Swing trading is one of the oldest and most popular methods for trading the markets. It was popularized by the legendary W.D. Gann in the early 20th century, who made millions on the stock market after defining his own unique set of rules and applying them to futures. Many books have since been written about this technique, each containing variations of the one overriding theme – identify a trend, wait for the pullback and hop on for the ride when it resumes.
Option Swing Trading takes advantage of short term moves in share prices and uses the leverage available in options to create an income stream with much less capital than would be needed if you were merely trading shares alone. Options also give you the ability to make money whether the move is upwards or downwards. You simply use call options for an upward swing and put options for a downward swing.
Option Swing Trading can be applied in either of two ways:
The first way is to wait for a strong price move in either direction, compare it to the size of recent historical moves and anticipate a short term reversal. The stock does not need to be trending for this strategy. You enter the trade at what you believe to be the extremity of the move, preferably after price action has been consolidating over at least 3 days. Once you enter the trade, the next challenge is to exit before the reversal blows itself out. You can often clean up with a tidy profit of greater than 50 percent on your risked capital. If you understand the advantages that can be obtained from using Vertical Debit Spreads in combination with this method, you can make excellent consistent profits with minimal risk.
The second way is to wait for a pullback on a trending stock. Using charting software, you draw trendlines under the “lows” if the stock is rising, or over the “highs” if the trend is downward. Trendlines help you decide whether the trend is weakening or not. If the trend is upward and you have drawn your lines under the troughs, you should also take note of the peaks. If the angle of the peaks is converging toward the angle of the troughs, the trend may be weakening so you need to be more careful. Same goes for a downward trend, only in reverse.
In short, you need to have some knowledge of stock chart patterns and technical analysis so that you can recognize opportunities and time your entry. Good trading psychology and self discipline are also essential. It is far better to patiently wait for just the right entry signal, rather than jumping in because you feel you have to be doing something. Same goes for your exit – accept a target profit and don’t be greedy. Greedy pigs end up in the bacon factory.
Option Swing Trading presents a number of advantages for the novice trader. It is simple to learn and can be undertaken “without giving up your day job”. You can make a significant income without the need for a lot of trading capital, as you would with share trading.