Swing TradingCHAPTER 5. INTRODUCTION TO SWING TRADING STRATEGIES AND CLASSIC SWING TRADE PATTERNS – WATCH LIST BUILDING

Options Strategies

A rare, but handy strategy!

For the gap fill strategy, we want to choose the NEAREST strike at the current price, right as it appears the stock will begin to move into the gap. This would be an ATM strike.

We also want to consider liquidity. We don’t want to be the only ones buying these options, we want to see OI and other volume already trading. In the case of SSYS, I had to look out to the June expiration in order to find sufficient volume (MINIMUM being 500 contracts traded at that nearest ATM strike) In June, the only strikes that were available at the time were June $60 & $65 calls, even though we bought when SSYS was trading around $56. The closer, ATM strike will be more expensive, but will allow us to profit sooner from any moves into the gap. This expiry/strike combination provided us with the most volume at the closest strike and gave us plenty of time before theta/time decay becomes an issue, and with enough liquidity that we can get out of the trade safely and not be forced to take a bigger loss should things go against us.

When trading gappers, we want the move to occur sooner than later. If the sell off continues, the stock can see another gap down, if the stock makes new lows throughout the day, instead of rejecting the lows, we want to stay away from it. Strong stocks often have a moment of weakness that we try to capitalize on.

We use options to trade these because we can’t possibly lose more than we paid in premium. If we held stock and the stock continued gapping down, our losses would be exponential. The more speculative the trade, the less I want to expose my equity to it. But, that doesn’t mean I don’t want to be there to capitalize on a quick sharp reversal. Often times we see things drop hard and sharp, and the harder and sharper the drop, the likelier we are to see a hard and sharp reversal.

Swing Trading StrategiesOptions gap fill strategy checklist

We look for stocks that have made extreme moves up or down (gappers only, 15-20%+)

We don’t really care why they made the move (earnings, news, etc), unless it is for bankruptcy, criminal investigation, or a buyout/M&A

We find the trade on our scanners 99% of the time

We evaluate the news/why it gapped down

On something that moves with enough volatility to gap down

$22, we don’t want to hold long stock (risk management)

We check options liquidity and pricing (500 contracts MIN volume)

We want to be long on this trade using call options because they will be cheapand provide us with the best R/R and still give us the ability to manage our riskfrom additional gaps to the downside. Max risk is DEFINED using this strategy.

Swing Trading StrategiesWhen a stock gaps, a high percentage of the time, it will make an attempt at filling that gap. Sometimes it is partially filled, and sometimes it is completely filled. We only want to capture that first, initial push toward the gap as shorts cover and buyers come back in. The longer we wait, the more of a chance it fails. Remember, this gapped down for a reason after all.

URBN already filled this gap and then some! GILD loves to fill gaps

Swing Trading Strategies

SSYS filling the massive gap after our entry LL gap fill fail, why we use options…manage risk!

Swing Trading StrategiesGap fills are everywhere all the time!

Traded SLXP at $88 for 100% win!

Swing Trading StrategiesBreakout with a catalyst checklist

We seek to find trades that have just released news of something big and have a multi day potential to run in store for them (M&A, FDA approval, new board member/CEO, activist investor stake, etc)

It is critical that we thoroughly evaluate and conduct our due diligence when investigating the veracity of the news/catalyst. The old saying is very true, “buy the rumor, sell the news.” The breaking news release sounds amazing, but don’t just jump in for a swing trade until you know for sure what the real potential for the news is. How many Ichan stake rumors have we scalped in chat that turned out to be bogus? More than not…

The breakout with a catalyst trade can be done with options or stock. Keep in mind, the IV of the news will be factored into the premiums almost instantly. So we need to know the strength of the catalyst and whether or not it is sustainable.

Find those trigger spots! Entry trigger, stop, secondary/add trigger, price target. Use support and resistance, moving averages or other identifiable spots on the chart.

Swing Trading StrategiesExample: GILD, released news multiple times in a two week window. First was discount pricing on their Hepatitis C drug, which meant more sales potential. The second round of news included CVS endorsement of a different GILD drug that would also boost sales. We took two trades on these breakouts with these catalysts. Both were good for 100% wins in short time using options. Why did we use options here?

Swing Trading Strategies

There are all kinds of catalysts, news, hype/fear, earnings etc.

Swing Trading Strategies

Strong Stocks will catch strong catalysts more often than weak stocks. Also, be aware of dividend and liquidity events.

Swing Trading StrategiesReversals & technical setups using support and resistance

These trades are stocks that have become extended to the downside and may be ready for a reversal or in some cases, a “dead cat bounce,” and also stocks that are ready to move through key support/resistance levels

A “dead cat bounce” is defined as: a temporary recover from a prolonged decline, followed by a continuation of a downtrend. A short lived “bounce” as shorts cover and buyers come in thinking that a bottom has been reached.

Dangerous to hold without using live stops/profit stops. Calling the top/bottom on any security is difficult. Be sure to take your profits early.

For stocks moving past significant support and resistance levels, keep an eye on daily volume and price action. Look for stocks to move past these key levels with enough volume to sustain the move.

Swing Trading StrategiesReversal example: Facebook (ended up a dead cat bounce), Cempra Inc. (reversal), consecutive candles (use scanner)

Note on the date of entry, we saw a break of the 50 moving average, that was our long entry signal. This was the first bullish reversal indicator following a 10 day sell off in the stock.

Waited for bullish moving average break and got candle over candle confirmation next day. Sell off continued (dead cat bounce confirmed as well)

IBB pullback (sector),CEMP reversed with IBB. Moving avg respect!

Swing Trading Strategies

The best swing trades come from clean moves on strong stocks moving up or down in a clear trend, blowing through moving averages. The moves aren’t extended and they are consistent through varying market conditions. One of my favorite confirmations is seeing a close at or above a recent moving average. Why? This tells us that buyers are in control and others (including shorts) will begin to take notice.

Coming off solid earnings, quiet mover to the upside in down/choppy markets. Solid supportidentified and strong volume push upright through the 20ma. These are the trades that my favorite scanner looks for.The nobodies that quietly slip through thecracks!

Look how fast that $30 area was rejected by buyers. That tells us that sellers are thin by this point.

Swing Trading Strategies

Utilize a top down evaluation before taking swing trades.

What is the broader market doing? Up, down or flat?

What is the sector doing?

What is the stock doing? Already moved? Still consolidating?

Swing Trading StrategiesSome of the easiest, and quickest trades for swing traders come out of continuation patterns. The most common of these is known as the candle over candle pattern. When one trading day candle closes above the other…it is a bullish magnet for a continuation of a run.

These trades are easy to spot. The run can be based on earnings, news, technicals or fundamentals from a strong company. A perfect example of a continuation pattern setup can be found in OPK. At what point in this trade do we see a candle over candle? How about every day following their new release.

I took a trade on OPK on the candle over candle move up through recent resistance around $10.50, and after a small pull back. This showed that the stock had consolidated and was ready to make new highs.

Once we broke through the $10.50 level, the candle over candle pattern signaled continuation on a MASSIVE scale. Showing no signs of slowing until nearly a week and a half later when the trend line was violated.

Swing Trading StrategiesOPK on its massive continuation

We got long at $10.55 and rodethis trade for a .68c average win.This trade was my biggest failure of the year!I underestimated the strength of the news.I was gun shy from recent market turbulence and wanted to take profits, but I left THOUSANDS of dollars on the table. There are twoways to trade this, conservative or aggressive. Exit or don’t.

This was another trade I found from my scanner. Each new trade idea gets evaluated fundamentally and technically before I take it.

Swing Trading StrategiesAnother example of a candle over candle continuation. And why I took a long over $98. Remember why Cramer got out? Well, that is the reason we got in!

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Knock, Knock, Knock, Knock. Who’s there? Buyers? that’s who!

Perfect example of how using only S/R w/ a catalyst for finding a trade.

The stronger the S/R, the stronger the breakout can be.

Small Cap BreakoutThe small cap breakout strategy is a new strategy, cobbled together from different versions of swing trading strategies

This is the most simple strategy to learn and trade, but requires understanding of how small cap stocks work

Keep in mind, NOTHING in trading is absolute…everything is a statistical probability

Every trading system, strategy and guide has RULES. Rules are there to help you manage risk and to trade profitably, even with losing trades

This strategy is no different and the following checklist requires strict adherence to the rules…discipline is what it takes to be profitable

Small Cap Breakout

This strategy requires a TC 2000 subscription from: www.worden.com

Small Cap BreakoutWhat you NEED to KNOW about small caps:◦ All small caps will breakout at SOME point, with or without

a catalyst (though, catalysts do help)◦ On AVERAGE, small caps under under $20, when breaking

out, will move 5%-20%◦ During the breakout, they will move for an AVERAGE of 3-5

days (candle over candle continuation and confirmation)

◦ We are ONLY looking to capture a percentage of the larger move (5%-10%), if we get more, then GREAT!

◦ This strategy is very similar to a popular Forex strategy used to trade breakouts in currencies

◦ Small Cap stocks will GENERALLY tend to buck the broader market trend more so than mid and large cap stocks. This means we can still take trades even during volatility in the markets

Small Cap BreakoutHow does the scanner work?

The scanner has a very simple algorithm that looks for KEY criteria

A higher relative volume move from the previous day

At LEAST a 4% move from the previous trading day (under 5% preferred)

A MINIMUM of 150k shares for the 5 day average volume

A price range BETWEEN $1 and $40 (under $20 preferred)

Small Cap Breakout

How do we trade this strategy once we have our alerts? What are the rules?

We want to trade stocks that are coming off a bottom/support, but below a breakout/key resistance area (TAS Boxes)

Stocks that have not already put in any more than 4% or 1-2 days of a move (remember, on AVG, we will only see 3-5 days during continuation of the breakout)

Stocks that have been consolidating in a range or flagging for the previous few days or better

And, we PREFER that these stocks are trading OVER their moving averages (20, 50, 200 EMA) and that they are in a general uptrend, or are at least stable

Small Cap Breakout

The rules for entry and trading this strategy are simple. STICK to them. The entry, 99% of the time will be over the previous days high with an initial stop at the previous low of day. This serves to keep us in trades long enough for the 4% to fail and not continue that next 6%-16% that we are looking for over the next 3-5 days, but also to give it room to run. It is the proverbial “happy medium”

Don’t buy the resistance, buy the breakout! Set you orders ahead of time.

Avoid market volatility during open range by waiting for 15-30 minutes after the open to set orders.

Don’t leave orders open all day!

Small Cap Breakout

Perfect example of a loser that was alerted for a potential breakout.By avoiding buying BEFOREthe breakout spot, we stayedaway from an instant and big loss

Note that the volume failed to ascend And how it directly coincided with priceAction to the downside. Shorts SMELL weakness

Small Cap BreakoutFGEN MXWL

The BEST confirmation we can get is the candle over candle continuation with an ascending volume pattern

Small Cap BreakoutATEN THLD

Small Cap BreakoutNQ GALE

Small Cap Breakout

You can clearly see the pattern is the same each time from those examples of LIVE trades that we made

Ascending volume and price breaking out AFTER a 4% move has been made

We are able to capture anywhere from 5-15%+ in profits by identifying these 4% high relative volume moves

This strategy will work on AVERAGE 70%-80%, but not always…NOTHING is absolute

Small Cap Breakout

BIOS BIOS was an alerted trade, but failed to breakout. We are looking to start scaling out after 5% over our entry.

We can trail a stop on the rest at the previous low of day, and continue to scale out every 5%-10% after we enter.

This strategy is easy to automate, set your orders and WALK AWAY. Do the math ahead of time and you will know where you are exiting before the trade even gets to your target. Beat the retailtraders at their own game and PAY yourself for you hard work!

Swing Trading StrategiesMy software, charting and broker preferences for swing trading/day trading

- eSignal for charting: They offer options for custom formulas as well as high resolution charts with a TON of indicator and customization options.

- Interactive Brokers and Speed Trader for my trading platforms. Interactive Brokers offers super low commission for trades, possibly the best in the industry, and they have great options analytics, however, they are not suited for scalping/day trading

- Speed Trader offers a flat rate commission and a high speed, lightweight platform for day trading and scalping. This is my preferred broker for gap and go strategies. There options analytics and order setups are lacking for swings, when compared to Interactive Brokers.

- Most of my scanning is done via Trade Ideas Pro. I use them for day trading, swing trading and position trading. The software they offer is second to none in the market and is the most powerful I have come across.

- I use TC2000 for scanning small cap trade ideas as the custom coding is more flexible than what Trade Ideas offers.

- TAS Profile Scanner/Market Profile Indicators – I use them to help me determine support/resistance levels, entries, and for quickly determining congruence on multiple time frames.

- For breaking news and upcoming economic events, I use Benzinga Pro. They are a real time, breaking news source that often times gives us a competitive advantage over competition when finding entries in trades moving based on news.

- For fundamental trade ideas, I use a combination of EquityFeed news scanners to find SEC filings and earnings releases; and believe it or not, Yahoo Finance and Google to track down basic company fundamentals and news releases.

- To learn to trade with an understanding of fundamentals on stocks, you need to know how to interpret news certain valuations. Fundamentals typically apply to more long term investors, however there are applications for swing traders as well at times.

Swing Trading StrategiesSEC filings & earnings reports – Use them to your advantage. Don’t be a bag holder!

News- When evaluating news, attempt to validate it through various

sources. Consider the validity. Often times, stale news/rumors will already be priced into the stock.

- Check the options volume on a stock at the time the news was released. Was there a spike in volume? If not, this could mean that the news was really just a rumor. Oftentimes, insiders will purchase options on a stock before or during a major news release.

- Don’t over estimate the value of the news. Chance are, once you get wind of something major, it has already made its way through the big money and you will end up holding the bag.

- When trading news plays, be sure to check the charts! If we find a solid news play that coincides with a great chart setup near key technical levels, then we may give it more preference over a news play with no technical setup.

Swing TradingHow I build a watch list – LIVE

-Scanners/charting/fundamentals

How to customize scanners to suit you and your trading style

Review of the current swing trades from the week

How to track your trade history & performance- Get a copy of my trade log/blotter

Extras & LinksEmail me with questions jeff@warriortrading.com

If you are interested in the mentoring program to work one on one building any of the skills we have discussed, contact me or sign up at https://www.warriortrading.com/trading-mentor/

Trade-Ideas – www.trade-ideas.com

TC2000 - http://www.worden.com/products/tc2000.com

SpeedTrader – www.speedtrader.com

Interactive Brokers – www.interactivebrokers.com

Option Hacker – www.optionhacker.com

OptionsHouse – www.optionshouse.com

eSignal – www.esignal.com

Benzinga Pro – www.pro.benzinga.com

TAS Market Profile Indicators – www.tasmarketprofile.com

Special Discountshttps://www.warriortrading.com/coupons/

Trading Courses

The EndQuestions, comments, concerns?

Email me: jeff@warriortrading.com