Swing Trading Strategies

You have probably already searched the phrase swing trading strategies so you know that there are almost as many variations of the best swing trading strategy as there are stock trading websites or maybe even individual traders.

Rather than get lost in the twists and turns of the details of any particular strategy let’s try to nail down the essential elements that should be part of any effective swing trading strategy, or at least one worthy of the name. Maybe a good place to start is with What is Swing Trading?

Maybe the most important element has nothing to do with stock charts or trading software or technical analysis indicators. That is, exactly what stocks or ETFs will you be trading?  There are more than 40,000 eligible trading symbols on the US exchanges and simple statistics tell us that some are going be better trading vehicles than others. Sorting through that massive list of symbols for the relatively few stocks, indexes and ETFs that fit your account size and your trading style is the necessary first step.

Liquidity

The two most important characteristics of a good swing trading stock or ETF are liquidity and volatility. You may only be in this position for a couple days. You want to swing trade a symbol that can move a few percentage points in a few days, and one that you can exit quickly without giving up most of your profits or needlessly increasing your loss because of slippage. For liquidity I like to see four million shares average daily volume for stocks and one million for ETFs.  For option trades I want to see a couple dozen active strikes with 500 or more contracts in call open interest.

SPY open interest

Swing Master/Options Master Chartist CBOE option chain

Good liquidity is more than the average daily volume number or open interest, however.

You want to know the size of the bid-ask spread for the symbols or the strike prices you want to trade. To get a feel for what good stock liquidity is in current market conditions, run some of the symbols from today’s most active stocks list through your trading platform. I only want to add stock and ETF symbols to my watchlists that have bid-ask spreads close to the size of the daily most active stocks like APPL, AMD, FB and BAC.

Volatility

I use today’s Average True Range (ATR) for a quick volatility measure. ATR is available on just about every broker platform and stock charting site. If there is a choice between two relatively similar stocks with good liquidity I almost always choose the one with the higher ATR.  Why? Because the stock with the higher ATR has better statistical chances of making a bigger price move in the swing trading time window.  For better results divide ATR by the current closing price for each stock and choose the higher number.  I call that ratio Punching Power because it means that the underlying stock or ETF can punch through a couple strike prices.

In Swing Master/Options Master Chartist we show the number of daily shares traded and the ATR in an information panel at the bottom of the Market Location page. We also show the annual distribution of ATR so you know whether that stock symbol’s current ATR is high or low in relation to its historical range of values.

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