How to make money swing trading

Swing trading as a style of trading has been as old as the market. It is based on fundamental nature of the markets. When markets or stocks move they move in momentum bursts. These momentum bursts are short term 3 to 5 days moves of 8 to 40% .  Momentum burst is structural tendency of the market and it exists on all timeframe and in all markets around the world.

Find a point from which as soon as you enter a momentum burst will start. If you can define such setup then you have an anticipation setup. And you will get very good low risk entry if the trade works. Research this approach if you are uncomfortable buying breakouts. Build on work by others in this areas before reinventing the wheel. Make comprehensive study of anticipation swing trading methods and then add your own sauce to it. That will give you an edge.

If you are comfortable buying breakout , then wait for stock to show the first hint of momentum burst by having range expansion and then jump on it. As breakout buyer you will miss the first few % of the move compared to the anticipation buyers. Research this approach if you are comfortable buying breakouts. Build on work by others in this areas before reinventing the wheel. Make comprehensive study of breakout swing trading methods and then add your own sauce to it. That will give you an edge.

If you want to make money swing trading understand the momentum burst phenomenon in significant detail. It might make you millions. 


Swing trading high priced stocks

High priced stock offer good opportunities for short term swing trades of 3 to 5 days. When they move they move in 10 to 25 dollar momentum bursts. This offers you an opportunity to risk say 1 or 2 dollar and try and capture a swing of 5 to 20 dollars.

MHK is an example of  recent trade like that. The stock had setup an orderly consolidation of 13 days. During that 13 days the stock was in a very tight channel with series of narrow gain days. On 19th November it had a range expansion where that days move was greater than previous 5 to 7 days. That was the entry signal and that is the day I entered in the afternoon. In next 3 days the stock went up 10 dollars from its opening price . I closed the trade yesterday capturing part of the 10 dollar move.

In order to find swings in high priced stocks you need to scan differently from low priced stock. I use a simple range expansion scan to find these. The scan basically looks for stock with range greater than last 3 days range. The scan throws a wide net from which one can select good setup.

The essence of swing trading techniques is to find an explosive short term move and enter it with very tight stops and exit before the momentum exhausts itself. For active traders the market offers thousands of such moves once you setup your scans and methods to find such moves. 


Using momentum pause for anticipation

PAYX is one of the stocks I am watching for breakout anticipation currently. The stock has a momentum pause.

When stocks establish momentum, they do not keep going straight. They go up for few weeks or days and then there is momentum pause as buying pressure decreases. When this happens the stock spends time consolidating.

These kind of setups are trend continuation or momentum continuation setups. The momentum reasserts itself and you often get next up leg.

It is easy to identify these kind of setups and anticipate a breakout on them. Once you setup a process flow to identify them, you can daily find 5 to 10 candidates like these. to find them you just need to focus on stocks with established momentum


What I look for in a short setup

NFLX is a short I initiated yesterday. I was watching it for couple of weeks for possible short entry.

NFLX was a market leader for last few years. Recently it missed earnings. That lead to a big volume drop . Which was followed by dead cat bounce on low volume. Yesterday that bounce attempt failed with range expansion on high volume.

Once a stock misses earnings after a big rally and a history of good earnings surprise previously, stocks tend to move in direction of the initial earnings reaction. On short side this effect gets delayed as bargain hunters buy on weakness.

It is too early to say whether the trade will work but these kind of failure setup after long rally have good risk reward potential.

In order to find them I look for stocks that had long periods in uptrend and that have recently dropped in momentum. (The momentum is calculated using 65 days Trend Intensity). Once the momentum shifts you have to find good shorting point.

A similar setup I am watching currently is SKX. After a multi month rally it recently had big volume drops followed by dead cat bounce. I have it on my short watchlist.


What I look for in a good IPO setup

Market action is dominated by 8 to 20% moves on 3 to 5 days timeframe. These are momentum burst or impulse kind moves where in a very short period of time stocks make a explosive move of few days. This same phenomenon also works on IPO.

To find opportunities like BOOT , I look for an IPO having a range expansion. The range expansion scan gives stocks that had bigger move than last few days of move. Along with range expansion I like to see a volume surge.

In ideal situation stock should close near high on breakout day. A stock that breaks out and say makes 1 dollar move on breakout day but intraday gave 50 cents of that move, is not something that I like to enter. If it pulls back say 25 cents after making high it is acceptable.

As you can see in BOOT prior to breakout day it was a negative day with stock down -.17%. I like to select stocks that had negative day prior to breakout day or a stock that is up less than 1%. I also avoid stocks that are up 3 days in a row prior to breakout. This ensures that the entry is at start of a swing move.

These kind of trades are typically of 8 to 40% magnitude and that move happens in 3 to 5 days time. To exit them I look for a price target of around 8 to 12%. If it is low priced stock then it can make even 20 to 40% move in 3 to 5 days as they tend to be more explosive. As far as possible I exit in t0 strength.

As we are entering the start of a momentum burst a tight stop can be used on these trades . If the trade violates the breakout day low the momentum is over and it is not worth holding it . So stop goes in at low of the entry day.

The market offers hundreds of such trading opportunities. Not every trade works like a charm like BOOT, but as long as half of them work and we keep losses small on one that do not work, it is ok. H

To find such trade daily on IPO you need to track IPO with less than one year trading history. Once you have that watchlist you can use a range expansion scan to find opportunities. If you set this up you can regularly generate your own trade candidates on your own. 


Loss of momentum

The market was over heated and in recent days there is some loss of momentum.

The sectors that were first to breakout out like biotech  and REITS are taking a pause or pulling back. But new sectors are breaking out so usual rotation kind action is happening.

One of the key thing to watch is small caps losing momentum. as a momentum trader small caps offer you best opportunities. when they move they can quickly make 10 to 20% move in days. However in last few days they have been losing momentum. If this trend accelerate then it will be cause for worry.

However based on daily  stocks in uptrend study on stocks using trend intensity,  I see ton of orderly pullbacks and consolidation. many stocks have started to pause after first up leg. These kind of continuation patterns have high probability of resolving to upside. Besides that the Trend Intensity universe is not showing signs of breakdown as of now. That means likely next up leg  for many of these stocks after a pause.


Stocks up 50% plus in a month above 20 tends to lead to correction

Stocks up 50% plus in a month above 20 tends to lead to correction /pullback in next small time frame. You can see it for yourself in the data. There can be delay of few days or 2 weeks but extremely positive readings on this indicators are short term bearish.

So far we have not seen a pullback or consolidation  but it is just a matter of time. When everyone is convinced this time is different, it tends to happen.

A pullback or consolidation will not likely be end of rally as the underlying setups are good. Lot of sideways action after first burst on many stocks. Plus dip buyers will ensure that it is shallow pullback.


To find big winner look at stocks that have doubled recently

There are around 7000 stocks in the market . If you are looking for a stock likely to double look for a stock that has already doubled recently from its 52 week low.

When a stock doubles from its low , in many cases  (but not all) there is a significant catalyst for such powerful move. That catalyst can remain valid for many months or at times years. If the move has such identifiable catalyst then those are the stock you can focus on for next part of the big move. Every stock that makes a 1000% move first has to  double.

If you use this kind of approach you narrow down the universe of stock to focus on to a small number of around 200 stocks in the market. That makes task of researching them easier. Within the 200 stocks many will have already made there big moves so they get eliminated. The one that recently doubled for the first time are the one worth focusing on.

You can set this up pretty easily in Telchart by using the scan:

 c/minl252>=2 and minv3.1>=100000

Once you get scan candidate you need to further research them to find the 5 to 6 good candidates with big catalyst.


Find setups that give you many opportunities

"One of the best things I've learned from this site is how many opportunities exist in the market. It takes away the temptation to go for the big trade. As long as I keep losses low and I keep throwing lines out I've done very well."

A Stockbee Member.

If you have a setup that gives you multiple opportunities for trade or if you trade a bunch of setup that together give you lots of opportunities to trade, then you can reduce your risk.

More opportunities allow you to make money without risking too much on single trade. You can risk little of your bankroll and take more shots at market. Psychologically it is easier on your mind as you are not overly dependent on one or 2 large trade for returns.

Methods that involve risking big per trade can produce big returns if trade works out but can also lead to big drawdowns . You can spend months trying to recover from that . As against that you can increase your number of trades if your trading setup produces many opportunities.

This is a choice you can make as a trader.


Find basic tendencies of market

If you want to trade the market find the basic and structural tendencies of the market.

A structural tendency of market is some kind of observed behavior of stocks that repeats . For example stocks with surprisingly good or bad earnings tend to go up or down for several days post announcing such earnings . It is called PEAD (post earnings announcement drift). If you research this and find this actually happens , then you can then design a process to identify such stocks daily and exploit the phenomenon to try and make money.

Similarly if you study stocks that go up a lot in short period of time like say 25% plus in less than a month and you find that these stocks had range expansion at start of such move then you have a structural basis to go with . Then you can build a process to identify such stocks.

Or if your study shows that when stocks go down a lot in short period of time of say 5 to 10 days, then they tend to bounce back hard for couple of days from such deeply oversold level and this phenomenon repeats. Then your task is cut out to try and build process flow around it.

Or if you find that stocks that have gone down 50% plus in less than a year tend to perform better in next one year then you can systematically isolate these kind of stocks and then build a process flow to exploit that.

The structural tendencies of stocks give you a process oriented solution to finding opportunities. If you select the right kind of market structure to focus on you increase probability of success in the long run (there still will be periods when your structural phenomenon may not work due to some change in market structure or your own failure as a trader to exploit that , but in both cases it is a fixable issue.

Sooner you find an exploitable phenomenon in your trading career better it is as it will save you time , frustration and money. Sooner you find an exploitable phenomenon in your trading career better it is as it will allow you to intensify your focus on getting process right.


A period of pullback/consolidation will be natural action

A period of pullback/consolidation will be natural action after a torrid V shaped recovery. That creates the momentum burst kind of setups where stock has first leg and then consolidates and breaks out.

Unless breadth significantly deteriorates the benefit of doubt is on bullish side.

Because so many stocks are over extended in short term a shakeout will be very much normal reaction . A series of breakout failure near high might signal lack of buyers but orderly pullbacks will signal continuation.

Patience will be required to wait for good continuation setup to form. healthcare, biotech, airlines, utilities, restaurants, reits are where they are likely to happen.

Some of the recent earnings winners are also likely to setup with orderly pullbacks as many of them had big gaps due to overall market momentum.


Markets continue to build on recovery

After a 9% kind of correction , markets have had a sharp V shaped recovery. The breadth has started to improve and new leadership has started to emerge.

A V shaped recovery is sign of strong buying on any correction. Which has been the hallmark of this market in last 18 to 20  months.

As long as breadth trends continue to improve the rally has probability of continuing . Any breadth deterioration is what I would watch for sign of pullback or reversal.

Stocks with momentum and momentum burst setups have started to show up and are having follow through.