Swing Trading Strategies
SWING TRADING STRATEGIES
By definition, a swing trade is when you purchase a stock and sell it the following day. Many new traders love to swing trade because it helps them to trade without breaking the PDT rule. Understanding the basic swing trading strategies is important for all traders, no matter your experience.
One of the most common questions I get is "how can I trade while under the PDT rule"?
The point of this blog post is to teach you some basic swing trading strategies. But, first, be sure to read my other blog post about the PDT rule. What is it? Why does it exist? Can we get around it? And many other questions are answered in that article, so be sure to check it out.
So, let's start with the basics. Swinging a stock (holding it overnight) carries some inherent risk. A company could release news early in pre-market, or in after hours, and the stock could drop before you can safely exit, and you could suffer greater losses.
Stop losses are not active in after-hours trading. This is important to know because most traders understand the importance of having a stop loss at all times. Meaning that if you buy a stock, and it drops to a certain level, then the stock will automatically sell and your loss will be limited.
But, as I mentioned, these stop losses are not able to work in extended-hours trading, so any bad news from the company released in pre-market or after-hours can be devastating. I want to make sure this is clear.
But, of course, there are certain things and setups that you can look for to limit the possibilities of that happening and increase your chance of having a nice profitable and winning swing trade!
First, I want to talk about avoiding swinging “low float” stocks. Be sure to check out my other blog post or video lesson on low float stocks so you have an idea of what those are.
Knowing the float of a stock is critical before swinging it because the lower float a stock has, the more freedom, and even incentive a company might have to do what we call a stock offering. And, yes, be sure to read that blog post too so you know why these are so bad.
Okay, so you have checked the float of the stock and feel comfortable with its float size. What else can we look for?
Strength is key! What I mean by this is that we want to pay close attention to how strongly a stock is closing. Is it closing near the high of day or low of the day? Or maybe it’s even mid-range and looking to close at the mid-range point of its daily trading range.
As an important general rule, the closer a stock closes the day to it’s high of day price, the stronger a candidate it is to buy and hold overnight.
So, if a stock opened at $10, touched as high as $13 and is heading into market close at around $11, that would be a weak close and would not be a good candidate to buy and hold overnight.
Okay now let’s take a look at the catalyst that is moving the stock. When looking for good swing trading strategies it’s so important to be sure you are looking at stocks that are trading at a higher daily volume than they usually do. This typically will happen to stocks that just released a hot new press release.
If a company releases positive earnings or a big new contract, those are great catalysts that lead to good swing candidates. Be sure to make sure the stock fits the other requisites posted above still though.
To swing a stock, it has to be the perfect storm where all things come together to make an A+ swing setup. High relative volume, good closing price action towards high of the day into the close, and a safe steady float are some of the first things you want to look for when looking for a stock to swing.
I now want to discuss certain catalysts that may seem positive, but actually, carry much greater risk to swing. The main example being biotech stocks that release positive phase 1/2/3 data or FDA approval.
While it might seem like a good idea to swing a stock whose company just announced positive test results about their cancer drug, this tends to be the most common time for a company to perform a stock offering. Which is bad news for you and your swing.
Lastly, be sure to check in on overall market strength. If the indexes (Dow Jones Industrial Average, NASDQ, etc.) are having a bad day, that typically is a bad sign to swing stocks.
While very simple, using this short guide as the beginning to your swing trading strategy, you can save yourself a lot of heartaches and start to find those diamonds in the rough to swing trade!
We offer swing alerts in our trading room nearly every day so be sure to check us out and start your free one-week trial with us!