Swing Trading For Dummies

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