A famous quote from Jesse Livermore: “It never was my thinking that made the big money for me. It always was my sitting…Men who can both be right and sit tight are uncommon.”
I begin with this quote because it touches upon a basic attribute of swing trading, that is, setting a relatively fixed framework for a trade (e.g. a thesis, a set up) and seeing it through to the end, regardless of the outcome. In other words, “sitting tight,” unless an adjustment, driven by reason and not sentiment, is warranted.
Another thing about swing trading as compared with longer term position trading is that the duration of a trade is relatively short, and the target, relatively close. Hence, it’s about setting the trade, waiting to see how it unfolds, and taking the first favorable (i.e. profitable) exit.
Fortinet (FTNT) presented us with a swing trading opportunity that somewhat exemplified this principle. Emerging from its V-bottom on June 3, FTNT advanced to the price of 77.32 seven days later [1], before reversing. Given that the broader US stock market had begun advancing, partly due to the Fed announcement on June 2 indicating the likelihood of future rate cuts, a swing trader might have viewed this is a good opportunity to go long.
By June 18, the charts indicated that the new swing low might be located at 74.44, which is around a 38.2% Fib retracement from the bottom of the current swing to the top. A breakout of [1] might then be a good entry point, with a stop a few points below [2].
The breakout at [3] did not look very promising, noting both the rejection from the top of the candle and the lack of volume behind it. Even worse were the following days where bearish volume picked up and resistance at [4] seemed to hold. Here’s where the “sitting tight” might have paid off.
Any responsible swing trader would have capped his or her risk to a favorable R% (e.g. 2% risk, or whatever might be manageable for that trader). If a swing trader had held steady, s/he would have seen FTNT slowly breakout and advance from the initial buy point. A reasonable and obvious target would have been at 84.07, the May 17 swing high, as shown at [5].
This was a pretty clear trade, though not all trades will work out (see our post analysis of our HACK trade to show how we deal with a failing trade). And that’s where sound money management principles come in, to manage losses which you know will happen. You also want to pick swing trade setups that have a favorable return/risk ratio, the trade scenario above having presented us with a ratio of 2.16-to-1.
The risk of loss in the trading of stocks, options, futures, forex, foreign equities, and bonds can be substantial and is not suitable for all investors. Trading on margin or the use of leverage is not suitable for all investors and losses exceeding your initial deposit is possible. Supporting documentation is available upon request. Trading futures, options on futures, and FX involves substantial risk of loss and is not suitable for all investors. Carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources and only risk capital should be used. Opinions, market data, and recommendations are subject to change at any time. The lower the margin used the higher the leverage and therefore increases your risk. Past performance is not necessarily indicative of future results.
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