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There are three basic ways you can make money as a swing trader.

You could trend trade, you could range trade, or you could do both.

Trend trading tends to yield more profits than range trading, but range trading tends to have a higher win ratio. In other words, you will make smaller profits per win when range trading, but you will have more wins.

Ultimately, you can make good money either way.

As a trend trader, your job is to identify those securities in the beginning stages of a trend and then ride that trend for profit.

You want to enter an established trend as early as possible and then exit quickly when you see signs of the trend coming to an end.

Keep your stop-losses tight.

When screening for bullish trends using a top down approach, first look for the top performing industry groups. You can do this with popular research services such as Daily Graphs, HGS Investor, Morningstar, or Investor’s Business Daily.

Then, within those top two or three industry groups, filter for stocks making new 52-week highs. Look for those that are just coming out of a trading range. The longer the security has been in a trading range, the more explosive the trend is likely to be.

To identify a trending security, you can either eyeball it or use the ADX indicator. When a security’s ADX reads over 20, it is considered to be in a trend. The higher the ADX reading, the stronger the trend. However, if the reading is too high, 40+, for example, it can signal that the end of the trend is coming.

Securities making fresh new highs in the last 26-days are the best candidates. Do not buy trending stocks that have been making new 52-week highs every other day. They are more likely to be overextended and you will be buying in late.

Once you’ve identified a good candidate, wait for a signal to enter the trade. Chart patterns give earlier warning, but technical signals require less interpretation.

Another option when going long on a trend trade is to enter on a day of strength. This is characterized by three consecutive candlesticks of declining highs. Then you enter on the next bar that trades higher than the previous bar’s high.

Whatever signal you choose to enter on (a chart pattern, a technical indicator, or the day of strength), it is important to only enter either on the day or the day after the signal is given.

When exiting a trend trade you need to consider when to take profit and when to cut losses.

One way is to exit based on a technical indicator. For example, when there is a MACD crossover or if the security falls below its 9-day moving average.

You could also exit based on the security’s price level. For example, if the price falls back into the trading range then the trend has likely failed and you should cut your losses. You can place a stop-loss just below the resistance level the security broke out from.

If you enter on the day of strength, then your stop-loss should be based on the low directly preceding the day of strength.

When setting your stop-loss, set it right below major, whole, round numbers. This will make it more likely that your order will be filled since many other traders will be using those more obvious numbers for their stop-losses.

As a range trader, you are looking for securities that are oscillating between a defined range.

The big advantage of range trading is that profit and risk objectives are easily defined.

Unfortunately, screening for securities in a trading range is not as easy as finding those that are trending.

When doing your search, look for those with an ADX reading below 20 and with support and resistance levels that are flat and easy to identify.

You also want to make sure that the range between the support and resistance levels is wide enough for you to make a decent profit. For a stock trading below $100, you want the trading range to be at least $5.

You can gauge the strength of a trading range by looking at a couple of factors:

• Time: The longer a security has been in a trading range, the more likely it is to continue
• Touches: The more times a security touches support and resistance, the more reliable that support or resistance level is. Look for a minimum of three touches.

You can enter a range trade based on a day of strength as explained before, or on a technical signal. Ensure you are using the correct type of technical indicator for range trading, i.e., stochastics or RSI.

Your target profit in a range trade is the opposite side of the trading range. So if you buy near support, you want to exit just below the resistance level.

Set your stop-loss just below the support level, just not on a major, whole, round number.

Whether you trade trends or ranges is a personal decision. It mostly boils down to what style of trading you prefer.

However, the overall market can determine which type of trading is easier at any given time.

When the overall market is in a bull phase, finding trends is easier.

When the market is stuck in a trading range, finding trends will be harder and range trading might be a better option.

And if the overall market is bearish, you might consider not trading at all, or exploring trading trends by going short.

Intermarket analysis is when you analyze all types of securities (equities, bonds, currencies, and commodities) to determine which market holds the most promise.

The markets are often (but not always) correlated. An upturn in one can signal a pending upturn or downturn in another. For example, rising bond prices usually precede a rise in the equity markets.

On the other hand, rising commodity prices usually means that equities will fall.

If the U.S. Federal Reserve raises interest rates, the dollar is likely to strengthen. Conversely, the larger the national debt, the weaker the dollar becomes.

A strong US dollar is good for US stocks and bonds.

A weakening US dollar will see a rise in commodity prices. A common way to take advantage of the commodities market is to buy shares of ETFs that track different commodities.

Bond prices are sensitive to inflation. A poor Consumer Price Index report will cause bond prices to fall, and a low inflation report will usually see an increase in bond prices.

As bond prices rise, bond yields fall and stocks become more attractive for investors. Conversely, falling bond prices will often lead to stock price weakness.

Relative Strength Analysis (also called intramarket analysis) allows you to compare securities within the same market so you can judge which securities are truly strong.

It involves charting one security or index relative to another, and can be used in a wide range of securities (equities, industries, commodities, etc.) Most charting programs allow you to do this easily.

When doing this, make sure you are making meaningful comparisons. Comparing Apple to General Motors, for example, makes no sense.

A good way to use this analysis is to compare the global markets. Here are the tickers for indexes you can use for comparison:

• SPY (US)
• IEV (Western Europe)
• EWJ (Japan)
• ILF (Latin America)
• FXI (China)
• EPP (Pacific Asia excluding Japan)

Once you have decided on two markets to compare, construct a ratio chart and then analyze it like you would any other security. Apply technical tools, look for support and resistance, and determine whether the ratio is trending or not.

You need to determine which market is outperforming the other. A rising ratio means the market index in the numerator of the fraction is outperforming the market index in the denominator of the fraction.

You can also use relative strength analysis to compare industry group performance to the overall market. This allows you to determine the strength of a specific industry. A rising ratio means there will be promising long opportunities in that industry.

Read the next chapter here.

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