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Swing Trading

Consider not holding any positions through earnings reports, due to the fact that it's very difficult to know if the price will move up or down (therefore, it's gambling).

As a swing trader, you have the advantage of time. Compared to day trading, everything is slowed down

As a swing trader, you’re looking for stocks that you expect to move in a relatively predictable manner for a period as short as overnight to as long as several weeks or more

Like a day trader, swing traders should be picking stocks that other investors are also picking.

  • a swing trader should always be going with the flow, especially if they’re playing momentum type trades.

Short selling is an important tool for a swing trader because stock prices usually drop much more quickly than they go up.

  • It is a commonly held rule of thumb that stocks fall 3 times faster than they rise, due to the fact that the fear of loss is much more powerful than the desire for gain. When a stock starts to move lower, shareholders fear they will give up their profits or gains and they quickly sell. This selling activity feeds into more selling as shareholders continue to take profits and traders start shorting
  • "Bulls take the stairs up; bears take the window down"

The question is not "how much am I going to make on this trade". The question to consider is, what is the upside and downside of this trade? "how much am I risking if I have to take a loss?"

  • To have a good trade setup, you should expect to get at least 2 times the reward in comparison to the risk that you are taking, which requires us only be successful with 60% of our trades.

As a rule of thumb, you should not risk more than 2% of the value of your trading account on a single trade

  • ex. if you have $100,000 dollars in your account, the most you should risk in a single trade is $2,000. If the stock price was $10, and our technical analysis led us to believe the downside was a loss of $0.25, while the upside was a gain of $0.75 (3x, making it a worthwhile trade), then we should buy a maximum of 8,000 shares ($2000 / $0.25).

Fundamental Analysis

Data points:

  • total revenue
  • earnings per share (EPS)
  • price to earnings ratio (P/E)
  • leverage: the amount of debt to equity
    • as a rule of thumb, less than 1 is good.
  • product pipeline: future potential growth driver
  • competitive advantages a company may have over competitors
  • conditions that might favor or disadvantage a particular
  • sector/commodity
  • company management
  • peer-to-peer comparisons
  • regulatory environment and pending changes
  • short interest
    • although companies with high short interest reflects an indication of market sentiment, a good day for this stock will quickly become a great day as the short sellers are squeezed out of their position, pushing the stock even higher.
  • hot sector manias
    • think of the Blockchain mania that occurred in 2017. Companies announced plans to adopt Blockchain into their service, which was a signal of opportunity to investors, causing the stock price to rise. It was therefore somewhat predictable that most companies making similar announcements would also experience similar bumps in their stock price.

Trade journal

Maintaining a trade journal is critical for allowing you to methodically plan out each trade with as little emotion as possible

By maintaining a trade journal, you will plan each trade you intend to enter, including the entry price and the price that you will exit the trade. There are 2 possible outcomes on the exit. You will either take a loss because the trade did not work the way you planned or you will book a profit.

Data points to keep track of:

  • date
  • market internals: i.e., conditions overall, S&P, Nasdaq, industry
  • sector
  • source of trade idea
  • reasoning to enter trade
  • sector alignment: is the trade you’re considering aligned with the
  • market and sector direction
  • technical indicators including RSI and MACD values
  • check for upcoming events to avoid holding through
  • entry price
  • stop price
  • target price
  • a risk to reward ratio > 2
  • actual entry price
  • actual exit price
  • profit/loss
  • comments: whatever seems relevant to you at the time, this may include notes on the trade as well as your execution and your level of confidence versus the actual trade result

Web-based tools: Tradevue, TradeBench and Edgewonk

Resources

  • FinViz (Financial Visualizations)
  • ChartMill
    • The site has a proprietary rating feature that gives a grade on a stock’s situation and rates the quality of the setup if a trader is considering entering a position
  • StockCharts
  • Estimize
    • The site has an excellent calendar which can be used to see the upcoming company, government and industry announcements that might move individual stocks, market sectors or the market overall.
  • StockTwits
    • Although there are many worthless posts, the site does offer a way to see what is trending and actively trading
  • CNBC
  • Yahoo Finance
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