My core method in the markets is all technical. I use weekly charts to find a swing trading timeframe entry, with a position trading sizing.
How do you find the swing trading entry? One example is I look for re-solidifying support and or resistance levels.
A great example of this is (SOL) in December 2015. After a false break of major support in late summer, support firmed in early winter. This gave us an easy, low risk level to trade against and a simple target of recent peaks in the 1.90s
When the stock broke it’s 2 month range, it quickly proceeded to the price target. With the position trading sizing, you can evaluate the group and the market to see if you want to take either a partial gain and leave some risk on OR take the full position off.
The important thing is to know what you want to see AHEAD of time. As a general rule of thumb, the faster the rip, the faster and heavier I want to sell it at my price target.
- Price patterns, momentum, shares in the float and volume help decide what stocks to buy.
- These simple factors work incredibly well; don’t let anybody tell you differently.
- Measured moves, moving averages, fibonacci levels and price pivot levels determine exit areas.
- Reward / Risk: 3:1 is the popular minimum requirement. I guess it works for some people, but you can do much better than that. I require 5:1+.
- also see: The Third Dimension
- Protective Stops: Like in SOL, stops below base levels are excellent protective stop levels. Otherwise, I like to place stops a safe distance away from event lows, key reversal day lows + prior swing lows.
- A safe distance means there is no doubt your invalidation area has been violated. I find that easier to avoid fooling myself.
- Trailing stops: Since I mostly sell on the way up, I use discretion with key intraday and daily moving averages such as the 5,10 and 20 day. This all depends on the time frame of the rally
- Opportunity Cost: the biggest weakness to this method is sometimes you can enter a position and have to sit in it for days or weeks before it moves. The best way to reduce opportunity cost is to understand when a base is faltering or the stock tells you it needs more time and cut your time loss.
I have a few different methods for short term (both day and swing trade timeframs) that I use very selectively.
- Gap ups. Specifically, breakaway or measuring gaps.
- Trade opening range breaks/after hours range breaks.
- Buy/sell on key reversal candles at trending moving averages.
- This works well in most markets.
- Price patterns on daily and weekly charts
- Attempt to catch the meat of a move anticipating a pattern breakout.
Fundamentals: In a bull market, you can consider a few fundamentals as well to refine stock selection. These are the main things I consider: accelerating of revenue growth and earnings, operating cash flow and direction of margins. Finding catalysts within a stock’s story helps you reduce opportunity cost as well.