Sourcing and charting your swing trading ideas
Swing trading ideas typically come from bottom-up screening or top-down searches. MagicFormulaInvesting is a bottom-up screening website, and High Growth Stock Investor and eTables by Investor’s Business Daily are two top-down tools that can also do bottom-up screening.Trading ideas: MagicFormulaInvesting.com
This website is very different from any you’ve visited.MagicFormulaInvesting.com is the brainchild of Joel Greenblatt, a successful hedge fund manager. The “magic formula” that the site’s title refers to is a simple quantitative ranking that Greenblatt developed. This formula assesses financial securities by two measures:
- A cheapness measure: Similar to the inverse of the P/E ratio
- An efficiency measure: Similar to the return on equity ratio
Trading ideas: High Growth Stock Investor
High Growth Stock Investor (HGS Investor) is a software tool that assists in identifying promising candidates to buy. The software incorporates both fundamental analysis data and technical analysis data. The software can be used to identify financial securities using both a top-down and a bottom-up approach.To assist you in identifying which industry groups to analyze, HGS Investor color-codes industry group rankings. Industry groups performing in the top 20 percent of the market are color-coded green. The next 20 percent of industry groups are color-coded yellow. The industry groups ranking in the bottom 60 percent of the market are color-coded red.
HGS Investor also allows you to analyze commodities, dividend-paying securities, international securities, and value investments. Though some traders use HGS Investor for longer-term horizons than swing traders typically would, the software can be extremely valuable for the traditional swing trader.
You can get a free trial of HGS Investor by visiting the firm’s website. An annual subscription costs around $700.
Trading ideas: eTables by Investor’s Business Daily
Investor’s Business Daily (IBD), unlike other newspapers, is geared to the swing trader. But the newspaper industry is a dying breed, and IBD has established powerful online tools that you should consider using.eTables is a service that allows you to review the best ideas from the editors of IBD (such as IBD New America or IBD 85-85, a list of securities with earnings per share and relative strength rankings of 85 or better).
eTables also highlights securities that have just emerged from bases and may be ripe for purchase. The company’s philosophy is built around the top-down trading and emphasizes strong industry groups and strong stocks within those groups. The service favors growth-oriented securities over value-oriented securities.
eTables can also assist you in selecting companies with strong fundamental and technical criteria, such as the following:
- Earnings per Share Growth Rating: This fundamentals-based ranking compares a firm’s earnings growth history to the other companies in the market.
- Relative Price Strength Rating: This may be viewed as a technical ranking because it compares the price performance of a security to all securities in the market.
- SMR Rating (Sales + Profit Margins + Return on Equity): eTables attempts to simplify fundamental analysis for you by crunching these figures and generating a grade of either A, B, C, D, or E.
- Accumulation/Distribution last three months: According to IBD, this rating measures “relative degree of institutional buying (accumulation) and selling (distribution) in a particular stock over the last 13 weeks.” Translated into English, this rating looks at whether big investors are buying shares en masse or selling shares en masse.
- Composite Rating: Finally, eTables publishes a Composite Rating that sums up a security’s score on the aforementioned criteria and adds in a security’s industry group ranking. The Composite Rating ranges between 1 and 99.
Charting software: TradeStation
You can find dozens of charting programs on the market. TradeStation is more than just a trading software tool. When the company was founded, charting and indicators were its bread and butter. TradeStation allows users to tap dozens of indicators that come prepackaged in the program or design their own trading indicators. By using those indicators, you can develop and backtest your trading strategies.TradeStation now incorporates brokerage with the charting platform. It allows users to trade public equities. TradeStation has won broker awards from the financial newspaper Barron’s and the trading magazine Technical Analysis of Stocks and Commodities. The TradeStation platform is free to brokerage clients who do a minimum number of trades a month (check with TradeStation to find out what that minimum is).
Charting software: StockCharts.com
StockCharts.com was founded in 1999 and offers users free charting services as well as premium services for paying members. Free charting features include the following:- Three indicators per chart
- Three overlays per chart (referring to indicators plotted on top of the price movement)
- 900 pixels maximum chart width
- 25 indicators per chart
- 25 overlays per chart
- Real-time data
- Larger charts
- Custom scans
- Custom alerts on individual stocks
Doing market research for your swing trades
Swing traders should always be sharpening their pencils. They should know what’s going on in the macroeconomic environment. For example, are interest rates high or low? Is the Fed concerned about inflation or economic growth? Is the U.S. dollar strengthening or weakening? You can keep abreast of these big-picture questions by staying on top of the latest news from financial publications.Real Vision TV
Real Vision was launched in 2014 to disrupt financial media. The subscription-based website offers streaming videos of the brightest minds in investing, economics, and trading talking about their insights and opinions. All interviews on Real Vision are proprietary (you can’t access them on other platforms) and the interviews offered on the site are more in depth than comparable pieces on mainstream financial news networks (for example, an interview with a legendary trader like Jim Rogers may last two hours).Real Vision is an ideal resource to find out about different parts of the world and hear different views on topics like the likely direction of equity markets, currencies, interest rates, and so on. The site doesn’t cater to one type of trader or investor. Instead, you’ll find views from shot-term traders, long-term investors, and everything in between. When there is a new topic you want to read about (such as Bitcoin), Real Vision has experts debating the topic.
You can subscribe to Real Vision TV for $180 per year.
GMO Research
GMO is an investment management firm based out of Boston and founded in 1977. As of the date of publication of this second edition of this book, the firm managed $70 billion.GMO is an institutional asset management company — meaning the firm manages money for large organizations like insurance companies, sovereign wealth funds, and pension plans. GMO is a fundamentally driven investment firm; the experts who work there are driven by extensive analysis of earnings, interest rates, valuations, and so on. Their investment horizon is measured in years, not weeks.
In short, GMO’s calls on the long-term direction of markets are more often than not correct. They’re focused on larger moves than what may happen in the near-term.
Because swing traders are focused by definition on shorter-term trends, it’s useful to expose oneself to the thinking of long-term investors who capture large, secular trends. Don’t expect that GMO’s free research will give you trading ideas. Rather, it’s useful to know the stage of the economic cycle and whether equities are expensive or cheap. That way when a swing trader sees trends emerging that align with the long-term picture GMO focuses on, she can position the portfolio to take advantage of the long-term picture.
You can subscribe to the research for free.
Keep tabs on your portfolio and the latest market news
When you hold a portfolio of swing trading positions, you’re going to want to stay on top of them like a hawk. But how can you do that, aside from watching their prices change during the day? Monitoring your portfolio on a day-to-day basis can be cumbersome, especially as you hold more and more securities. Although setting alerts on your securities by using technical trading software (such as TradeStation, which I cover earlier in the “Charting software: TradeStation” section) is important, you should also keep tabs on any fundamental news developments that occur.Your brokerage provider should provide fundamental news on each position you own. The broker option is generally best because it automatically reflects your holdings and updates every time you buy a new position. Other paid subscriptions that can perform the same analysis include StockCharts.com.
Free online tools are available that you can use to monitor your portfolio.
Yahoo! Finance portfolio tool
The easiest way I’ve found to keep tabs on all the news on my positions is to use the My Portfolio from Yahoo! Finance. This tool allows you to quickly enter the symbols of your portfolio holdings and even link the site to your broker or brokers’ systems. After the symbols are loaded, the tool pulls down any news headlines associated with those symbols, sorted by date, from such sources as Bloomberg, Reuters, and company press releases. By checking this website on a daily basis, you can stay on top of company announcements (such as earnings dates shown in the Events tab under the Calendars option in Markets) or positive/negative mentions of your securities in the popular press. And the best part is it’s free.To see the portfolio tool, visit Yahoo! Finance. Then click on the tab labeled My Portfolio. You may need to sign onto Yahoo! or create a Yahoo! ID to uniquely identify you and your holdings. After you’ve logged onto Yahoo!, you can edit or create portfolios on Yahoo! Finance.
Yahoo! Economic Calendar
On almost every business day, the federal government or private organizations release economic news that affects financial markets. Some of the information is very important (such as Federal Reserve Bank interest rate decisions), whereas other data points have little impact.To keep yourself apprised of the important stuff, turn to Yahoo! Economic Calendar, which provides a listing of all major economic news scheduled to be released in any given week. The website shows what data is to be released and what the market expects the data to be. The calendar even provides coverage for global markets (such as Japan, the United Kingdom, South Korea, and so on). Some data is released before the market opens, and other data is released during market hours. Yahoo! lists the time of each release — so keep in mind you may see some early hours for Asian or European markets.
But how do you know when a report helps or hurts stocks? Follow these guidelines:
- Inflation: Generally, higher-than-expected inflationary data (in the form of the Consumer Price Index or the Producer Price Index) is negative for both stocks and bonds.
- Economic data: The growth rate in the country’s gross domestic product may be interpreted as bearish or bullish for stocks, depending on the stage of the economic cycle. If the economy is weak, then strong economic growth numbers are highly prized. However, if the economy is overheating, a strong economic report may send stock prices falling fast because investors will fear interest rate hikes that hurt companies’ profitability.
- Central Bank Actions: These actions (for example, lowering or raising short-term interest rates) tend to have the largest effects on financial markets. When the Federal Reserve lowers interest rates by more than market expectations, it generally leads to rallies in stocks and bonds. When the Federal Reserve raises interest rates by more than market expectations, it generally leads to declines in stocks and bonds.