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Tuesday, December 18, 2007

My Swing Trading Methodology . . .

Note: It should be noted that the following discusses TRADING. Not long term investing. Trading is short term speculation. Investing is long term, and much less speculative.

The following are my own personal rules for swing trading stocks:

Seems obvious? But pick the right stocks. Pick stocks that are liquid. Liquid means that you are able to get in and out of the stock trade very easily. Because that's what swing traders do. We jump in, and we jump out. The volume should be adequately high. Otherwise you might jump in? But when you jump out - there aren't enough traders who will accept your order, and your position can't be liquidated. Thus, you're stuck in the trade.

When it comes to picking the right stocks, I have a few rules to recognize. It should be noted that they only way I have personally found to have success? Is for ALL of these rules to line up. I find that when I ignore one? I generally get burned.

When I find what I think is a good company - it is done by doing this. Finding a company with a good Balance Sheet. You can perform the following criteria using any stock screener, such as this one found at Yahoo!

BALANCE SHEET
Current P/E, or just the P/E is at 6 to 17 (Number fluctuates according to market conditions)
Forward P/E is under 13 (Number fluctuates according to market conditions)
Trading with the overall (overall) chart trend, but buy it when the price is historically cheap. Not when it's near it's lifetime highs. Stocks don't stay near lifetime highs for very long.
Profit Margin greater than 8%
Dividend Yield >= 3%
Volume is adequately high (I like at least, over 300,000 a day. I've been known to go as low as 100,000, but I like higher volume. Means it's easier to jump in and out of the market)

Then, when you find a stock like that, you want to look for entering how.

Buy low. Sell high.

How to time your entry? On the charts themselves?

I use this, and it works, very, very, very well.

SEASONAL TENDENCY
Seasonal tendency means, that at certain times of the year, the market overall tends to go in certain directions. Notice I said: TENDS to go in those directions. Nothing is saying it will. But because of regular factors (Holidays, Earnings releases, Retail slowdowns in the summer months, etc), the market has shown definite tendencies.

I also said, the market over all tends to follow. Not individual stocks. But stocks DO follow the market at times. So if you can filter a good company by the Balance Sheet, and then find a time that is a seasonal strong time for the entire market? It might be a good time to buy an individual stock, as the likelihood (though there is no guarantee) is that the stock will follow overall market direction.

So what's the seasonal tendency? You find this - by combining all of the data for all of the days on the markets, over, say, 30 years or so. A few places have done this for us already:

Seasonal Charts - Here's that website again: http://www.seasonalcharts.com/

Last that was averaged out though? Was 2002 I believe. It still pretty much holds true; although I've went ahead and spent the money on getting some newer seasonal data. I make sure my seasonal data is kept up to date every year.

Go to the red box that says "CASH" and then select "STOCK INDICES". Then select either the DOW JONES, S&P 500, or NASDAQ Seasonal chart. They even have the TORONTO seasonal tendencies. If you were to visit my office? I have those 3 charts taped to the wall. Any American company that's doing well, has the tendency - TENDENCY to follow these patterns.

For instance, if you notice, Monday, July 2nd, to July the 4th (Market being closed then) the market will probably be pretty quiet. Traders are going on vacation, and exiting trades. They come back on July 5th, reacting to last quarters news with gusto. Seasonally, all the markets tend to experience growth from July 5th, to about the middle of the month. Then, I look to get out of all my positions. Biggest rule there is DON'T FIGHT THE SEASONAL TENDENCY ! ! ! !

But on July 15th? Should you really be looking to go long per the seasonal tendancy? Honestly?

Nope. That . . . is why I stopped stock trading on July 15th. And look at the heartache it saved me in 2007

Ok. Now, you have to time WHEN to buy. Don't just buy based on this, or you'll lose money. At what PRICE should you enter the market? It can matter - to the penny, because we're trading. Not investing.

1.28 RULE
Look for a market that isn't too wild. But going in nice waves. Up and down. Up and down. Notice a pattern? One seems to be in many markets, no matter how much they go up, or down. One thing that's been devised by a guy named Larry Williams, is called the 1.28 Rule. I use this to determine what exact day I might be looking to enter the market. I make sure that the 1.28 reversal day, coincides with the Seasonal tendency of the market. Therefore, I'm lining up two likelihoods.

This is how the 1.28 Rule works. See the following picture: for 1.28 Rule for seeing when a BOTTOM might form:

(Click to enlarge)



And here's the 1.28 Rule, for seeing when a TOP might form.

(Click to enlarge)


That's how you work that. BUT, it's only an estimation. A likelihood. How to further confirm? Checking out the support and resistance that the market is experiencing.

SUPPORT AND RESISTANCE:
1.28 Rule + Seasonals gave us an idea as to WHEN. Support and Resistance give us an idea as to WHAT PRICE

I'm assuming you know about support and resistance. I know a gentleman that combined the ideas of Fibronicci retracements, with Support and resistance trends, as well as a few observations of his own and called them prime-lines. Worth looking into.

Regardless, here's a chart to show you the basics of support and resistance:

(Click to enlarge)



Resistance in a market is formed when the market goes high, retraces itself, and goes high again. If it hits that area twice, and then comes down? Resistance was just formed.

Support in a market is formed when the market goes lower, retraces itself and goes up, and then comes down again. If it comes down and bounces off the same area twice? Support was just formed.

There's a lot to that, and I would recommend that if you're not familiar with it? You google and read a bit more into trendlines, support, resistance and the the like.

So, at this point, do you just BUY?

NO !!!!

Let the market confirm what we think is probable to happen. These are all probabilities, and understandings about Price and Time that we have lined up in our favour. In other words, let the market direction begin to show you that yes, the stock is really going to make this move because it's starting to move, and thus you can pull the trigger. But not before.


CHART PATTERNS
Here is a site that shows you what some patterns are. Patterns usually have to do with support and resistance

Double Bottom:
(Click to enlarge)



1-2-3 TOP (Sometimes called 1-2-x if the person BUYS between the 2 and the 3 point, and conversley, like a double bottom, and form a 1-2-3 bottom) :

(Click to enlarge)




As well as an article discussing triangle patterns . . .

Use a chart pattern, to confirm your buy. There are many, many, many chart patterns. What I usually do is this. Wait for the market to open. If it's not too rough an open. In other words, it opens somewhere on a 1-2-x pattern, buy a few cents past the resistance of the previous days highest high.

Like this:

(Click to enlarge)

TAKING PROFITS:
Take profits as soon as the money management strategy says to take them. This is an effective system for 2 to 5 day trade. Let's say you buy 1000 shares. What to do? If your risk is 7 cents? Then what should be your profit goal according to the money management thread? 28 cents right? If the trade turns around and fails? I stop my losses, losing only 7 cents and get out immediately.

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