Swing trading is a style of trading where traders try to profit from the up and down swings in stock prices, and the trades usually last from a few days to a few weeks. You can make a lot of money with this style of trading, but first, you need to know how to find the right stocks to trade.
You can find stocks to swing trade by using some of the following methods:
- Pick stocks of companies that have a culture of consistently releasing relevant and reliable information during market hours
- Screen the stocks based on trading volume and volatility, and choose the ones that trade over 500,000 shares per day with moderate price volatility
- Technically analyze the selected stocks to avoid stocks that show correlation and, then, categorize them into “potential buy” and “potential sell short” stocks
- Use your trading strategy, select the stocks that show valid buy and sell short setups from the respective categories
So, in essence, finding the stocks to trade could involve using fundamental data, technical analysis, and the criteria that make up your trading strategy. Read on to learn more about each of them.
Keep in mind that the strategies and examples laid out in this article are not the one and only answer. Every trader has his/her own way of trading, and you cannot say that one necessarily is better than the other. However, the methods laid out in the article outline methods that some swing traders are very likely to use.
When looking for interesting stocks to swing trade, the first thing to look for is the commitment of the company to getting the public aware of what they are doing. That is, looking for companies that always release reliable information about their operations through press releases and timely reports.
A lot of stuff can be on the news about a stock, but you should concern yourself with the things that matter, such as news about new products, change of important personnel like executive directors, restructuring, takeovers, acquisitions, mergers, buyouts, stock split, dividends, and public offerings. Of course, you must not neglect earning reports.
For any stock you are considering, always check the company’s news calendar to get an idea of the kind of information they share with the public and their timing in relation to market hours. Some companies release most of their news — including earnings — after market hours.
Since swing trading, unlike day trading, requires leaving your trades overnight, releasing important news (earnings, for example) after the market hours may make the stock a little bit riskier because of premarket price gaps. This doesn’t mean that you can’t trade such stocks, but you’re better off with those stocks that their news comes in during market hours.
Whatever you choose, just make sure you’re always up to date with news about the stocks. In addition to the company’s website and important news sites like MarketWatch, CNBC, and Bloomberg, you may also check SECFilings.com for other news.
Another thing that some swing traders is to group stocks with solid fundamentals (consistent quarterly and yearly earnings and revenue growth, low debt burden, and low payout ratio) under “potential buys”, while those with weak fundamentals (decreasing or negative earnings, high payout ratio, and high debt burden) under “potential sells shorts”.
Keep in mind that many traders who swing trade only care for technical patterns in price data and neglect fundamental data!
Many traders use technical analysis as the only method of finding stocks to swing trade. Below we will discuss the most import aspects of technical analysis that swing traders use when looking for stocks to swing trade.
This is one of the most important parameters for screening stocks. The reason is simple: when you’re swing trading, you should only trade stocks that are adequately liquid so that you can easily enter and exit the stock when you want.
Liquidity, for the most part, is a function of the volume of the stock transacted each day. Be sure to choose only stocks that trade at least 500,000 shares per day. This would ensure that you can always buy or sell your couple of hundred or thousand shares whenever you trade.
Another very important parameter to consider is how volatile the price of the stock is. In other words, what’s the size each swing in price and how long does a swing take to complete? As a swing trader, you intend to benefit from up and down price swings, so you want to trade stocks that make reasonable price movement in each swing and avoid the ones that are relatively quiet.
One parameter that checks the volatility of a stock is “Beta”. The beta value of a stock is a measure of the stock’s volatility compared to that of the market index. Some swing traders only choose stocks with beta values of more than 1.0.
For correlated stocks, whatever affects one stock also affects the other, and when you lose money in one, it’s almost certain the other would be a loser too. It is very important you avoid stocks that are closely correlated. This is very necessary to reduce your portfolio risk. One rule of the thumb is to avoid choosing many stocks from the same industry or companies that offer related products.
If you don’t want to be trading penny stocks, make sure you filter stocks based on price. You should have your preferred minimum price for a stock.
This is a measure of a stock’s price trend compared to another stock, the industry, or the market index. It compares the price performance of a stock against others. The stocks that have been performing better than the market are regarded as market leaders while the ones that have been performing poorly are regarded as laggards.
Some traders swing trade by using the market-wide relative strength of the stocks they have selected to find market leaders and laggards and group them into “potential buy” and “potential sell shorts”. Then, they typically use their trading strategy to look for buy and sell short setups in the respective groups.
While it is possible you can manually screen stocks using the above parameters, it’s much easier if you can use a tool where you can input the respective variables and get a list of stocks that meet your criteria in seconds. There are many stock screeners out there, such as Finviz, and StockRover. Use them to make your job easier.
Your trading strategy
As a stock trader, you must have a trading strategy — a set of criteria that tells you when there’s a buying or selling opportunity in a stock. This can be a chart pattern like triangle or head and shoulder, or it may be an indicator signal like overbought/oversold region in Stochastic or RSI, for example.
Once having filtered the stocks by fundamental data, you should have been left with some stocks in the “potential buy” and “potential sell short” group. Your job now is to use your strategy criteria to choose the stocks that have a buy setup from the “potential buy” group. These are the stocks you can buy. You should place the ones that don’t yet have a buy setup in the “watch list for buy” and regularly monitor each of them until a valid buy setup forms.
In the same way, you select stocks that have a valid sell short setup from the “potential sell short” group. You can place a sell short order for these ones. The stocks that don’t yet have a valid sell short setup could be placed in the “watch list for sell short” and regularly monitored until a valid sell short setup forms in any of them.
Finding the right stocks to swing trade could involve screening stocks with fundamental and technical parameters to select a few that show strong buy and sell short potentials, and then, using your trading strategy to pick the ones that have a valid trade setup.