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Short Term Trading Methods

After reviewing the Short-Term Tutorial, you understand that short term swing trading involves putting on two simultaneous orders, a buy stop and a sell short stop order to get you into the trade. There are three different methods to determine exactly where to place the stop orders.

Originally, we thought that if a stock is to break to the upside, it has to take out yesterday's high. Likewise, if it is to break out to the downside, it has to take out yesterday's low. Thus, the Original Swing Trading Method sets the stops at or close to the highs and lows of the previous bar. You can set the exact level by using a dollar or percentage amount above or below the actual highs and lows by changing the text boxes.

The defaults are set at zero.

One customer felt that if a stock had a low of $50, a high of $55 and a close of $54, that setting the breakout levels at yesterday's high and low was not fair. The high level would mean the stock had to move up $1 and the low level would mean that the stock would have to move down $4. He felt that the breakout points should be plus or minus a certain percentage of the daily range.

Thus, a new method, called the New Swing Trading Method set the breakout points at a percentage of yesterday's range. For example, in the above case, the range was $5 ($55-$50). Using the default of 30%, would create a breakout point at 30% of the range (30% of $5 = $1.50). The buy stop would be set at $54 plus $1.50 or $55.50 and the sell short stop would be set at $54 minus $1.50 or $52.50. When we experimented with this method, we did not find any major improvement. The only recommendation is to not set the percentage too low, because this tightens up the stop levels and allows more whipsaw action to take place.

Finally, a third method of setting the stops is available. This method uses pivot points called Breakout Trading. A pivot point is a point of support or resistance where the stock stopped going up or down. For example if you hold up your right hand and each finger represented a trading day. The center finger is the highest and the top of that finger would represent a resistance level where the stock could go no higher. Likewise, holding your hand down, the center finger would represent a support level where it could go no lower. The breakout method uses these pivot points to set the buy stop and sell short stops. This method is different than the above two methods in that it uses multiple days to calculate the breakout points.

Our experience with using the three different methods is that the Breakout method is the most effective. It has the least number of whipsaws because the breakout points tend to be wider apart. A drawback to this method is that the risk levels are higher. This is because the difference between the two stops is normally wider than the first two methods. As a result, when one stop is executed and you are in the trade, the other stop, that now acts as a protective stop is usually further away than in the other two swing trading methods.

One final note is that if there is sufficient data to effectively use the seasonal portion of the program, you should use that information to give you a good indication of a likely move rather than use the swing trading methods. Any type of analysis that uses lots of data will most likely give you better results than using a method that uses a limited amount of data.

The best swing trading stocks are those with a roller coaster appearance and big body candlesticks. They are stocks with a lot of uncertainty such as a new IPO, where you have insufficient data for either the long-term or seasonal analysis. They are highly speculative stocks that are capable of big sudden moves.

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