Monday, December 21, 2009

Methods And Indicators Used When Looking For A Swing Trade

Methods And Indicators Used When Looking For A Swing Trade!

I don’t know about you, but when i look for potential plays in the market i want to find them fast and easy without having to do much digging around and analyzing a stock in to much detail. I will point out a few methods and indicators I use in order to cut the process of finding plays in half. Keep in mind this is how I look for Swing trades. 

Swing trade in other words means holding a stock for more than one day, usually ranging from 3-5 days or longer, making profits in a short period of time while maximizing the potential in profits over a few days weather you go long or short.

Lets get right to it!

First, how do we find company’s with a nice chart pattern that is setting up for a nice short or long swing trade?
I start by going to FinViz website, and use there custom stock scan tool. I then click on the create custom scan, and enter in the data criteria I am looking for. I will start with entering in a price range, since i have a small account and a risk taker I will scan for $5-$10 stocks, you can also enter in a percent gain for stocks to, something like 1-10% gain for that day. Enter the volume range as well, we don’t want to trade an illiquid stock that would be hard to get in and out of. I usually enter in something like, grater than 1mil shares traded in a day. Now for this scan tool you can enter in other data for a more refined search but I don’t use them, I will just find plays and use charts to get my own opinion on chart patterns.

Now I do sometimes set the check boxes above the price, to get some better search results so i don’t have a list of 100+ stocks i have to scan threw and research.
After you enter in the data you wish to search stocks on based on your input, you will see a list on the right side with all the stocks that meet the criteria entered.

As soon as I get my list, I open up my charting software(I use ThinkorSwim) and I will enter in the ticker and get a quick glance at the chart. After I narrow my list down based on chart patterns of the stocks I will use some basic fundamental analysis for each stock to validate it is a good company, more on that in a bit.

Indicators I use with my charting software to determine a good swing are, moving averages, volume, the ADX indicator, MACD, and support and resistance areas.

Moving averages, I use the MA(4),EMA(9),EMA(200), 4 day, 9day, and 200 day moving averages all with different color lines for better chart reading.

If you are unfamiliar with moving averages i suggest reading about them here.
Now, the only thing I use moving averages for is when I see them cross either up or down signaling a change in the trend. I use the 4 and 9 day moving averages for this, because they are closer together and will give me faster signal than a 20 and 50 day moving average signal would.

I have provided and image that gives and example of the MA crossing with a upward trend following,
notice my chart settings, its exactly what i use. click it to enlarge it.

The volume is another good indicator, now we did set a criteria for our stock search that has the specified volume in it. But when glancing at a chart, you can notice if volume is beginning to fade or steadily increasing both would also factor in when deciding to go long or short.

Average directional index (ADX) is one of my favorite indicators, this thing will help you determine if the stock is trending in one direction or consolidating and just trading sideways (Boring!). I have my ADX set on 14 days, which also will give me a shorter time frame and a faster trending signal. I will get short and to the point, if the signal line for the ADX is above 20 then it is trending, if it is below then it usually means it is trading sideways. We want a stock that is trending and not just siting sideways, so we can gain profits on the up or down side.

The indicators I mentioned i use as a check list. When I type the ticker into my charting software, I look at the chart, check to see if the moving averages are crossing(up or to the down side), i look at my ADX and see if the stock is trending or approaching a the 20 mark validating a trend. I check out the MACD and determine if that signal line is crossing the MACD line and is above the 0 mark, then i check out the volume, determine if it is fading or increasing, I then do some basic fundamental analysis and check for upcoming events for that stock or and PR that have come out that could determine the future price action for the stock. If all is good i add this stock to my watch list, and i also write down an entry and exit price that i would like to get before i enter in the trade. If i am going long on a swing trade my indicator to sell is when i see those moving averages cross to the down side, and with this setup of the moving averages it is usually 3 down days that will make them cross.
Note, i use yearly and 3 month charts when looking for chart patterns necessary for a swing trade.

recommended books:
The Swing Traders Bible: Strategies to Profit from Market Volatility (Wiley Trading)
This book is very good and well written with lots of chart examples.

Swing Trading For Dummies
yes it is one of those Dummies books but it was very informative and i learned a great deal about swing trading.

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