This post is for swing traders and those who want to make some money in 3-13 day moves in stocks. It takes focus and it’s not for everyone.
The process of swing trading needs to be approached systematically akin to any other business. I have been swing trading for most of my trading career, and over the last 4 years adding VectorVest to my arsenal of tools has had a profound effect on the results and more importantly, on the ease of the journey.
The technique has been particularly useful in this rag tale market that’s been in hold on the LSE for most of 2014. Although I could write a few books on all the technical tools available, I will do my best to distill a few places to start here.
Let’s make a start. I will do my best to make the process mechanical and remove my subjective input.
- I only swing trade in shares that are growing earnings aggressively and safely. VectorVest does that for me in a few mouse clicks. I also can do this by looking at the stock viewer and highlighting those shares from the top that are undervalued with an RV>1.3 and an RS>1.2 that are on a BUY recommendation. UniSearch can automate this and also do many more complicated scans. Searches such as Ruler Stocks in the prudent folder will find shares that have the best combination of growth and safety. If you are struggling with Unisearch, please come to a User Group or just pick up the phone get a quick lesson. Remember the strong silent type only ever worked for Clint Eastwood. No one in history has ever become successful on their own.
- I only wish to swing trade in the shares from 1 that are trending above an 89 day moving average. I have written about the “magic 89” before. It’s truly a sacred number, and I have no doubt that if your trades are with the 89, the results will improve. I have a trader in Cape Town who calls the line the “Green snake”. I always (if I can) use the color green for the 89 as it signifies GO. Protrader allows the process to be included in a search which can combine points 1 and 2. Don’t stress if you haven’t got Protrader, as pulling up the charts from 1 and eyeballing them takes seconds.
- Knowledge of candle patterns is essential for short term traders. There is plenty of information on these on the net and lots of fairly cheap books around on the subject. I really only use two of these, although I teach about 5 of candle/bar chart reversal patterns in my swing trading course. Concentrate on “an Outside Day” to start with. This is a day where the HIGH and Low totally engulf the high and low of the prior day. The more days this day engulfs, the better. It’s a high probability signal. Again, Protrader can scan for these patterns easily and without fuss.
- The stochastic indicator was assembled by an old friend of mine who is sadly not with us anymore. George Lane used a relatively simple method of measuring short term changes in momentum. When his metric is below 20, it signifies a market that’s pulled back for a while and is stretched on the downside. If the market is above the 89 with cracking fundamentals, the share is maybe ready to have another run up the chart. It’s always hard to buy a pullback as they normally exhaust on the downside via a big red bar that puts the fear of GOD into us. The good trade is ALWAYS the hard trade. If you cannot find the default stochastic on VectorVest, please phone the call centre. Again, Protrader can automate the process although I get a lot of pleasure from the charts and personally keep my hands dirty and close to the market action. I have spent years studying indicator divergences. If you are up to speed on this, the best signals are found when the stochastic is showing REVERSE divergence with price. If you don’t just focus on the metric being less than 20. I will cover divergences on the 28th June in my London seminar.
- I want to FADE the short term trend (the pullback) in the direction of the long term trend which is defined by the 89 and the strong fundamentals. Easy to say but not many get it right. Most will panic in the pullback and get out exactly where they should be buying in. It’s great. If it were easy, there would be no risk and thus no reward. I might have to get a real job.
- Pullbacks normally stop at FIBONACCI levels and should occur on falling volume. That’s a story for another day and a 2 day course at least and includes many patterns that are highly predictive but unfortunately quite subjective. I will focus on more mechanical and testable methods in this entry.
- After the pullback with the stochastic below 20, I then look for a candle pattern such as an outside day to confirm a turn. Outside days rarely fail, but inside day patterns also have a good percentage hit rate. In candle parlance, they are called “Harami” patterns. Try and get your mind around these and the candle reversal patterns. It will be time well spent.
- The Trigger Line is a moving average which adds significance to the candle pattern, in a stock with great fundamentals that’s oversold and is above the 89 day average. I use a 13 day exponentially smoothed average. Just right click on the Price on the right hand side of the VectorVest chart and pull it up. If you can’t find it, please phone the call centre. When a candle pattern also closes above an 13 day EMA which is above the 89 day average, then a move is highly probable. I BUY the next open, but in your own rules you can specify a BUY when the high of the candle pattern is exceeded.
- Do your best to sit in the move as long as the share price does not close below the 13 EMA. Upon a close below the 13 EMA, just exit the position and sit quietly and wait for the next. The move tends to last from 3-13 days.
- There are two places for the initial stop loss. The stop loss is essential. Many will use the VectorVest stop and some use the low of the candle pattern used for entry. The latter is normally closer to the price action but unfortunately is a bit obvious. It’s not uncommon for a spike which last seconds to run these obvious levels. This can be frustrating to say the least. I think you should start using the VectorVest stop found on the program. The stop is well out of the traffic and shouldn’t be hit in the noise. Remember that the maximum loss should be no more than 2% of your account size. When you are starting, make it 1%. Whats the hurry?
The process is not difficult and reasonably mechanical. I can add in lots more in relation to FIB, volume and time cycles but the above is very workable.
For those brave souls who like to sell things that you don’t own, then turn the process on its head.
June 15 2014