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Strategies and Help Topics

Anatomy Of A Swing Trade

The Basic Concept of Swing Trading

Basic Concepts

Swing Trading refers to buying a stock and holding that position for a several day to several week period in order to capture short term gains by taking advantage of the cyclical nature of stock price movement.

A Swing Trade Is Composed Of 6 Basic Elements

The Anatomy Of A Swing Trade

1.) Trade Trigger and Entry Zone

A trade trigger price is computed by the system on a daily basis. When you see a stock close above the trigger price it is a potential buy for the next day.

2.) Initial Protective Stop Loss

When a stock is triggered into a trade an Initial Trailing Stop will be generated. This is a hard GTC (Good Till Canceled) stop loss that protects against catastrophic loss by a failed trade and a runaway price move to the downside. Think of this as your main non-negotiable line of defense for each trade.

3.) System Trailing Stop

When a stock begins to move in your favor past the trigger price – the system will begin to compute a trailing stop. The trailing stop is designed to keep you in a trade during the swing cycle and at the same time designed to tighten under an upward moving price over time to lock in and protect gains that are achieved.

4.) Delta Target

For each stock that triggers an entry the system will compute a Delta Target. Think of this as a high probability 1st target where you have the option to take half or all of your position off the table. The Delta Target is 3.5 times the stocks average daily range computed above the trigger price.

5.) Trend Runner

When a stock hits the Delta Target and continues to move to the upside in your favor it becomes a Trend Runner. A stock can continue as a Trend Runner as long as it moves higher and does not hit the system trailing stop. Many trend runners can achieve gains 3-4 times greater than the system Delta Target during the course of an extended swing trade.

6.) Parabolic Stop

As a stock price really takes off in your favor you will often see price momentum and trajectory accelerate quickly to extremely overbought and unsustainable short term levels. The system will detect this and compute a much tightened Parabolic Stop. A trader can use the parabolic stop to squeeze out final profits after a good run or use it as a protection level on a portion of the trade holding the remainder with the normal trailing stop.

Variations On The Swing Trading Theme

The basic concept of swing trading is to buy low and sell high within the context of the short term price cycle which is typically 2-3 weeks in duration. Only the strongest and smoothest stocks within a confirmed uptrend are chosen to trade so that the price continuation and upside potential is maximized in your favor. The system locates these just as the stock is nearing a potential “buy low” zone in the current swing cycle above that stocks strong upward momentum. At this point a trigger price for trade entry is computed. You should think of this as a price trade barrier and not take action until you see price move above the trigger price. Think of the trigger price as a BARRIER to taking a trade and not the exact price you have to enter at. The Trigger level is adaptive and may change on a daily basis. As the setup develops over a few days you will see trigger level and the stock price get closer together. A buy signal is generated when a closing day price is ABOVE the currently posted trigger price. You can buy the stock the following day as long as the price is trading at or above the trigger price. Stocks that perform after entry can also be held for longer term positions of up to several weeks or longer as long as stock price stays above the system generated trailing stop levels posted in the open trades list.

A.) Variations on Trade Entry

The basic entry methodology for any stock that closes one day above the trigger price is to buy the following morning at the open as long as the opening price is still above the trigger price. An aggressive swing trader who is watching the markets intra-day may decide to buy the stock just before the close on the first day price moves past the trigger price.

B.) Variations on Trade Follow Through

Different Swing Trades will follow through to different degrees. Here are the 4 scenarios you will see. (1.) Your swing trade goes against you immediately after you buy it and price runs quickly down to hit your initial protective stop loss quickly. This could occur the very first day if the stock experiences a negative news event that causes the stock to go into heavy sell-off mode. (2.) Your swing trade moves quickly in your favor and runs to hit the 1st Delta Target which as mentioned is 3.5 times the daily range of the stock. After hitting the system target price stalls and falls back down to your entry level and drops back down below the original trigger price. (3.) Your swing trade moves in your favor and hits the Delta Target and continues higher. Within days the system trailing stop kicks in and you see price continue to the upside in your favor with the trailing stop following behind to begin to lock in gains. At some point the stock momentum fizzles and hits the system trailing stop which may lock in additional gains above and beyond the system delta target. (4.) Your swing trade moves in your favor in a big way hitting the Delta target and accelerating higher with a greatly increased trajectory. A system parabolic stop kicks in and begins to tighten very closely under current unsustainable price levels eventually taking you out much higher levels than where the normal system stop currently is.

We also have two flavors of swing trade follow through. Fifty percent of the time you will see your trades take off quickly in your favor smooth as butter shortly after you get filled and price never looks back. Within days it is possible to see the system stop at your break even level. The stock price continues higher quickly and easily taking out the Delta target and making higher highs. The other half of the time we can see price get hung up in a fierce battle and remain stuck in a tug-of-war congestion zone right at and around the trigger price before either eventually taking off in our favor or breaking down to run down and hit our stop loss.

C.) Variations On Trade Configurations

There are numerous variations on position size and trade configurations. Lets take a look at two basic methodologies.

Method 1:  The first approach and simplest is ALL IN on entries and ALL OUT at exits. So for instance, you buy 100 shares of XYZ stock after a one day close above the trigger price. You then place a GTC SELL/STOP loss order for 100 shares at the system stop level and a GTC SELL/LIMIT order at the system Delta Target price for 100 shares. You follow the system trailing stop with your full position of 100 shares until either the Delta Target is hit or the trailing stop is hit.

Method 2:  The 2nd variation in trade configurations is to scale out over 2 exits. XYZ stock triggers a buy and the following day you purchase 100 shares at the market. You place a GTC SELL/STOP order loss for 100 shares at the system stop level and a GTC SELL/LIMIT order at the system Delta Target price for half the position or 50 shares. Once the system Delta Target is hit you exit half the position and let the remainder ride following the system stop price.

Each method has it’s pros and cons. There are times during weak market conditions that we may have less follow through after entry and may only hit the system Delta targets before our stock price fizzles back below our entry price making it advantageous to close out the entire position at the system Delta Target. Other times in robust market conditions we may see a stock easily hit the system Delta Target and then continue on for a much bigger price move over the following days/weeks with the system trailing stop intact allowing us to capture even nicer gains by maintaining half the position as a runner.

D.) Variations On Trade Position Size

In swing trading there are 2 main ways to determine position size or how many shares to buy.

Method 1:   The first is to compute an equal dollar amount of shares for each trade you take. For example, let’s say that you have a $25,000 swing trading account and are going to start off committing $5000 to each swing trade position you take. Simply divide the price of the stock at entry into your fixed position size. So for example, MSFT triggers at $110 a share. You will buy $5000 at $110 or 45 shares. ($5000 / $110 = 45) Next XYZ stock triggers at $18.75 a share. You will buy $5000 at $18.75 or 265 shares. The position size is fixed at $5000 and stays the same. The number of shares changes based on the price of the stock. With this first method your position size in dollar amount always stays the same however your stop amount may differ based on the fact that some trades may have wider initial stops than others based on a stocks ranges and recent daily bar patterns.

Method 2:   The second and slightly more complex method is to fix the risk amount per trade. This is computed by starting with the percent stop and determining how many shares to buy so that the risk amount on a stop out always remains the same. This is computed choosing a max Trade Risk size and then subtracting the initial system stop loss from your entry price. Next you divide your chosen max risk per trade by the difference. So for example, you decide to fix your risk per trade at $100 regardless of how big the stop may be from trade to trade. XYZ triggers at 18.75 with a -6.6% stop at 17.50 for a difference of $1.25. To compute the number of shares to buy based on a fixed risk you will perform the following calculation. ([Total Dollar Risk] divided by ([Entry Price] minus [Stop Price])). So with the above example the formula would be $100 divided by $1.25 or 80 shares.

 Click Here to access the Calculators Page (coming soon)

E.) Variations on Trade Length

In swing trading there are two time horizons to the length of time you can stay in a trade.

Trade Length 1:   The first approach is quick in and out.. one shot one kill.. holding positions over a short time horizon of 2-5 days focusing on hitting the system Delta Targets for quick wins.

Trade Length 2:   Is to use swing trade entries to plant positions in the market in an attempt to catch extended runs using the system trailing stop for all exit decisions. This can keep you in high momentum price runs which can go a substantial distance past the system Delta Target. These position style trades can last any where from 10 days to several weeks or greater.

Note: You can also use a combo approach which is to take half of your position off at the system Delta Target and let the remainder ride with the system trailing stop.

Winning Over The Series

Trading is a game of odds based on timing and tolerances and repetition. A crucial concept to keep in mind regardless of the exact approach you take in swing trading is that the statistical edge is attained by taking many trades over time, i.e. we win over the series. All strategies and systems have some failure rate and seeing good results from swing trading can at times be glacially slow and remain frustrating for weeks when we experience sluggish markets. What this means is that you must plan ahead to reserve judgement on your P&L until you have completed a decent number of trades, i.e. 20-30 round-trip executions which may spread out over several months. In order to manage this though and stay in the game you should start off with very small position sizes so you can push through the series regardless of any temporary upfront drawdowns which would otherwise cause you to halt your trading activity and abandon the system. If your initial positions sizes are too big to start this is very likely to happen. When your trading performance and profit edge are achieved over a decent set of trades you can begin increasing your position sizes pyramiding to greater and greater size over time, thus increasing your profit potential. We will talk more about how to decide on and calculate your beginning position sizes.

A Note On Gaps

There is one thing that we have not talked about so far which can have a great impact on your swing trading and that is price GAPS. A price gap is defined as anytime a stock opens at a higher or lower price then from where it closed the previous day with no visible trading occurring in between on your chart. Gaps are a double edged sword for swing traders as stocks can gap to the upside in our favor or gap to the downside against us and even below our stops and on rare occasions we can see catastrophic gaps against us. So herein lies the dilemma… NOT holding positions overnight severely limits the amount of time our swing trading cycle has to develop, i.e. we make our best profits in Swing Trading HOLDING positions over several days or longer – BUT…. holding over night also exposes us to the possibility of a large gap down against us. This again underscores the importance of starting out your swing trading plan with extremely small position sizes and scaling up as you go based on positive performance over the series. Big price gaps can occur after a stock releases earnings or due to other important – positive/negative – news that hits the airwaves, for this reason it is always important to do your own due diligence in checking the earnings calendar/news on the particular symbol you are about to trade. We do not recommend holding an open position through earnings. Open Trades will be closed ahead of earnings. If a stock is releasing earnings today after the bell – it will get moved to the Closed Trades table using today’s open price.

A Note On Diversification

As a trader you have the option to put all your trading fire power into one position at a time… or diversify it, i.e. spread your trading capital over multiple smaller positions. The main goal of diversification is to lesson the risk of an overnight catastrophic gap down against your account by any one stock. There are several pros and cons to diversifying or not in trading and we will review a couple to give you an idea of the trade offs. When you diversify you have more work to manage multiple positions and you will of course incur more commission expenses but you will lesson your risk of catastrophic gap damage to your account should it occur… by the same factor as the number of simultaneous positions you carry. We recommend the ideal basket of stocks is anywhere from 3-6 equally weighted swing trading positions at the same time. Anything over 10 simultaneous positions and you enter the zone of over-diversification where your commissions will sky-rocket and your profit potential will start to diminish due to the fact that you have your capital spread too thin. In other words.. if you fall into the trap of trading more than 10 positions at the same time.. expect lots of headaches and mediocre results. Diversification serves a purpose up to a point. You could go years in trading without experiencing a catastrophic gap down and then suddenly wake up to one. Light diversification is the best way to counter large negative gaps.

A Note On Stock Selection

The Investing Systems Stock Service provides you with a steady stream of high momentum stocks that are currently setting up in our specialized high probability swing trading setup. At any given time there could be 50-100 stocks in the pending list and up to 5-10 triggering per day. Obviously you can’t trade every stock that appears in the list. So how do you pick which stocks to trade? One method is to filter out and choose stocks by a preferred price range that you have. Some traders prefer lower price stocks in the $10-$40 while other traders focus on higher price stocks.. $80-$100+. You could include certain stocks in industry sectors that you are familiar with and exclude stocks in sectors that are not familiar with. Maybe you only trade stock symbols of companies that are well known and have good fundamentals. The main thing to understand here is that in swing trading you make money over the series and that each potential stock trade regardless of criteria is nothing more than a vehicle to temporarily park money in the market. In other words, trying to filter out the best picks only goes so far. Every stock that appears in the Pending Trades list meets an extensive set of technical and statistical criteria and beyond that it becomes a crap shoot. You could have a fundamentally strong company with the perfect setup but the trade fails and hits your stop while at the same time another stock with weak fundamentals and a sloppy setup goes on to be a big winner. The market doesn’t always behave rationally or make sense so we can only take the stock selection/filtering to a degree. Spend a little time. Look at the charts. Read up on some of the stocks in the list and choose your plays. Over the series, regardless of the stocks you pick from the list, the odds are still in your favor. It doesn’t get much better than that.

Overview Of Our Swing Trading System

The Investing System’s Automated Swing Trading Service presents you with the following 5 stock tables which are updated daily after the close. They are: Pending Trades, Triggered Today, Open Trades, Trades Closed Today and Closed Trades. Lets review each one briefly and point out the useful data that you will incorporate into the swing trading strategies described below.

In the * Pending Trades * table you will find a steady stream of high momentum stocks that fit our specialized high probability setup. These are stocks that are setting up but have NOT yet triggered an entry. This table gives you the basic information about a stock, symbol, company name, current price, the date it showed up on the list and the current trigger price or barrier to trade. Once a stock shows up in the pending table it stays on that list until it either triggers a trade entry or price falls and the symbol drops out of the setup pattern.

As you review the pending stock list each day nightly after the close you will see that the trigger levels adapt to the changing closing prices and you will see the two eventually converge. You are looking for a 1 day close above the most recent trigger price. For your convenience we have a Triggered Today table located above the Pending Table that isolates and shows you stocks that trigger each day. When you see a stock on the * Triggered Today * list you have an actionable stock to work with. At the point a stock gets moved to the * Triggered Today * list the system will compute an initial protective stop loss level as well as a high probability price target. A stock symbol will only remain in the * Triggered Today * list for one day, the day it triggered. Also when a stock moves out of the * Pending Table * to the * Triggered Today * list it also goes into the * Open Trades * list.

Once in a trade you can monitor the * Open Trades * Table each day where you will find the trigger date and price, the delta target, the current trailing stop, the current closing price and the current gain/loss percentage. The final column to the right pstop is a system computed parabolic stop level which will only appear when your stock makes a large, fast and unsustainable price move in your favor. We will talk more on how to utilize the pstop below. Once a stock makes it to the * Open Trades * table it remains on that list until the normal system trailing stop is hit.

When the main system stop is hit, either on a failed trade or after a stock that has experienced a good run, the stock symbol is moved to both * Closed Trades * and * Closed Trades * Today list. Just like the Triggered Today table, stocks will only remain on the * Closed Trades Today * list for one day, the day they hit the stop. In the * Closed Trades * Table you will see where the trigger price and delta target were and the maximum price and percentage gain that were achieved above the trigger price in the case of a win or the maximum price and percentage loss based on the system stop.

3 Top Swing Trading Strategies Using Our System Stock Picks

It has been said that there are two primary ways we make money trading: catching a big price move with a small position or having a large position and catching a small move. In this section we will review 3 systematic approaches to using our stock pick tables and describe the basic rules for each strategy. Each strategy can be traded on a stock by stock basis, i.e. one at a time, or as a diversified basket approach where you maintain multiple (3-6) smaller positions at the same time.

Swing Trading Strategy #1:   The Short Term Delta Target Exit Approach.

This first method is a short term, take no prisoners swing trader scalper approach. When a stock triggers you will compute your position size and buy that day. You place orders for your stop and target and let the trade work. The advantage of this strategy is that you have well defined high-probability fixed targets that are computed to get you out with quick profits and free up your capital to go on to the next trade. The disadvantage is that you limit the trade’s further profit potential by closing out the entire trade at the system target. This strategy uses “A bird in the hand is worth two in the bush” logic.

Here are the rules for   Short Term Delta Target Exit:

1. Select a stock that closes 1 day above the system trigger price. (Triggered Today Table)

2. Compute how many shares you will buy based on one of the two methods described earlier.

3. Buy at the open the following day as long as the stock is trading above the trigger price.

4. Place a GTC Sell Stop Order at the system stop price for the FULL number of shares.

5. Place a GTC LMT Sell Order at the system target price for the FULL number of shares.

6. Monitor trade nightly after market close for a system stop move. (Open Trades Table)

Note: Some trades can run and hit the system Delta Target quickly before the trailing stop even has a chance to begin moving. Other trades you may take longer to follow through and you may see the trailing stop tighten. There are occasions where you will see stock price close near the system target price as well as generate a Parabolic Stop (pstop column). You should move your stop to the pstop level. This will sandwich your trade between a the target and a tight stop with a gain. This puts you in a Win/Win situation.

Swing Trading Strategy #2:   The Buy and Hold Trailing Stop Exit Approach.

Th second method is a strategy designed to keep you in trades for as long as they want to run in your favor. Once you trigger into a trade you place an order for your stop loss only (no target) and let the trade work. The idea is to let stock price movement and the system trailing stop make your exit decision for you. The advantage to this approach is that you can stay in and ride big winners for increased profits above and beyond the system delta target. The disadvantage is that you can see some of your trades hit the system target price but then quickly turn against you and you either give it all back or incur a small loss. This strategy uses “Let your winners run and cut your losers quick” logic. Patience.

Here are the rules for Buy and Hold Trailing Stop Exit:

1. Select a stock that closes 1 day above the system trigger price. (Triggered Today Table)

2. Compute how many shares you will buy based on one of the two methods described earlier.

3. Buy at the open the following day as long as the stock is trading above the trigger price.

4. Place a GTC Sell Stop Order at the system stop price for the FULL number of shares.

5. Monitor trade nightly after market close for a system stop move. (Open Trades Table)

Note: Even though this strategy is designed to let the normal system trailing stop auto-exit you from a trade that runs you can also utilize the system parabolic stop. For example, lets say that your trade over a several week period runs 2-3 times greater distance than the system delta target and you notice in the Open Trades Table a system pstop gets generated. This signifies your stock is making an extreme and potentially unsustainable price move in your favor. You can tighten your stop to the pstop level and protect those increased gains. At this point it is likely your stock is in need of a pull back anyway and you may see it show up on the Pending List again in the near term future as price cycles back down.

Swing Trading Strategy #3: The Delta Target/Runner Combo Approach.

The third method is a combo approach that merges the previous two strategies. After you trigger into a trade you will play half your position for the quick delta target and let the other half run with the trailing stop in an attempt to catch even bigger gains. The advantage to this method is that you open the trade up to the positive aspects of taking quick profits while at the same time allowing your winner to run. You can also tighten your stop to your entry at the point the Delta target gets hit and lock in a small gain as well as prevent any further potential loss on the remainder. The disadvantage to this method is that is slightly more complex and slightly more costly in commissions.

Here are the rules for Delta Target/Runner Combo:

1. Select a stock that closes 1 day above the system trigger price. (Triggered Today Table)

2. Compute how many shares you will buy based on one of the two methods described earlier.

3. Buy at the open the following day as long as the stock is trading above the trigger price.

4. Place a GTC Sell Stop Order at the system stop price for the FULL the number of shares.

5. Place a GTC LMT Sell Order at the system target price for the HALF the number of shares.

6. Monitor trade nightly after market close for a system stop move. (Open Trades Table)

Note: The Parabolic stop (pstop column – Open/Triggered Trades) can be incorporated as a final stop tighting move on stage two of your combo trade as described above in Strategy #2

Using the Data Tables

Pending Trades – The pending trades table gives you an ongoing list of high momentum stocks that are currently pulling back and setting up to make potential continuation moves higher. Think of the trigger price as a BARRIER to taking a trade. The Trigger level is adaptive and may change on a daily basis. As the individual stock setups develop you will see trigger levels and the stock price get closer together. A buy signal is generated when a closing day price is ABOVE the posted trigger price.

You can buy the stock the following day as long as the price is trading at or above the trigger price. These stocks can be swing traded on a one by one basis or traded in a light basket of 3-5 small positions at a time creating a well diversified mini portfolio to hedge against risk. Stocks that perform after entry can also be held for longer term positions of up to several weeks or longer as long as stock price stays above the system generated trailing stop levels posted in the open trades list.

Open Trades – The Open trades lists are all the stocks from the Pending Trades list that have triggered a buy signal with a one day close above the pending trades trigger price. Once an entry is triggered the system computes an initial protective stop as well as the 1st high probability target price. The entire position can be exited at the 1st target price or half the shares can be liquidated at this price and the remainder left in to run using the system trailing stop as your protection level thus splitting up the position to hedge a quick win with the potential for longer term gain.

Closed Trades – The Closed trades list reflects all stocks that have come through the Pending Trades list and then triggered into positions in the Open Trades list. You will see 3 outcomes. A portion of stocks will trigger into trades and then go on to hit Target #1 and beyond being taken out at some point by the trailing stop. Another portion of stocks will have their full initial stop hit for a full loss. Finally we will have stocks that fall in between these two levels with the system trailing stop getting positions to at or near break even status or with small gains.

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