Trading is not a game of exacts. Perfectionists need not apply. Markets are made up of many irration...
A Guide to Swing Trading
10/22/2004 12:00 am EST
"Trading is a journey, not a destination and half the fun and reward is in the research," says Jon Markman, editor of StockTactics Advisor. Here, he explains the basics of his swing trading strategy, as well as some of his latest trading ideas.
"What is swing trading? Swing trading is trading campaign based on forecasting intermediate-term moves in indexes, sectors and stocks. Swing trading takes long or short positions that are expected to be held for anywhere between 2 weeks and 6 months – possibly longer if the move becomes well engrained. I call this swing trading strategy the 'new buy and hold'.
"So what is the campaign? Here’s my plan before I look for stocks. First, I want to understand the major economic trends, the major market trends, and the major news cycle trends. I want to know if it is a strong or weak economy or if stocks are tending to go up or down. Now I look for strong or weak sectors. Then I find volatiliy, seeking trending stocks to play for either reversals or continuations. We look for stocks that will continue doing what they're doing or stocks that will stop doing what they're doing. Then you buy and hold for a while, or short for a while. That's swing trading.
"In bull markets, trade long. Don’t sell the first rally, assuming your stock idea moved too far too fast. If you’re right, it should keep on running. Buy strength, sell weakness. But beware reversals at obvious resistance and support zones. Think big. Expect every trade to be the most lucrative of the year. Add to wins. Never average down. If you lose money in a stock, you’ve made a mistake. As a swing trader, we are buying a stock thinking we have bought the right stock at the right time. If we bought the right stock and it’s going down, it’s not the right time. So we get out as quickly as possible. We try to take small losses – something that is very important in swing trading. Instead of averaging down, we average up.
"When a trade becomes successful after the first 10%, we raise the stop on the stock and we add to our position. If the stock goes up again, we add more to our position. So we average up, not down. Be patient. The old adage, ‘You never go broke taking a profit,’ may be the most worthless piece of advice ever given. And don’t stress out. If you’ve got sharp losses, bow out for a day or two. Close all trades and recharge. Don’t overspend your mental capital.
"Meanwhile, here are some of our latest specific swing trading ideas. First of all, we entered a swing trade in cellular tower owner/operator SBA Communications (SBAC NASDAQ) at $7.12. We think it still has a good shot at reaching our goal of 22% to 25% appreciation over the next 3 months. Although our current target is $8.69, we actually think it could get to $10 in a decent market. We still caution, however, that this is for aggressive traders only, as it is a momentum name that should be exited in the event that it violates its uptrend and stop.
"We have also added Terra Industries (TRA NYSE) as a swing-trade, based in part on work from our research assistant, Adam Hirsch. Terra is a small-cap producer and marketer of nitrogen-based products used by agricultural and industrial companies. The stock has been on the ascent for the past year on increased demand for fertilizer products worldwide especially in China. Terra's stock recently came under pressure due to an issuance of convertible preferred shares. Yet, rare dips in the stock have led to good entry points, as the stock has come back down to a support level of $7.50-$8.00. Look for a resumption in the uptrend as pressure from the issuance lifts. Downside risk should be limited to the $7.00 area. Our upside target is $10.
"FuelCell Energy (FCEL NASDAQ) is a Connecticut-based manufacturer and developer of industrial fuel cells. The stock has made an impressive rebound from the $7.50 are in August. It’s a volatile high beta name that tends to do well when talk in Washington and elsewhere turns to alternatives to crude oil as an energy source. Fuel Cell has nearly 25 power plants up and running; they are designed for ‘base load’ power for data centers, factories, office buildings, hotels and backup for utilities. Now trading at $12.72, our target is $16 with a stop at $11.70.
"Paxar (PXR NYSE) remains a holdover from our swing trades initiated last month. The company is a global leader in the identification and tracking of consumer products. In July, the company announced the industry’s first radio frequency identification (RFID) tag service bureau to help other companies become compliant with the new Wal-Mart labeling standard. It also recently announced a new breakthrough system that procuded RFID tags as short as one inch – about a quarter of the size of previous RFID tags."
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