2/07/2013

Swing trading and overall market direction

Swing traders operate in the context of overall market direction. Trending markets are good for breakout based methods. In trending markets there is constant buying pressure. One set of stocks or sector breakout and then follow through for couple of weeks and then pause. During these pause some reverse, some have low volume correction and some get in to volatile range.

The stocks that get in to low volume correction also in most cases go through range contractions. Once sufficient time of a week to 4 days has passed the equilibrium between buyers and sellers changes and there is another breakout as fresh set of buyers enter the market. That is where the second opportunity is for swing traders. This dynamic happens over and over till it stops working and stock reverses.

Swing traders who understand this dynamic try and focus n the first or second breakout once trend gets established. As trend in individual stock matures, the overall market trend also matures and at some stage breakout buying stops working. Also at this stage stocks start forming wider ranges as against orderly corrections.  This results in failed breakouts.

Sometime markets make big multi month or year moves. In those kind of moves individual swing traders also find bigger swings to play with. Bigger swings in markets tend to happen in first year of bull market after market had a big 30 to 40% plus kind of correction. As the overall market trends mature and we get in to third or fourth year of long running bull moves, the moves are often short lived. Which is what we have experienced in last year or so. The market moves in duration term are just few months. This often creates only one or 2 swing opportunity in stock for intermediate term swing trader.

Traders start reacting to these kind of markets by becoming shorter and shorter duration swing traders and some eventually become day traders. Some give up on swing trading all together and search for other methods. That has been the way market has been for over 100 years. It is like farming , some year give you bumper crop and in some year you just have to scrape through.

The key is to survive the difficult periods for your style without taking big losses. And also to not completely abandon your style. You can develop new methods to supplement your style but often your original methods work best after the underlying market circumstance change. 
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