Swing trades are short-term in nature, typically lasting between 2 and 5 days. The goal of a swing trade is to capture a profit of between $1 and $5 dollars resulting from the natural flow and movement in a stocks price.
Each day, after the close, we scan daily charts, looking for set ups and post the alerts prior to the open the following day.
Each alert includes specific entry criteria, (which means the alert is not valid until the price crosses over the price mentioned) protective stop loss price, and target price.
Swing Trade Guidelines
To keep this easy, the guidelines are laid out in terms of a long trade, but the rules also apply to short trades. (just opposite)
Below you’ll find what we feel are the best rules for handling SWING TRADES.
A trade meets entry requirements ONLY once it trades over (or under) the required price.
That means if our idea says “Buy ABCD Above $17.50″ it is not valid until it trades $17.51. Do NOT try to get in early. These swing trades are based on technical analysis and the breakout or breakdown will often not materialize until a specific price is hit.
If a stock breaks down and hits the stop price before hitting its entry price, the play is invalid.
If a stock moves beyond its entry price in the first 5 minutes of trading, it should only be entered when the 5 minute high is exceeded.
Stops and Management
A trade is considered stopped ONLY if it trades under the required number and that price that prints was ‘in the market’ at the time (not outside the bid or offer).
All targets are to be attained without any interference. The stop posted is the stop for the play.
Types of Trades
Now you will need to master the use of a couple types of orders to swing trade effectively.
1) In the case of a long trade, the entry order done with a Market IF Touched or Buy Stop order which is placed above the current market. In the example of Sprint, the order would be placed at $2.91.
If the entry is triggered, now you need to place a order to sell the stock if it goes up at a profit and an order to sell to sell if it goes down at a loss. The easiest way to do this is through an OCO (one cancels other) order. The first would be a LIMIT Sell above the current market price (for this example $4) and a Stop loss order placed below ($2.50).
You now have your position covered (bracketed) so regardless of which direction it goes the stock will be sold without you having to watch it.
As you become more comfortable you do have the ability to scale out of trades which means selling a bit at a time as it moves higher or use trailing stops and we will discuss those ideas another time.
There will be four exceptions. For the first two exceptions, the trade is divided into ‘halves’, and the partial trades are managed separately based on their own target.
Exception #1 – 85% rule. Upon trading above the 85% mark on the way to a target, begin using a bar by bar daily trailing stop (on that portion of the trade), beginning on the current open bar. Set the stop to one-half of one percent below the bar (above on a short).
Exception #2 – Time stop rule. After five bars are complete, begin using a bar by bar daily trailing stop, beginning on the sixth bar. Set the stop to one-half of one percent of the stock price (example, 15 cents for a $30.00 stock) below the bar (above on a short).
Exception #3- Earnings-If a trade is still active at the close of the day prior to an earnings report for the company, then the trade should be closed.
Exception #4- Disaster- If the stock gaps to or beyond its stop point on any day, a disaster plan needs to be followed, with half of the position being closed out after a 5 minute high and the remainder being closed after a 30 minute high. If the trade or any portion of it survives the disaster rules, then a daily trailing stop will continue from that point on.
If, however, the stock price opens without having violated its stop and quickly proceeds to trade through the stop price, then the play should be stopped immediately, even if this occurs within the first five minutes of trading.
Each target is either hit, or trailed out by one of the exceptions, and each target is managed independently with the proportionate trade size.
Pay close attention to the entry prices, don’t jump the gun, always use stops, and book your profits as described.
Swing trades are a great way to build your account with high probability, lower risk trades than found on the OTC markets.
Take advantage of them.