Lessons from the Pros

Important Questions Answered on Trading Styles

Last week, my article focused on the differences, pros, and cons, of the three main styles of trading. Day, swing, and longer term position trading (investing) are all fine ways to speculate in markets, but they are very different from each other in many ways. While I often participate in all three styles, if I was forced to choose one, it would be swing trading. This is still a niche style that is less crowded than the other two. It is a time frame that is too long for the day trader yet too short for the longer term investor. There are other benefits to consider as well. Last week’s piece drew plenty of feedback and important questions. Today, we will answer some of those questions and look deeper into the issue of trading styles.

Hi Sam,

I have been an avid reader of your regular postings on Online Trading Academy for a while now, I really enjoy your articles on trading. In particular, I like the down-to-earth style you write about in trading. I have earnestly tried to follow whatever you have said and they have brought me success. In your last piece on trading time horizon, I too am a swing trader, never holding a position more than a month but never too short as well. I think once the trade setup is done with the proper stop loss or trailing stop, the system carries on its own without emotions coming to play. Thank you for affirming what I have being doing all these years. And keep those articles coming in. We all need them to jolt ourselves to reality sometimes!!! Fads come and go, the basics never die.

Regards,

R. M.
Singapore

Dear R.M. –

Thank you for the email and kind words. The last line of your email is something most people don’t realize until it’s too late. Somehow, you have figured out those key four words, "the basics never die," congrats on that. Most of my articles are in some way shape or form related to the irrefutable laws of demand and supply. After all, the movement of price in any and all markets is a function of an ongoing demand and supply equation. Trading opportunity exists when this simple and straight-forward equation is out-of-balance. My life’s work in trading and trading education is to quantify this equation on a price chart and show people how to take advantage of an objective supply and demand imbalance. At the core of any significant economic, political, scientific, social, medical, psychological or cultural theory lies a quest to understand and quantify the forces of change, action, or energy. The theories that attempt to quantify "force" that have stood the test of time date back centuries and are extremely simple. In 1686, noted physicist Isaac Newton suggested in his Laws of Motion that an object will remain in motion until it is met with an equal or greater force. Noted economist Adam Smith suggested hundreds of years ago that when supply exceeds demand at a price level in a given market, price will decline. Smith and Newton didn’t create or invent the laws and principles for which they are famous. Supply, demand, motion, and the relationships therein existed long before Smith and Newton, long before humans walked the earth for that matter. What these two individuals did however is look mass conventional perception in the face and challenge it with a reality that had been there all along ("The Basics"). They were able to discover what no one else had because of a belief system that allowed them to open doors others never knew existed. If you notice, Newton and Smith didn’t figure out one specific issue. They had a belief system (centered around "the basics") that allowed them to rather easily apply the core principles of their knowledge to a host of issues, producing answers the rest of the world still considers "ingenious" centuries later. Lastly, were Newton and Smith really saying anything different? I would argue that they were saying exactly the same thing. Both would have made great traders in my opinion. Thanks for the email.

Hi Sam,

I’m an Online Trading Academy grad and the one thing I haven’t gotten clear about swing trading is on what time frame do you do swing trading, and what moving averages are best to use? I plan to make swing trading my personal style of trading.

Thanks,

E. B.

Dear E.B –

Great choice on the swing trading. As I have said, day trading is fine, as well, but you are likely to find swing trading less stressful and time consuming. As for time frames, ideally you want a combination of a larger time frame and a smaller time frame. The larger time frame can be your daily or weekly chart. You will use this larger time frame to help quantify where price is in the larger time frame supply/demand curve. This will tell you what side of the market you want to be on, buying or selling (expecting higher prices or lower prices in the near future). In other words, if you are looking at a stock, for example, and current price is near a weekly demand level, there is probably a quality swing trading buying opportunity at hand. You would also want to use a smaller time frame chart such as a 60–minute chart (but no smaller) in your swing trading analysis. The reason for this is to pinpoint your entry price. Let’s go back to our example of a stock at a weekly demand level. By going down to a smaller time frame and taking an x-ray look at that weekly demand through the lens of a 60–minute chart, you should be able to reduce the risk on that trading opportunity by reducing the size of the stop loss. Focus on where the majority of the trading activity is in that demand level as that is where the turning point is likely to be. Thanks for the email.

Sam,

I read your article today re. three types of speculative trading (day, swing, long-term). I am new to trading and have been simulating day trading. My results are not good enough to start real trading.

My question is: Does swing trading require any different analysis (charts, reading, etc) than day trading? I was interested in your conclusion that you personally find swing trading the best for you. However the training that I have received has focused on day trading. If I went to swing trading, so I need different analysis techniques?

Thanks for your help and your articles,

B. L.

Dear B.L. –

Swing trading does not require a completely different type of analysis. Since you are comparing it to day trading, let me point out the small difference in analysis. When properly day trading, you will be looking at multiple time frames and making decisions very quickly, while the market is open and moving much of the time. This is fine for some people, but difficult for most. When swing trading, you must also look at the larger time frame / smaller time frame combination, but it’s a slower pace and you don’t have to perform your analysis when the market is open and moving. The advantage here is that performing swing trading analysis while the market is closed takes the emotion out of trading which often, is the biggest risk you will face. The techniques are no different. Find your demand and supply levels, assess the trend, then plan and take your trades according to your rules. Thanks for the email.

If you have any questions of comments, please email me anytime. Have a good day.

- Sam Seiden sseiden@tradingacademy.com