Swing Trading for Dummies

Increase profit and limit risk with swing trading basics

Swing trading is all about riding the momentum of brief price changes in trending stocks. Although it can be risky, swing trading is popular for a reason, and Swing Trading For Dummies, 2nd Edition, will show you how to manage the risk and navigate the latest markets to succeed at this lucrative trading strategy.

In this updated edition, you’ll find expert guidance on new accounting rules, the 2018 tax law, trading in international markets, algorithmic trading, and more. Plus, learn about the role social media now plays in moving asset prices, and how you can tap into online trends to ride price swings.

• Understand money management, journal keeping, and strategy planning
• Focus on fundamental analysis to increase your chance of success
• Evaluate companies to screen for under- or overvalued stocks
• Develop and implement your trading plan and calculate performance

Starting from the basic differences between swing trading and other trading styles and progressing through plain-English explanations of more advanced topics like charts and reporting standards, Swing Trading For Dummies will help you maintain and grow your assets with swing trading in any market!

Omar Bassal, CFA, is the founder and managing director of Shukr Investments. He has held senior investment positions in the United States and Middle East. Bassal holds the Chartered Financial Analyst designation, an MBA with honors from the Wharton School of Business, and has been investing since 1994. Omar wrote the first edition of Swing Trading For Dummies in 2008.

Introduction 1

About This Book 2

Foolish Assumptions 3

Icons Used in This Book 3

Where to Go from Here 4

Part 1: Getting into the Swing of Things 5

Chapter 1: Swing Trading from A to Z 7

Understanding What Swing Trading is (and Isn’t) 8

The differences between swing trading and buy-and-hold investing 8

The differences between swing trading and day trading 11

What Swing Trading is to You: Determining Your Time Commitment 12

Swing trading as your primary source of income 12

Swing trading to supplement income or improve investment returns 13

Swing trading just for fun 14

Sneaking a Peek at the Swing Trader’s Strategic Plan 14

The “what”: Determining which securities you’ll trade 15

More “what”: Trading stocks consistent with your values 17

The “where”: Deciding where you’ll trade 18

The “when” and the “how”: Choosing your trading style and strategy 19

Building Your Swing Trading Prowess 24

Chapter 2: Understanding the Swing Trader’s Two Main Strategies 25

Strategy and Style: The Swing Trader’s Bio 26

Two forms of analysis, head to head 26

Scope approach: Top down or bottom up? 29

Styles of trading: Discretionary versus Quantitative 29

Wrapping Your Mind around Technical Theory 30

Understanding how and why technical analysis works 31

Sizing up the technical advantages and disadvantages 33

The two main approaches of technical analysis 34

Appreciating the Value of the Big Picture: Fundamental Theory 37

Understanding how and why fundamental analysis works 37

Surveying the fundamental advantages and disadvantages 39

Looking at catalysts and the great growth/value divide 40

Chapter 3: Focusing on the Small Stuff: The Administrative Tasks 45

Hooking Up with a Broker 46

Choosing a broker 46

Opening an account 49

Selecting Service Providers 50

Providers to do business with 51

Providers to avoid 55

Starting a Trading Journal 57

Creating a Winning Mindset 59

Part 2: Timing is Everything: Technical Analysis 61

Chapter 4: Charting the Market 63

Nailing Down the Concepts: The Roles of Price and Volume in Charting 64

Having Fun with Pictures: The Four Main Chart Types 65

Charts in Action: A Pictorial View of the Security Cycle of Life 68

The waiting game: Accumulation 68

The big bang: Expansion 70

The aftermath: Distribution 71

The downfall: Contraction 73

Assessing Trading-Crowd Psychology: Popular Patterns for All Chart Types 74

The Darvas box: Accumulation in action 75

Head and shoulders: The top-off 76

The cup and handle: Your signal to stick around for coffee 78

Triangles: A fiscal tug of war 80

Gaps: Your swing trading crystal ball 81

Letting Special Candlestick Patterns Reveal Trend Changes 84

Hammer time! 85

The hanging man 86

Double vision: Bullish and bearish engulfing patterns 86

The triple threat: Morning and evening stars 88

Measuring the Strength of Trends with Trendlines 89

Uptrend lines: Support for the stubborn bulls 90

Downtrend lines: Falling resistance 91

Horizontal lines: Typical support and resistance 92

Chapter 5: Asking Technical Indicators for Directions 93

All You Need to Know about Analyzing Indicators 94

You must apply the right type of indicator 94

Not all price swings are meaningful 94

Prices don’t reflect volume, so you need to account for it 96

An indicator’s accuracy isn’t the best measure of its value 97

Two to three indicators are enough 98

Inputs should always fit your time horizon 98

Divergences are the strongest signals in technical analysis 99

Determining Whether a Security is Trending 100

Recognizing Major Trending Indicators 102

The compass of indicators: Directional Movement Index (DMI) 102

A mean, lean revelation machine: Moving averages 104

A meeting of the means: MACD 109

Spotting Major Non-Trending Indicators 112

Stochastics: A study of change over time 112

Relative Strength Index (RSI): A comparison of apples and oranges 115

Combining Technical Indicators with Chart Patterns 118

Using Technical Indicators to Determine Whether to Be In or Out of the Market 119

Chapter 6: Trend Following or Trading Ranges 121

Trading Trends versus Trading Ranges: A Quick Rundown 122

Trend Trading 124

Finding a strong trend 124

Knowing when to enter a trend 126

Managing risk by determining your pain threshold 129

Trading Ranges: Perhaps Stasis is Bliss? 129

Finding a security in a wide trading range 130

Entering on a range and setting your exit level 131

Comparing Markets to One Another: Intermarket Analysis 132

Passing the buck: The U.S dollar 133

Tracking commodities 135

Watching how bond price and stock price movements correlate 137

Putting Securities in a Market Head-to-Head: Relative Strength Analysis 139

Treating the world as your oyster: The global scope 139

Holding industry groups to the market standard 141

Part 3: Running the Numbers: Fundamental Analysis 145

Chapter 7: Understanding a Company, Inside and Out 147

Getting Your Hands on a Company’s Financial Statements 148

What to look for 148

When to look 149

Where to look 150

Assessing a Company’s Financial Statements 151

Balance sheet 152

Income statement 156

Cash flow statement 159

Analyzing More Than Just Numbers: Qualitative Data 162

Valuing a Company Based on Data You’ve Gathered 164

Understanding the two main methods of valuation 164

Implementing the swing trader’s preferred model 165

Chapter 8: Finding Companies Based on Their Fundamentals 169

Seeing the Forest for the Trees: The Top-Down Approach 169

Understanding the basics of the top-down approach 170

Sizing up the market and examining the technical picture 171

Assessing industry potential 178

Starting from the Grassroots Level: The Bottom-Up Approach 180

Using screens to filter information 181

Assessing your screening results 186

Deciding Which Approach to Use 187

Chapter 9: Assessing a Company’s Stock: Six Tried-and-True Steps 189

The Six Step Dance: Analyzing a Company 190

Step 1: Taking a Company’s Industry into Account 191

Scoping out markets you’re familiar with 192

Identifying what type of sector a company is in 193

Step 2: Determining a Company’s Financial Stability 196

Current ratio 197

Debt to shareholders’ equity ratio 197

Interest coverage ratio 198

Step 3: Looking Back at Historical Earnings and Sales Growth 199

Step 4: Understanding Earnings and Sales Expectations 201

Step 5: Checking Out the Competition 203

Step 6: Estimating a Company’s Value 206

Gauging shares’ relative cheapness or expensiveness 206

Figuring out whether the comparative share-price difference is justified 207

Part 4: Planning the Trade and Trading the Plan 211

Chapter 10: Fail Fast: Managing Risk 213

Risk Measurement and Management in a Nutshell 215

First Things First: Measuring the Riskiness of Stocks before You Buy 216

Looking at liquidity: Trade frequency 216

Sizing up the company: The smaller, the riskier 217

Assessing the beta: One security compared to the market 218

Avoiding low-priced shares: As simple as it sounds 219

Limiting Losses at the Individual Stock Level 220

Figuring out how much you’re willing to lose 220

Setting your position size 222

Building a Portfolio with Minimal Risk 226

Limit all position losses to 7 percent 226

Diversify your allocations 228

Planning Your Exit Strategies 232

Exiting for profitable trades 232

Exiting based on the passage of time 235

Exiting based on a stop-loss level 236

Chapter 11: Knowing Your Entry and Exit Strategies 241

Understanding Market Mechanics 242

Surveying the Major Order Types 243

Living life in the fast lane: Market orders 243

Knowing your boundaries: Limit orders 244

Calling a halt: Stop orders 244

Mixing the best of both worlds: Stop limit orders 245

New order types: Algorithmic orders 247

Placing Orders as a Part-Time Swing Trader 248

Entering the fray 248

Exiting to cut your losses (or make a profit) 249

Placing Orders if Swing Trading’s Your Full-Time Gig 249

Considering the best order types for you 249

Taking advantage of intraday charting to time your entries and exits 250

Investigating who’s behind the bidding: Nasdaq Level II quotes 253

Chapter 12: Walking through a Trade, Swing-Style 259

Step 1: Sizing Up the Market 260

Looking for short-term trends on the daily chart 260

Analyzing the weekly chart for longer-term trends 261

Step 2: Identifying the Top Industry Groups 262

Step 3: Selecting Promising Candidates 263

Screening securities 264

Ranking the filtered securities and assessing chart patterns 264

Step 4: Determining Position Size 268

Setting your stop-loss level 269

Limiting your losses to a certain percentage 269

Step 5: Executing Your Order 270

Step 6: Recording Your Trade 271

Step 7: Monitoring Your Shares’ Motion and Exiting When the Time is Right 272

Step 8: Improving Your Swing Trading Skills 274

Chapter 13: Looking at the Scoreboard to Evaluate Your Performance 277

No Additions, No Withdrawals? No Problem! 278

Comparing Returns over Different Time Periods: Annualizing Returns 279

Accounting for Deposits and Withdrawals: The Time-Weighted Return Method 281

Breaking the time period into chunks 283

Calculating the return for each time period 286

Chain-linking time period returns to calculate a total return 286

Comparing Your Returns to an Appropriate Benchmark 287

Evaluating Your Trading Plan 291

Part 5: The Part of Tens 293

Chapter 14: Ten Simple Rules for Swing Trading 295

Trade Your Plan 295

Follow the Lead of the Overall Market and Industry Groups 297

Don’t Let Emotions Control Your Trading 298

Diversify, but Not Too Much 299

Set Your Risk Level 299

Set a Profit Target or Technical Exit 300

Use Limit Orders 301

Use Stop-Loss Orders 301

Keep a Trading Journal 302

Have Fun 303

Chapter 15: Ten (Plus One) Deadly Mistakes of Swing Trading 305

Violating Your Trading Plan 305

Starting with Too Little Capital 306

Gambling on Earnings Dates 307

Speculating on Penny Stocks 308

Changing Your Trading Destination Midflight 308

Doubling Down 309

Keeping Open Positions While You Travel 310

Thinking You’re Hot Stuff 310

Concentrating on a Single Sector 311

Trading Illiquid Securities 312

Overtrading Stocks 312

Appendix: Helpful Resources for Today’s Swing Trader 315

Index 327

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