Category: Technical Analysis

Swing Trading Fundamentals

by adminTechnical Analysis4 Comments on Swing Trading Fundamentals

What is swing trading?

I am sure that a lot of you have heard the term swing trading. For me it is a cool trading strategy, where you take advantages of market fluctuations. Unlike day trading, where you do not want to keep the stock at the end of the day, with swing trading you hold the stock for an extended period (usually 5 – 20 days, or even more). According to Investopedia.com the holding period can range between a few days to several weeks.

Why is it so appealing?

The initial time investment to find the right stock that experiences big fluctuations in price is large. But later you can invest 30 minutes to 1 hour in the evening to plan your orders for that week/s. Then you set your opening order, stop loss and take.

When the market opens you interpret what is happening with the stocks and you determine if you want to proceed with your orders.

I usually find a stock that had a significant loss or where the uptrend is due to some report. When I have interesting stocks, I try to read a bit about the situation. Also I try to find apps that report on these stocks. This helps me filter out the stocks. Mainly you do not want to invest into a company that is failing.

If you look at the stock graph below, it is visible that the stock has some level of support when it is good to buy it and some level of resistance when one should sell it. You can use technical analysis to determine where a good point is to buy. But keep in mind, past performance is not a indicator of future performance.

If we focus on a smaller period it is visible that you can make money by buying the stock when it reaches the red line and selling it when it is near the green line. Also, it is noticeable that the stock has a swinging behaviour. It is going from a high to a low and vice versa. This is why this type of trading is called swing trading. Because you are trying to take advantage of the swing of the stock price. These green and red lines are just a representation of technical indicators.

Pros and Cons

It is visible that you can open a position on Day 1 and on Day 3 have a profit of 10-20%. The negative side is if you do not know when to sell, your profit quickly diminishes.

You also do not pay that many fees like day trading. Unlike day trading you do not have to constantly monitor your stock.

Conclusion

Looking at Swing Trading it is visible that it offers a time efficient way to profit from price change in the short-term. Imagine you invest in a stock in January, by February the stock price has risen by 30%. In July it drops to the initial 10% increase. At the end of the year the annual price increase is 15%.

In the case that you invested only in January your profit would be only 15%, but in the case that you tried to follow the swing of price, your profit would have been a lot bigger.

Resources:

[1] – https://www.investopedia.com/terms/s/swingtrading.asp

[2] – https://www.etoro.com — Graphs were take from eToro

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Buying Long and Selling Short

by Igor JakovljevicTechnical Analysis1 Comment on Buying Long and Selling Short

Introduction

When I started to research the topic of investing I always heard terms buying long and selling short. I was not sure what do they mean. For me selling short was too abstract to realise what it actually means, is it selling the stock the you own? Is it betting that someone is going to sell stocks?

The other option “Buying Long” was also not clear to me. First I thought this has something to do with value investing or with opportunity to buy stocks. I was never sure what it actually is.

In this post I will try to explain what these terms are

Buying Long

Let us start with an example for the expression “Buying Long”. Imagine you buy 10 shares of Verizon (VZ) for $40. In the investing world the term used is “Opening a Buy Position”. Then you wait some time and the stock prices rises to $41 and you decide to sell your stock. Well you are not selling your stock, but you are “Closing a Buy position”. In a perfect world (where you do not pay fees) you would make 10 dollars on those 10 shares if you decide to sell them. This is where the idea comes from that if you buy shares at a low price and sell them high (buy low – sell high) that you can make a lot of money. This idea is great in theory but it is hard to execute it in reality. The buying part of the expression refers to this concept of exchanging something that you own for something that you think is valuable.

So we have covered the term buying, but what is with the “long” part of the term. Well according to investopedia, a long position refers to the purchase of an asset with the expectation that it will increase in its value. This just comes from the investment world. If we translate “Buying Long” to normal terms you get the simple explanation.

Buying long is just buying an asset with the hope that after a “long” period of time it will return more than you have invested.

Buying is in investing terms the action of opening a position with the presumption that the price will increase.

Selling Short

The second method is “Selling short” and as previously we start off with an example. To avoid common misconceptions, selling stocks is not actually selling stocks that you own. You are “Opening a Sell Position” on a stock. This means that you do not have to own the stock, before opening a sell position.

When you “Open a Sell Position”, you borrow 10 stocks from your broker and sell them immediately. This means that at that moment you do not own the stocks that you borrowed, but you have the money for which you sold the stocks. Then you wait for the price of the stock to drop below the price that you sold them for, and you buy them in order to return them to the broker.

So if you “Open a Sell Position” for 10 Verizon stocks for $10. You immediately sell 10 Verizon stocks for 10$ each. Then you wait until the price of Verizon is less than 10$ and then you “Close the Sell Position”. In this case if the price was 8$, you would buy 10 Verizon stocks for 80$ and return them immediately to the broker and you keep the 20$ difference between the sell and buy price.

Now you are thinking, but where is the stock selling and why is it called selling short?

Each broker charges interest for every day that you owe the borrower stock. This pushes you to close the sell position as soon as possible. This is why selling is associated with the term “SHORT”.

You are basically borrowing stocks that you do not own and selling them, with the intent to buy them when they are cheaper and return them to the issuer of the stock loan.

What could go wrong? Well many things, imagine you borrow 10 stocks of company A and then sell them for 10$ each. After some time the price of the stocks jumps to 50$. You now have to buy 500$ of Stocks to return the 100$ stock loan. You might think, well okay I will wait until the stock price goes down. While you are waiting you do not have liquidity and you have to pay fees for the stocks that you borrowed, trust me this is not fun.

Also the issuer can request the return of the stocks at any time with minimal notice. This is why you usually keep the borrower stocks for a short period of time.

Conclusion

Looking at just these two basic terms it is visible how hard it is start investing in stocks or other investments. Going long is buying stocks and holding them for a longer period of time, with the hope that their price will increase. Shorting stocks is making profit on the decrease of stock price.

Another interesting thing is that going long or shorting are just terms coined in the investment world.

If you want to know more about swing trading or simple technical analysis, you can read the following blog posts:

Swing Trading Fundamentals
How to use the Williams Percent Range (%R)

Sources:

[1] https://www.investopedia.com/ask/answers/05/shortsaleclosed.asp

[2] https://www.investopedia.com/terms/l/long.asp

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How to use the Williams Percent Range (%R)

by Igor JakovljevicTechnical Analysis1 Comment on How to use the Williams Percent Range (%R)

Technical analysis is used to determine when to buy or sell stocks, there are different indicators that can be used for this, but in this post I will talk about the %R indicator.

What is the %R indicator?

One of the first indicators that I found when searching for technical analysis was the Williams Percent Range or %R indicator. This indicator tracks the momentum of a stocks price and describes if it is oversold or overbought. It can be used to determine when to enter or when to exit a market. That is when to buy stock or sell them.

Oversold means that too many traders have opened a sell position on the stock and expect that the price is going to drop even more. This has decreased the value of the stock and it is a good moment to buy the stock.

Overbought means that traders have bought so many stocks that the price of the stock has risen. When this happens there is a chance that the price will drop and normalise.

How to use the %R

The William %R moves between 0 and -100, when it is above -20 (from -20 to 0) then the stock is overbought, when it is below -80 (from -80 to -100) then the stock is oversold.

On the picture below you can see how the indicator moves from oversold (pink area) to overbought (grey area). But what does this mean for an investor?

When the %R is overbought (grey area) it is a good moment in time to sell the stock and vice versa. When the indicator exits the pink area or is in the pink then you should buy the stock.

wiliams indicator graph simple

But oversold and overbought do not give 100% sure indication of trend reversal. They simply mean that the price has reached a high or a low in comparison to previous data. But when a price reaches a low it can mean that it will revert to a uptrend.

In order to have a better idea when to sell or buy, you should always use more indicators.

Example of Usage

Below you can see what I did in the case of this stock. At “Point 1” I saw a good indicator that the market is going to turn, because the stock was oversold. I bought $500 worth of stock, the stock jumped by 1.4%. At “Point 2” I sold my stocks and make $7 in a matter of 4 minutes. Then at “Point 3” I bought the stock because I though the trend is going to jump high, but it just jumped by %0.4, but this time I invested $507, so I earned an additional $2,028. Then my 30 minute slot for trading a day was gone, so I had to stop trading.

Conclusion

Like many other indicators it tries to predict future outcomes based on previous data, which does not work that good in most cases. Indicating that a stock is oversold or overbought does not mean that the price will reverse. It only means that it has reached the peak or bottom in comparison to previous data. It is important to use other indicators in combination with this one to make a better decision.

Take a look at the post about Swing Trading. You can use this indicator also for Swing Trading.

Sources:

[1] –  https://www.investopedia.com/terms/w/williamsr.asp

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