ll begin by discussing and looking at the specifics surrounding how you can increase your swing trading gains by buying on pullbacks.
Click here to read How to Successfully Swing Trade – Part 2: Buying on Pullbacks