Everyone that invests in the stock market is a trader. Even if they only buy and hold. In fact that's how all of us got into the positions we're holding today. We traded money for stock. Someday most of us will reverse this process and trade the stock we own for someone else's money. That's the nature of this business.
I've been around traders for a long time and I've generally found that no two traders are alike. What distinguishes them for me is not what they trade or even how often they trade. The difference is how long they hold a stock.
I've been around traders for a long time and I've generally found that no two traders are alike. What distinguishes them for me is not what they trade or even how often they trade. The difference is how long they hold a stock.
“Average investors who try to do a lot of trading will only make their brokers rich.” |
The ones that hold their shares for only a few hours are generally referred to as day traders, and I like them. A lot. Mainly because they tend to lose a lot of money. Others that buy and hold their shares forever are the ones I refer to as the "buy and hope" traders. They hope their stock will go up but it really doesn't matter to them because they'll never sell anything anyway. They like to take comfort in the fact that they think they're the "owners" of the company. They're the stock donors for the short sellers.
Everyone that falls in the middle of these two groups is either a swing trader or an active options seller. This group tends to use a select group of price, volume or momentum indicators to determine if a company's stock is over bought or over sold. This group is actually proactively managing their accounts on a daily basis. They are the entrepreneurs. They are businessmen.
"Buy on the cannons, sell on the trumpets." |
Some swing traders and options sellers trade in and out of stocks and options over a period of months or years while others trade over a period of just a few days. One thing is for sure. They all do it in very similar ways. The swing trader's goal is to buy stock when its price is low and sell stock when its price is high. The options sellers goal is to sell cash secured puts when the price is low and sell covered calls when the price is high. They both use every advantage of their favorite technical indicators to find their particular edge for their style of trading. They trade in and out of stocks/options according to their own level of trading comfort.
Since swing traders/options sellers make trading decisions based upon price, volume and a few of their favorite momentum indicators, and since these same indicators are independent of the time frame of the chart being used, swing traders/options sellers at all levels of the trading spectrum are conducting their business similarly. The one thing most swing traders/ options sellers have in common is that once they become comfortable trading in one time frame, they use the chart of one time frame lower to support their trading decisions. For example, a swing trader/options seller who is comfortable with executing trades on a monthly basis will generally use the weekly charts to make their decisions. Personally I like to trade weekly so I obtain most of my data from the daily charts to make my decisions. Those traders that feel comfortable trading on a daily basis will use hourly charts.
A successful swing trader enters a stock when it’s oversold and exits a stock when it’s overbought. He’d then short the stock when it’s overbought and cover his short once it becomes oversold. A true swing trader wouldn’t be able to trade an extensive list of stocks because the time required to concentrate on and monitor more than a select few volatile stocks would be overwhelming. Buying a stock and only checking on it’s earnings, profits and dividends every three months can only be done by an investor that swings over a period of years or decades and relies on the stock’s P/E ratio as his swing trigger. It’s not something a short term swing trader does and it’s definitely not what a day trader does.
I'm more of an options seller and I use many of the same ideas and methods that a swing trader uses when I’m buying and selling options. For the most part I use the same ideas that a swing trader uses on a weekly basis when I’m selling options. The information I’m looking at is price, volume and a couple of momentum indicators The main difference between myself and a swing trader is that when a swing trader would go long by buying stock, I’d go long by selling puts. Where a swing trader would go short by selling or shorting stock, I’d sell covered calls on the positions I already own. The swing trader is always buying and selling equity while I’m always selling the option premium for income. The result is that in a fast moving market the swing trader may make more money than the options seller, but in a flat market the option seller will make more money due to the deteriorating premium. I’ve learned over the years that there are vastly more flat markets than volatile markets so the probability of success is with the option seller.
For the most part and for the biggest part of my portfolio, I’m a buy and hold type of investor which is a swing trader with a trading time frame consisting of months, years or even decades. I spend so much time trying to decide which stock to buy that once I finally make the decision to purchase a stock, it becomes hard for me to sell it as long as it continues to perform as I had originally expected. The price of the stock may become overbought or oversold at times but if revenue, profits and dividends continue to increase over time, I have a tendency to simply hold the stock, collect the dividends and sell the options rather than swing into and onto of stock and paying the taxes on the trades. This becomes even more important to me as I get older and dividends and options become more and more important in increasing my investments and supporting my lifestyle.
I'm more of an options seller and I use many of the same ideas and methods that a swing trader uses when I’m buying and selling options. For the most part I use the same ideas that a swing trader uses on a weekly basis when I’m selling options. The information I’m looking at is price, volume and a couple of momentum indicators The main difference between myself and a swing trader is that when a swing trader would go long by buying stock, I’d go long by selling puts. Where a swing trader would go short by selling or shorting stock, I’d sell covered calls on the positions I already own. The swing trader is always buying and selling equity while I’m always selling the option premium for income. The result is that in a fast moving market the swing trader may make more money than the options seller, but in a flat market the option seller will make more money due to the deteriorating premium. I’ve learned over the years that there are vastly more flat markets than volatile markets so the probability of success is with the option seller.
For the most part and for the biggest part of my portfolio, I’m a buy and hold type of investor which is a swing trader with a trading time frame consisting of months, years or even decades. I spend so much time trying to decide which stock to buy that once I finally make the decision to purchase a stock, it becomes hard for me to sell it as long as it continues to perform as I had originally expected. The price of the stock may become overbought or oversold at times but if revenue, profits and dividends continue to increase over time, I have a tendency to simply hold the stock, collect the dividends and sell the options rather than swing into and onto of stock and paying the taxes on the trades. This becomes even more important to me as I get older and dividends and options become more and more important in increasing my investments and supporting my lifestyle.
The above article includes many of the ideas originally published in the article "Swing Traders", dated 29 September 2013. For that article and many other interesting articles, please click on the "MORE INFORMATION" button below.
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