How Do You Identify Stocks that are Appropriate for Swing Trading?

All of the methods that are used to identify stocks that are appropriate for swing

trading are based on technical analysis. Technical analysis is a way of using

historical price/volume patterns to predict future behavior. It is not necessary to

have a detailed understanding of technical analysis in order to swing trade.

There are tools available that can assist investors at every level – from novice to

expert. While there are many sources of information and tools that help identify

swing trading opportunities, this book will focus on those provided at

www.mrswing.com. Once you understand the principles, you can explore other

sources of information.

What Tools are Available?

• Subscriptions services that provide daily swing trading recommendations –

www.mrswing.com offers a service called MasterSwings. Larry Swing uses

technical analysis and pattern recognition software (SwingTracker) to

identify candidates for swing trading. Every evening, subscribers receive emails

that identify several different types of patterns that are conducive to

swing trading. Aside from showing you the pattern, the email indicates the

current price, the entry price, the target (limit) price for taking profit, and the

stop loss price for limiting downside risk. This service can be used by

investors at all knowledge levels.

An example of a MasterSwings email alert for Lockheed Martin (LMT) is

shown on the next page. A candlestick chart shows the recent price action for

LMT, and a table indicates the closing price and all three action prices – the

price to buy (using a buy stop order), the target price which is 7% above the

purchase price (using a buy limit order), and the protective stop price which

is approximately 4% below the purchase price (using a sell stop order). The

20- and 50-day moving averages (MA) are also shown so that you can more

easily visualize the direction of the trend.

The rational behind these prices are discussed in the section entitled The

Master Plan.

Introduction to Swing Trading

To make money in the stock market it is necessary to have a disciplined approach to

trading. We also believe that it is also important to keep things simple. While our

goal is to keep things simple, the trading rules might initially seem a bit complex.

However, once you learn the rules and you trade with discipline, you will make

money in the stock market.

Swing trading allows you to make money when the market is bullish, or bearish, or

just going sideways. That is why it has a distinct advantage over other approaches

to investing. The goal is to make money, not to rest one’s hopes on the future of a

stock, a sector, or the economy.

4.1 What is Swing Trading

Everyone is familiar with waves. A wave alternates from positive to negative, then

to positive and negative, and so on. Waves are found in nature – you see waves

when you throw a rock into a lake. Sound is transmitted in waves. And when stock

prices change, they follow a wave-like pattern. The wave is rarely as orderly a sine

wave, but they are waves nevertheless, and we use these waves in Swing Trading.

4.2 Let’s Look at an Up Trends

The chart below shows the price movement of Myriad Genetics (MYGN) in an

uptrend. Notice that after the price moves up, it takes a rest, or pulls back. When

we swing trade an uptrend, we buy on the pull-back.

An uptrend can be identified by a series of higher highs and higher lows (the bottom

of each pull-back). In other words, an uptrend is a series of successive rallies with

each rally going higher than the previous one and each pull-back stopping above the

previous one.

The price movement looks more like the zig-zag of a saw blade than a sinusoid, but

once an uptrend is established the pattern tends to repeat itself. In swing trading

we capitalize on the predictability of the pattern. We buy during the pull-back to

increase our chances of making a profit.

The Steps in Swing Trading

First, restrict your selection to the universe of stocks that fulfill certain criteria.

Choose stocks that …

• Have a price of at least $7

• Have an average daily volume of at least 500,000 shares

Then …

STEP 1 – Identify a stock that is in an uptrend or a downtrend.

STEP 2 – For stocks in an uptrend, identify those that are experiencing a pull-back.

For stocks in a downtrend, identify those that are experiencing a pull-up.

STEP 3 – Once an appropriate candidate is identified, place a limit order to buy

(uptrend) or sell short (downtrend) the stock based on the Master Plan.

STEP 4 – Once a stock has been traded (a position opened), place a stop-loss order

to limit downside risk and place a limit order to identify the price at which

you will take profits. (Ideally, these two orders are placed together as an

OCO (One Cancels Other) order; this is sometimes called an OCA (One

Cancels All) order.

STEP 5 – At the end of each day, adjust the stop loss prices based on the Master

Plan.

4.5 What Can You Expect?

First – only a portion of your trades will be executed. The Master Plan is designed

to only trade stocks that initially move in the anticipated direction. If the

price moves in the opposite direction (continues pulling back or pulling

up), the trade is not placed.

Second – you will be holding positions for a limited amount of time. While swing

trading is not day trading, you are only holding positions until targets are

met.

Third – some of your trades will result in losses, however losses are minimized by

the Master Plan which raises the stops as the stock price rises; this is

known as trailing stops. Being disciplined, and following the Master

Plan will insure that profits exceed losses which means you will make

money.