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Introduction to Swing Trades
Tony Golan
Chief Technical Analyst
StockProfit.com™
Swing trades are short-term trades, lasting anywhere from a couple of days to as much as a few weeks. Like all other trades, the stock must be in a long-term up-trend, making higher highs and higher lows above the 200-day moving average and has to have an RSD reading of over 25%.
Since a swing trade is an end-of-day trade, the stock must make a new high, followed by a short-term mild correction of at least three days after the day that makes the high. Corrections of less than three days are not enough to enter for a swing trade.
Once we get a signal like that, we enter the next day when the stock goes .02 above the high of the signal day. The initial sell-stop goes .03 below the low of the signal day. Then, at the end of every market day in which the stock makes a higher high and a higher low and closes above the open (a white candlestick), we move up the stop to .03 below that day's low, until we're either stopped out or take a big short-term profit if the market gives it to you.
Below is an example of such a trade. SEPR had just reversed a long-term down-trend, rallied above the 200-day moving average, pulled back, rallied to another new high, then pulled back for a few days, and turned back up with a white candlestick and above-average, rising volume.
 Zoom
The high on the signal day was 14.21. Subscribers of the Momentum Stock Trader were instructed to buy SEPR when it goes .02 above the high of the signal day. The exact instructions in the Momentum Stock Trader read "Buy SEPR @14.23 Stop 14.73 Limit Day". Translated into English, it means "Buy SEPR only when it trades at 14.23 or higher. Then, but it, but don't pay any more than 14.73 for it, only good for the next day". This is the kind of order an end-of-day trader can place before the market opens, then go to work.
The Momentum Stock Trader also instructed subscribers to place a Good-'Till-Cancelled sell-stop @13.53. That means that if the low of the signal day is violated, the stock will be sold automatically as that would invalidate the likelihood of the up-trend and the reason for buying the stock in the first place.
We were able to buy SEPR @14.62. The next chart shows how the SEPR trade unfolded after we got it.
Zoom
SEPR went up, but didn't do it right away. By following the stop-placement strategy for swing trades, we were able to stay in the trend for the duration, finally getting stopped out roughly five weeks later at 18.97, for a 29.5% gain. When compared with the initial sell-stop of 7.5%, this trade yields a reward-to-risk ratio of roughly 4:1. This is a very strong ratio for a short-term trade.
The other type of swing trade is called a Trailing Buy-Stop trade (TBS). In a TBS trade, you enter early by anticipating the turn back up after a 3-day correction following a new high.
The mechanics of the TBS trade are as follows: A stock in a long-term up-trend whose RSD is greater than 25% makes a new high, then corrects mildly for 3 trading days. After the third day (at least), you would place a buy-stop .02 above the high of the most recent trading day. If the stock rebounds and goes above the previous day's high, you get triggered into it and you're already in. This results in a lower entry price, a tighter stop, a smaller loss if the trade doesn't work out and a bigger gain if it does. Additionally, TBS trade setups are much more frequent than a swing signal trade.
The next chart shows an example of a TBS trade.
Zoom
MVL was already in a strong long-term up-trend when it set up a TBS swing trade setup. The stock had gone from around 6 to around 11, RSD was well above the 25% threshold, and the stock pulled back mildly for four trading days with small candlesticks. The high on the fourth day was 10.53 (adjusted for a 3:2 split). Subscribers to the Momentum Stock Trader were instructed to "Buy MVL @10.55 Stop 11.05 Limit Day". The next day, MVL rallied and we bought it at 15.83 (10.55 split adjusted). The initial sell-stop was set at 10.27, .03 below that day's low (15.40 pre-split).
The next chart shows what happened after we got into MVL.
Zoom
MVL went up right from the start, then ran into trouble just below the 20 resistance level (pre-split). We move up the stop to 19.50, just below the low of the day when the stock ran out of momentum just below the 20 resistance level. We were stopped out of MVL @19.50 a couple of days later for a 22.9% gain in about 10 days! With an initial sell-stop of 2.7%, the MVL trade ended up with a reward-to-risk ratio of 8.5! Again, swing trades exhibit strong reward-to-risk ratio, but the ratio even increases with the TBS trade setup.
The FLML chart below shows another example of the TBS trade entry setup.
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FLML had been in a powerful up-trend much prior to the trade setup already. When a stock goes from 6 to 23, some people might be scared to buy it, but RSD was at a whopping reading of 113, the stock made a new high and pulled back mildly for three consecutive days after making a new high.
The high on FLML was 21.29 that day. Subscribers to the Momentum Stock Trader were alerted to "Buy FLML @21.31 Stop 22.31 Limit Day". The next day the stock went above the buy-stop price and we bought FLML @21.32. The initial sell-stop was placed at 19.70.
The chart below shows what happened to FLML after we bought it.
Zoom
The day after we bought FLML it gapped-up and rallied sharply. It went up again the next day. We could have raised the stop, but the market doesn't give you gifts like that often, and when it does, you take them with both hands and kindly say "Thank you!" to the market. That is exactly what we did. We sold FLML the next day at the market at the open and got 29.25 for a 36.9% gain in 3 days!!!!!
The reward-to-risk ratio on FLML was a powerful 4.9. Trade setups like that will get it done.
Another example of the TBS swing trade setup at work was the CELL trade.
Zoom
CELL was in a strong long-term up-trend at the time, with an amazingly strong RSD level of 150. CELL rallied sharply to a new high, then pulled back mildly with small candlestick for 3 trading days. There was a TBS swing trade setup.
The Momentum Stock Trader that evening instructed clients to "Buy CELL @25.92 Stop 26.92 Limit Day" with a sell-stop @24.70.
The next chart shows how the trade unfolded after we got in.
Zoom
CELL triggered the next day, then consolidated for awhile, then rallied again, finally stopping us out at 34.97 exactly three weeks after we got in for a 32.7% gain. The reward-to-risk ratio on CELL was a whopping 7.1!
Swing trades are short-term trades, lasting several days to several weeks. Since it's a short-term trade, it has tighter stops than intermediate-term trades. The stop-movement scheme enables us to stay in the trend for as long as possible, and in some cases the gains on these short-term trades is comparable to the gains on intermediate-term trades lasting many months.
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