How I find my stocks:
Feel - I have a group of stocks I follow that are my primary targets. I compiled this list based on products or services I regularly use. I follow these companies, I read news about these companies, and I watch and learn how the stock price reacts to different news and events. For a “Buy The Dip (BTD)” strategy, this is most effective with strong stocks, especially strong growth stocks.
Squawk - Breaking news catalysts can often be the catalyst needed to move a stock over several sessions. A swing trade doesn’t depend on picking a bottom.
Movers - This tool shows a trader what is already moving, and allows them to perform any kind of chart analysis needed.
Screener - We use the screener tool in the evening to prepare for the next day. We run a scan looking for stocks that are liquid (<1M volume on the day) and that are trading with a high relative volume (>1.5 Rvol). You can also apply a price or market cap filter to hone in on the stocks you prefer to trade. Once the list has been pulled, sort by relative volume, and then review as many charts as you have time for. Make a watchlist of the ones that look the best, ie. price at support, positive trend, reversal, etc.
Happy Hour 4-5 pm Monday-Thursday - The community discusses themes and sectors that are likely to move, or have already started moving. Someone time 1 stock can move and then cause other sympathy plays.
Requirements to trade
Position Sizing - This is based on the trader’s own risk profile and account size. For larger accounts, this can be a % of the total account balance. For smaller accounts, this might be a specific dollar value. I started my first account with 1000, so 2% of the account wasn’t really feasible. This is a problem a lot of new traders face, especially when they learn from experts or those that have high account balances. Currently, I size my position based on the overall cost of the trade. A swing trade tends to be 2-6K in size depending on the company and share structure. A company with a lower float and fewer shares outstanding is likely to cause me to size down as a means of protection. Option trades are always smaller as they represent increased risk. Using a dollar amount, we try to stay between $300-$700 for the cost of the position.
Price or Market cap - Do you have a preferred price range? Market Cap range? Big cap stocks trade differently (and sometimes more predictably than smaller cap stocks). We feel big caps are more predictable, yet small caps can make large outsized moves with the right catalyst. It’s best to balance this.
Volume - Can I get in and out? Are there enough shares trading for this trade to be successful? If the target is hit, can the trader exit? Oftentimes a surge in volume will also lead to a pop in the price. Continued buying interest can act as a confirmation of a trade thesis.
Time frame - Define this ahead of time. How long does the trader plan to hold? 1 day? 3 days? more?
Max risk/stop-loss - This is largely dependent on the size of the account as well as the risk tolerance of the trader. Losses are part of this game. Accept it and learn how to minimize them.
Sessions I trade: Regular session. I need volume to confirm my moves and to provide good entry and exit points. I don’t get that in the extended sessions.
Charting:
Think of charting as a guide. We use charts to help give us the best possible chance to execute a repeatable strategy. Nothing is 100% and a news story will often trump any chart pattern or drawing you have. For this reason, we try to keep this as simple as possible. Buying and selling should feel mechanical, not emotional.
Indicators
Moving Averages: For swing trades, we use the simple moving average which weights all the candles the same. We primarily use the 50, 100, 200 but others like the 150, 500 can be added. Be sure not to overwhelm yourself. If you find one value that seems to yield better results for the kind of stocks you trade, then stick with that. Key takeaway: Enter when the price is using the moving average as support, and exit on resistance.
Fibonacci Retracements: Derived from perhaps some of the most frequently occurring numerical patterns in nature, the Fibonacci retracement calculates levels based on the starting and ending points. You don’t have to understand the underlying math in order to use this. These levels can often represent support and resistance points on a chart and can be used for both entry and exits.
To draw this, select the Fibonacci Retracement drawing from the left hand drawing bar on the chart tab of details. Using the Daily or weekly chart, start the drawing at a recent low point and then finish the drawing at a recent high point. See example below:
RSI: Relative Strength Index is a widely used indicator that helps a trader determine if a stock is overbought or oversold. Stocks that are overbought often lose momentum and sell off, and stocks that are oversold tend to bounce back. Think of this indicator as an oscillator of sorts, and try to catch the ‘next’ move. For example, if a stock has an RSI of 28 (oversold) and the price is sitting at a support level, then this can serve as a good entry point.
Support and Resistance: The idea of a swing trade is to capture a substantial movement at the right time. In this case, since we are buying a stock that is selling off, it is important to take new long opportunities when discounts are presented. Knowing how to buy a stock while it is selling off is no easy task. We must try and tilt the odds in our favor as much as possible. Buying the dip is centered around adding on weakness, and the point at which to buy is often the most firm on previous “support” areas of the chart. Think of this as an area rather than a fixed ‘to-the-penny’ point.
Resistance areas can often be used as exit points and your exit strategy may involve scaling out of your position. Former resistance often becomes support and vice versa so noting where these points are on the graph with a simple price level is extremely useful for determining where different key levels may be.
Buy trigger: This can be a catalyst, a technical setup, or a combination of the two. If you can combine data points, like a solid earnings report coupled with a move off a support level can be a strong buy signal for the next upward leg.
Exit strategy: This should be twofold: 1. What does success look like? 2. What does failure look like?
Success: Profit/price target, time horizon, % of main account allocation. We often use our own price/profit targets as they often are developed over time. Start small and work your way up. Learning to let your winners run is a skill that takes time to develop. Making sure you book gains along the way is prudent for staying profitable over longer stretches of time and varying market conditions. We like to have price targets. If the stock was 20, the exit may be 30, or any other number depending on our analysis.
Failure: Trade does not go as planned. What is max pain? In this strategy, we are adding to a stock that has recently sold off to some degree. Making sure you keep your losses small is important in long-term profitability goals. The easiest control measure is to set a stop loss at the beginning of the trade. Have it be a part of your plan. This can be a raw number or a % of the total trade. We like to use raw numbers in this case. As an example, “300 is the max loss on this trade” is simple and easy to measure and track.
Scale In/Out: Scaling in can be a very effective way of controlling your risk if you are unsure a stock will reverse its recent sell-off. For example, if you are looking at a chart of a stock with a Fibonacci retracement, you may identify multiple levels where the stock could potentially turn around. Instead of going ‘all in’ on one level, a trader can spread the risk across multiple levels. We like to do this in lots of 2-4, depending on the conviction of the catalyst and the size of the position. Three buys across two weeks for 250 shares per buy allows us to build a position of 750 shares at different price points and may even allow more time for the trade plan to materialize.
Scaling out can help you allow a winning trade to run. If you can manage to keep your losers small, and your winners big, you don't have to hit on every trade in order to remain profitable. We like to sell half our position if the stock or option position goes up 100%. At that point, the rest of the trade is free. Even if it goes to zero, the trader is at breakeven. Of course, we don't want this to happen. We want the remaining part of the position to continue to go up, perhaps two or three hundred percent. This also allows us to set a trailing stop. If the stock does not continue to go up, a trader can close the remainder of the position and book the rest of the gains on the trade. NOTE: A stop loss should not be scaled out of. Your first stop is your best stop. You can always rebuy if the story changes.