Master Swing Trading: A Proven Framework for Consistent Profits

by | Jun 15, 2024 | Investing Strategies | 0 comments

Introduction to Swing Trading

Welcome to our guide on swing trading, an investment strategy designed to capitalize on short- to medium-term price movements. This article outlines a robust decision-making framework to enhance your swing trading effectiveness, leveraging critical criteria for stock selection and analysis.

For those who prefer selecting individual stocks, it is crucial to first understand what type of investor you are. To help with this, we have created three articles summarizing the three main types of investors: Value Investors, Growth Investors, and GARP Investors. Additionally, for those interested in passive investment strategies over a very long term (20-30 years), our guide on building a robust ETF portfolio offers comprehensive insights. Furthermore, you can explore our article on how to invest in commodities.

What is Swing Trading?

Swing trading is a style of trading that seeks to capture gains in a stock (or any financial instrument) within an overnight hold to several weeks. It sits between day trading, where positions are closed within a single trading day, and trend trading, where positions are held for several months. Swing traders primarily use technical analysis due to the short-term nature of the trades, but they may also use fundamental analysis or a combination of both to make their trading decisions.

Benefits of Swing Trading

Swing trading can be a suitable strategy for those who cannot dedicate all their time to trading. Unlike day trading or scalping, which require constant monitoring of the markets throughout the trading day, swing trading allows for more flexibility.

Comparing Swing Trading, Day Trading, and Scalping

Several studies and surveys indicate that the majority of day traders and scalpers do not achieve consistent profitability. For instance, research by the U.S. Securities and Exchange Commission (SEC) shows that approximately 70-80% of day traders lose money over the long term. A study by the University of California, Davis, found that only 1% of day traders were profitable net of fees.

Conversely, swing trading and long-term investing tend to yield better results. Portfolio managers in hedge funds, mutual funds, venture capital, and private equity often rely on swing trading and long-term strategies to achieve substantial gains. According to a report by the National Bureau of Economic Research (NBER), hedge funds that employ swing trading strategies often outperform those that engage in high-frequency trading (HFT) and day trading.

Here’s a comparison table to highlight the differences between swing trading, day trading, and scalping:

AspectSwing TradingDay TradingScalping
Time CommitmentModerate (hours to weeks)High (all-day monitoring)Very High (constant monitoring)
Trade DurationDays to weeksMinutes to hoursSeconds to minutes
Frequency of TradesLow to moderateHighVery High
Stress LevelModerateHighVery High
Potential ReturnsModerate to highHighLow to moderate
Risk LevelModerateHighVery High
Required KnowledgeModerate to highHighHigh
Technical AnalysisEssentialEssentialEssential
Fundamental AnalysisUseful but not essentialLess emphasisMinimal
Capital RequirementModerateHighVariable
Comparison of Day Trading, Scalping, and Swing Trading highlighting their differences in time frame, trading frequency, holding period, stress level, risk management, capital requirement, profit potential, and success rate.

A Comprehensive Swing Trading Framework

The decision-making process we propose is both efficient and effective, utilizing a series of rigorously selected criteria relevant to swing trading. This framework can be directly implemented using tool like GuruFocus, which provide updated data and relevant indicators. Through comprehensive backtesting on our portfolio, this process has proven effective for both short-term and medium-term trades, demonstrating its reliability in identifying potential trading opportunities.

This decision-making framework is derived from the book Biotech Boom by Fatih AK. For a deeper understanding and more detailed strategies, I highly recommend reading it. Please note that this is an affiliate link, and I will earn a commission if you purchase the book through.

CategoryCriterion/StepDescription/TargetYes (1)No (0)References
Basic CriteriaClosing and Opening PricesAre the daily closing and opening prices analyzed graphically?GuruFocus, Yahoo Finance
Stock PriceIs the stock priced under $5?GuruFocus, Finviz, Yahoo Finance
Market CapitalizationIs the market capitalization under $2 billion?GuruFocus, Finviz, Morningstar
SectorIs the stock in a sector like technology, healthcare, finance, etc.?GuruFocus, Finviz, Morningstar
Technical Criteria52-Week LowIs the stock within 50% of its 52-week low?GuruFocus, Finviz, Yahoo Finance
Golden CrossHas the 50-day SMA crossed above the 200-day SMA, or the 20-day SMA above the 50-day SMA?GuruFocus, Finviz, Yahoo Finance
RSI (Relative Strength Index)Is the RSI between 40 and 60?GuruFocus, Finviz, Yahoo Finance
Volume and Average Daily VolumeIs the daily volume between 1 and 2 million?GuruFocus, Finviz, Yahoo Finance
Valuation ParametersP/E RatioIs the P/E ratio less than 80% of the market average CAPE ratio or below 15?GuruFocus, Finviz, Morningstar
P/S RatioIs the P/S ratio less than 2?GuruFocus, Finviz, Morningstar
PEG RatioIs the PEG ratio less than 2?GuruFocus, Finviz, Morningstar
PCF RatioIs the PCF ratio less than 15?GuruFocus, Finviz, Morningstar
Financial CriteriaEarnings DateAre the upcoming earnings reports monitored?GuruFocus, Finviz, Yahoo Finance
EPS GrowthHas the EPS shown positive growth compared to previous quarters?GuruFocus, Finviz, Yahoo Finance
Cash FlowDoes the company have at least 12 months of cash flow?GuruFocus, Finviz, Yahoo Finance
Debt-to-Equity RatioIs the debt-to-equity ratio less than 1.0?GuruFocus, Finviz, Morningstar
Cash AvailabilityDoes the company have 12-24 months of available cash?GuruFocus, Finviz, Yahoo Finance
Ownership StructureInsider OwnershipIs the insider ownership greater than 20%?GuruFocus, Finviz, Yahoo Finance
Institutional OwnershipIs the institutional ownership less than 20%?GuruFocus, Finviz, Yahoo Finance
FloatIs the float less than 100 million?GuruFocus, Finviz, Yahoo Finance
Short FloatIs the short float less than 5%?GuruFocus, Finviz, Yahoo Finance
CatalystsDiversified PipelineDoes the company have a diversified range of products or services in development?GuruFocus, Finviz, Company Reports
Regulatory StatusDo the products have significant regulatory designations or approvals?GuruFocus, Finviz, Company Reports
Catalyst DatesAre there confirmed catalyst dates within the next three months?GuruFocus, Finviz, Company Reports
Comprehensive Swing Trading Framework

To decide whether to buy a stock for swing trading, aim for an optimal score of 12 to 17 points out of the total 24 criteria. This range indicates a balanced evaluation of the stock’s potential based on the comprehensive criteria outlined above

For those who want to move faster and benefit from our trading positions and consult our constantly updated, catalyst-focused portfolios offering parabolic movements, you can access them via the following link: Investment Portfolios.

Conclusion

Integrating these scores into your strategy helps avoid companies with significant financial risks. However, the primary goal in swing trading is to capitalize on short-term price movements without holding positions long-term. The total of 24 criteria aims to achieve an optimal score of 12 to 17 points to consider a stock a potential trading opportunity.

For a more detailed and precise framework (quantitative, qualitative, technical, fundamental), readers can explore our other articles and the following book, which is probably one of the most concise on the topic: The Art of Unearthing Gems in the Stock Market. This resource is perfect for investors of all levels and offers in-depth insights into proven strategies for achieving true success in the stock market. Please note that this is an affiliate link, and I will earn a commission if you purchase the book through it.

For those interested in starting their investment journey, consider using our affiliate link for Trade Republic. By using this link, you will receive a €10 bonus in shares as a gift: Trade Republic.

Stay tuned for more expert advice and join our community of informed investors by subscribing to our newsletter. To join us, simply click the “Join our newsletter” button at the top right for free analyses, ideas, and lessons. To receive alerts for taking positions, lightening, and rebalancing, subscribe to our newsletter or pay for premium access via the link: Subscribe.

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