Signs You’ve Found a Good Candidate for a Swing Trade

By Omar Bassal, CFA

Part of Swing Trading For Dummies Cheat Sheet

To succeed with swing trading, you need to know how to read market indicators. Make a swing trade that’s more likely to yield good results by getting to know the following signs of favorable conditions. (Just keep in mind that no trade is a sure money-maker.)

  • The market is on your side. You’ve determined that the market is trending in the same direction you want to swing trade. (If it isn’t, you may need to find a different trending market entirely.)

  • The industry group is on your side. Stocks tend to follow their industry groups up or down. If the security’s industry group is trending strongly in the same direction you want to swing trade, chances are your trade will be profitable.

  • If you’re trend trading, the candidate is moving out of a base. The candidate should be in an existing uptrend or downtrend that has pulled back in the short term. Use the ADX indicator to determine whether a trend exists.

  • If you’re trading ranges, the candidate has just bounced off of support/resistance with a technical indicator confirmation. Watch for the technical indicator (an oscillator) to generate a buy or sell signal. Divergences between your oscillator and the price action signal higher-confidence trades.

  • The fundamentals back the technicals. Pair your great chart setup with strong fundamentals. And no, you don’t need to spend 25 hours reading a company’s financial statements. Simply verify the important items, such as financial health, return on equity, P/E ratio, and expected earnings growth rates.

  • The stop loss level is near your desired execution price. The best swing trading candidates are those where your emergency exit is nearby. The closer your desired entry price is to your stop loss level, the less you stand to lose if matters turn ugly.

  • You allocate the right amount to the trade. Loss is always possible, even with the best swing trading candidate. Set your position size in accordance with your trading plan, which should put an absolute ceiling on your position size and set a maximum percentage of capital you’re willing to lose.