Alívio do IRS é maior para 17% das famílias

[Ulisses Pereira]

"Swing Trading for Beginners"


By Alan Farley
Special to RealMoney.com
09/16/2003 12:00 PM EDT


"So you want to be a swing trader. Get in line, because a lot of other folks have exactly the same idea. In fact, thousands of new traders try their hand at the market casino each year. Unfortunately, most walk away a little poorer and a lot wiser. But things could turn out better for you if you get it right from the get-go.


I've complied a list of the best questions submitted to me by new traders. I hope my answers will shorten your learning curve and get you on the road to profitability as quickly as possible. But good advice goes only so far when it comes to trading longevity. So slow down, take your time and make this intense discipline a lifelong quest.

My goal is to trade for a living, and I'll soon have the money needed for my account. I spent the last 13 months just watching the markets, paper trading and gaining the experience needed to avoid beginner's drawdown. What else can I do?

Pre-trading preparation takes you only so far, because there's a degree of risk-avoidance in the process. Paper trading lets you game and consider all the angles without actually losing money. But realize you will draw down, and you will lose money with real trades. You need to get used to that idea right now.

The problem is there's a lot about trading you won't understand until you place yourself at risk. So you have no choice but to jump in and learn the hard way. In fact, it's the nature of risk that determines your ultimate success or failure in the markets. I always recommend that new traders expose themselves to real losses as soon as possible, so they can get past the book learning of technical analysis and Trading 101-type lessons.

You'll find your losses have a much greater impact on your thinking and strategic planning than you can imagine or believe right now. In fact, they'll make you tone deaf and give you 10 thumbs. The trick is to survive long enough to wrestle that beast to the ground.


What is a good average return for swing trading? What percentage of my portfolio should I put to work on any trade?

No two traders are alike, nor do they approach the markets in the same way. Some folks do this part time and risk very small percentages of capital. Others do it full time and place a high percentage of equity at risk in each trade. Some have $5,000 discount brokerage accounts, while others manage large hedge funds.

Swing trading isn't an exact science or a system. It's a way to get an edge so you can profit from trades. Every swing trader chooses to enter and exit the market in a slightly different way. So the average returns are all over the map, from those who double their money every six months to those who can't beat the interest rates in their checking accounts.

Do you recommend a 1% or 2% limit on capital risked per swing trade? Is 5% too aggressive?

If you're an experienced and profitable trader, using a percentage of capital is a good way to manage risk. But if you're a new, semi-new or struggling trader, this isn't the best way to approach position sizing. Each trade setup has a size that's right for your risk tolerance. This is independent of your account size. Newer traders routinely take positions that are too large for their risk or knowledge level. In fact, their overall performance suffers when they take larger trades, because (a) they get so jumpy that good trades are exited too soon, or (b) they hold positions too long because they panic watching the wider swings and get the deer-in-the-headlights syndrome.

Is it realistic for a new trader to grow an account by 5% to 10% a month?

Returns of 5% to 10% a month are completely unrealistic for new traders. The question actually reflects a larger issue. New traders need to focus on the dynamics that generate price movement and not worry about making money. These processes take a very long time to understand. Trying to make money interferes with trading education, because it creates all types of performance anxiety issues. Learn to trade well, and the money will eventually follow.


How would you recommend trading an account size of $150,000?

You don't need all that money in your account to trade. In fact, it's more of a liability than a benefit for a new trader. You probably don't need any more than $35,000 maximum at your stage of development. All the extra money will do is demand you trade it and raise your risk above an acceptable level. As for how you allocate the money in your account, the answer right now should be "mostly cash."

Could you comment on what to look for on the ticker tape when taking a long or short position?

The bottom line is you're looking for convergence. Each trade strategy has unique characteristics that identify it on the price chart. The ticker tape adds another type of signature, and what you see should match the chart most of the time. In narrow range situations, there's really nothing to look at, because you're entering a dead market. In pullbacks, look for panic or overexcitement and a thin bid-ask. In breakouts or breakdowns, the tape should print lots and lots of volume, with price pulling away from support or resistance in a hurry.

How can I interpret the changing spreads I'm watching on Nasdaq Level II? How can understanding this tool help my trading?

I don't believe you can predict direction from Level II quotes (these show you all bid/ask spreads from market makers, not just the narrowest). The best thing you can do is to predict interest and liquidity. Different stocks have different personalities on the tape. Some stocks trade very wide price ranges for their float. The spread changes during different times of the year, as average volume fluctuates. Realize you're not seeing true supply and demand on Level II. Most exchanges and ECNs have ways to hide order size, so you're actually seeing a lie. The best way to use Level II is to trade against its directional movement, as long as it's approaching a key level on your setup chart.


Other than your excellent book, The Master Swing Trader, could you recommend your top five books?

Here are my five favorites:

Alexander Elder, Trading for a Living


Edwin LeFevre, Reminiscences of a Stock Operator


Robert Edwards and John Magee, Technical Analysis of Stock Trends


John J. Murphy, Technical Analysis of the Financial Markets


Stan Weinstein, Secrets for Profiting in Bull and Bear Markets

At what point can I think about increasing my share lots?

The problem is you'll trade differently as your risk rises. As you trade larger sizes, you'll get more gun-shy, and it will be harder to stick to your trading plan. You need to treat size and profitability as an entirely new trading discipline. Move slowly and develop a set of workflows for growing your risk, seeing how they affect your performance at each step. Since the price swing will be greater when you carry a bigger position, be careful, because the drawdowns mean something entirely different. If you find your profits aren't what you expect after you increase size, go back to small lots for a few more weeks or months.

Do you consider company fundamentals, the competition's charts and the tenor of the market in your analysis?

Only when I trip over them. Everybody looks at the market in his or her own way. I'm a technician and don't understand company fundamentals, nor do I believe in them. But it's a different story with market environmental factors. Cross-market convergence is extremely important to me when it comes to trade execution.

I've never seen fundamentals predict price, so I don't have a clue how we're supposed to trade them. As far as I'm concerned, value is way more subjective than a cup-and-handle pattern or a stochastics indicator. And how much profit growth is supposed to yield how much price movement? Price-to-earnings ratios are cyclical numbers that expand and contract through sentiment shifts much more erratically than put/call ratios.

I assume you consider candlesticks superior to other charting methods. What are the pros and cons?

I use candlesticks exclusively and recommend everyone else do so, because they're infinitely better than bar or line charts. The best thing about candlesticks is how they open a window into lower time frames. A single candlestick captures very detailed information on price action. Some might argue this can be done with a regular bar, but look at the comparative visual information between the two types. Candlesticks emit far more data and insight per unit.


Stocks seem to turn around right after I buy or sell them, or my stop gets hit. What am I doing wrong?

You're describing trader's disease. Price is attracted to the zone of greatest pain. That's the nature of the market. Additionally, you can't trade volatile stocks with tight or "scientific" stops. The reason is that all their support and resistance is channeled into three dimensions, rather than sitting at a single line in the sand. Price moves into neutral boundaries repeatedly in these stocks, with the sole purpose of shaking you out of the market.



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