Swing Trading for Dummies Summary (C12): Swing Trade Walkthrough

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This chapter will take you through all the steps of making a swing trade using a top-down analysis.

There is no one correct trading strategy. This is merely an example. Use it as a template to create your own workflow using the strategies and methods you prefer.

When you size up the market you are taking a look at all the individual types of securities and assessing how they will affect each other.

This includes equities, commodities, fixed income, currencies, and others.

You do this because all the different markets are correlated.

You also want to take a closer look at the specific market you are trading. For example, if you want to trade equities, you will want to determine if growth or value stocks are in favor, which industries are on the rise, which market cap ranges are doing well, and so on. Do this using relative strength charts.

Specifically, look for short-term trends in the daily charts. Are the major indexes (such as the Dow Jones and S&P 500) trending up, trending down, or in a trading range?

Also look at longer-term trends on the weekly chart. Ideally, you want to trade in the direction of both the long-term and short-term trend. However, if they don’t align and you want to trade anyway, as a swing trader it is best to go with the short-term trend.

Sam’s Note: Another way to quickly size up the equities market is with Finviz. See chapter 9.

Stick to buying stocks within the leading industry groups and sectors. This increases the chances that the stock’s price will increase with the overall market.

Investor’s Business Daily (IBD) ranks all the industries and publishes it. Focus on the top two or three industries from that list.

Sam’s Note: Visit www.investors.com/ibd-data-tables and choose ‘Industry Group Rankings’. You can also look at the industries that are on a steady rise and near the top of the list, even if they are not in the top three.

If you are looking to go short, focus on the industry groups at the bottom of the list. You may want to do this if the market as a whole is trending down.

The first two steps are the main factors for picking winning trades, i.e., going with the market and choosing the right industry group.

After that, you want to increase your chances by analyzing individual securities.

Use fundamental analysis to select the securities, and then use technical analysis to time your entries and exits.

If you hate doing fundamental analysis, still do at least something. Even just quickly ranking companies by their current ratios or using IBD’s EPS rating is much better than nothing.

Here is a base screen you can use and build on by adding a specific industry and other fundamentals, such as:

• Stock price: >$5
• Average Daily Volume: >100,000
• Market cap: >$250 million

By using the above three indicators and adding a specific industry your list of stocks should be manageable. If it is too large, you can narrow it down further by adding additional filters such as:

• Relative volume: >1
• Current Ratio: >1.5
• Debt to equity: <30
• Interest coverage ratio: >5

Once you have your list, rank them by some measure, e.g. earnings rank, price to cash flow ratio, or return on equity.

Finally, go through the top stocks in your list to look for promising chart patterns and technical indicators. What you are looking for exactly depends on your pre-determined entry criteria. Make sure it is a very clear and current signal. Anything ambiguous or that happened over 24 hours ago should be skipped.

Additionally, when you find a promising security to trade, check when its next earnings report is due. If it is within the next two weeks, skip it. Holding a position during a stock’s earnings report release is gambling. You have no idea how the market is going to react.

Calculate your possible loss by subtracting your stop loss level from the buy price (assuming you are going long).

Do the math to ensure the number of shares you buy will not risk more than 2% of your total trading capital.

Here are the formulas to calculate how many shares you can buy:

• Buy price - purchase price = possible loss per share
• 2% x trading capital = maximum allowable risk
• Maximum allowable risk / possible loss per share = number of shares you can buy
• Round the number of shares down to the nearest whole number

Sam’s Note: I personally use 1% as my total possible loss per trade, and 7% as my total possible loss from all trades in my portfolio. Additionally, I ensure no single trade’s total stake is more than 6% of my total trading capital.

See chapter 10 for more on position sizing.

If you are able to trade while the market is open and you want to add a little more value, you can use an intraday trading overlay to help time your entry.

If you trade outside market hours, use a limit order to enter near the closing price of the previous day.

As soon as your trade is executed, enter your stop loss order. Remember to enter it as good until canceled and never on a whole round number.

Record all your trades in your trading journal.

The more detail you enter the more helpful it will be. However, the longer it takes, the less likely you are to stick with it, and you need to stick with it.

Find your balance.

See Chapter Three for more information on what to include in your trading journal.

At least once a day you need to check-in on your open trades to see if they are generating any sell signals.

Your sell signals are predetermined by you and written down before you place the trade. It is in your trading plan and you must adhere to it rigidly.

You must know when to sell if your trade is profitable, unprofitable, or meandering sideways.

You can use tools such as stop loss orders, limit orders, trailing stops, and others to help automate things.

At least once a month, review your journal entries and look for ways to improve your trading plan.

Don’t force alterations to your plan. Look for patterns in both your winning and losing trades and adjust it only in response to those patterns.

Read the next chapter here.

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