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Deciding what stocks to buy and when to buy them
Swing traders aim to profit by exploiting the volatility of particular assets (stocks, currencies, futures, options).
To decide what to trade, you should look for three things:
Swing traders aim to profit by exploiting the volatility of particular assets (stocks, currencies, futures, options).
To decide what to trade, you should look for three things:
1. Liquidity.
You must be able to enter and exit a trade at a good price. When your asset hits that price, you don’t want to be unable to trade because of illiquidity.
Look for high volume and a tight bid-ask spread.
You must be able to enter and exit a trade at a good price. When your asset hits that price, you don’t want to be unable to trade because of illiquidity.
Look for high volume and a tight bid-ask spread.
2. Volatility. You need prices to move in order to make money.
Volatility tells you the price range you can expect to see an asset’s price moving in. More volatile stocks can lead to greater profit, but also greater loss.
Assess using indicators like ATR or Bollinger Bands.
Volatility tells you the price range you can expect to see an asset’s price moving in. More volatile stocks can lead to greater profit, but also greater loss.
Assess using indicators like ATR or Bollinger Bands.
3. Volume. You want to trade assets that get lots of interest.
This ensures that conditions (1) and (2) are met. You're looking at how much an asset is bought and sold in any given period.
High volume indicates interest in an asset, and can precede moves in price (up or down).
This ensures that conditions (1) and (2) are met. You're looking at how much an asset is bought and sold in any given period.
High volume indicates interest in an asset, and can precede moves in price (up or down).
So, you know what kind of assets you're looking for.
Now you need to know how and when to enter the trade. This is something that tells you that the time is right to buy. So what makes the price of an asset move?
Two things: buying and selling.
Now you need to know how and when to enter the trade. This is something that tells you that the time is right to buy. So what makes the price of an asset move?
Two things: buying and selling.
When there is a lot of buying pressure, the price goes up.
When there is a lot of selling pressure, the price goes down.
That’s it.
But what makes people buy and sell? Meme-stonks aside, in general people will respond to some or all of the following (not exhaustive):
When there is a lot of selling pressure, the price goes down.
That’s it.
But what makes people buy and sell? Meme-stonks aside, in general people will respond to some or all of the following (not exhaustive):
1. News.
Sounds obvious, but people often ignore it.
Some ideas:
- Set up a news alert for the ticker.
- For individual stocks, look at the earnings calendar.
- For pharma companies, browse the FDA approval calendar.
- Check for short seller reports.
Sounds obvious, but people often ignore it.
Some ideas:
- Set up a news alert for the ticker.
- For individual stocks, look at the earnings calendar.
- For pharma companies, browse the FDA approval calendar.
- Check for short seller reports.
2. Hype.
When everyone starts talking about an asset, it’s usually a bad time to invest in it. By the time the masses are aware, the big move has already happened. That doesn’t stop people jumping on the hype train though.
Sites like http://StockTwits.com can be helpful.
When everyone starts talking about an asset, it’s usually a bad time to invest in it. By the time the masses are aware, the big move has already happened. That doesn’t stop people jumping on the hype train though.
Sites like http://StockTwits.com can be helpful.
3. Charts.
Chart analysis is what drives most people to enter a trade. Candlestick patterns and technical indicators are used to define a set of conditions that trigger a buy when met.
When looking at technical indicators, bear in mind that these are derived from price action.
Chart analysis is what drives most people to enter a trade. Candlestick patterns and technical indicators are used to define a set of conditions that trigger a buy when met.
When looking at technical indicators, bear in mind that these are derived from price action.
In other words, the information in the TI is already in the candlesticks, it has just been arranged and presented differently.
Adding more TIs therefore often doesn’t add more information and can overwhelm. Best keep your system simple.
More detail on TIs in a future tweet.
Adding more TIs therefore often doesn’t add more information and can overwhelm. Best keep your system simple.
More detail on TIs in a future tweet.
So, now you know what you want to trade, and what you need to look for to decide when to enter. What next?
Write it down in your trading plan. It is likely that you’ll need different rules for different assets, or at least different types of asset.
Write it down in your trading plan. It is likely that you’ll need different rules for different assets, or at least different types of asset.
That’s part of the reason you need to write them down.
The main reason is so that, once the adrenaline starts pumping, you can stick to the plan and execute without second guessing yourself.
Be specific. “Buy when the price is low” sounds like a sensible thing to do...
The main reason is so that, once the adrenaline starts pumping, you can stick to the plan and execute without second guessing yourself.
Be specific. “Buy when the price is low” sounds like a sensible thing to do...
... But how do you know it isn’t going to go lower? You don’t.
No one does, unless they have a crystal ball.
But you can make use of charts and TIs to give you better odds than just guessing.
Say something like (I’m just making this up – not an actual strategy):
No one does, unless they have a crystal ball.
But you can make use of charts and TIs to give you better odds than just guessing.
Say something like (I’m just making this up – not an actual strategy):
- No negative news in last 3 days.
- Asset is trading 10% below all-time highs
- Asset is in upward trend
- Price is above the 100 day MA
- Price has just crossed the 14 day MA
- MACD line crossing signal line from below
- RSI below 40
- ATR shows sufficient volatility for profit
- Asset is trading 10% below all-time highs
- Asset is in upward trend
- Price is above the 100 day MA
- Price has just crossed the 14 day MA
- MACD line crossing signal line from below
- RSI below 40
- ATR shows sufficient volatility for profit
If you have identified the assets you want to trade, and defined the set of conditions that will alert you to an entry, you now need to do two further things.
1. Assess charts for potential setups. This can be a manual or automated process, but it’s best to start manually.
2. Define the set of conditions that will make you sell the asset to exit the trade.
– to be continued.
2. Define the set of conditions that will make you sell the asset to exit the trade.
– to be continued.
If you found the information in this thread useful, consider retweeting the first tweet.
It would be much appreciated.
Also, I will be following this up with more on selling signals and technical indicators, so stay tuned if that is something that interests you.
It would be much appreciated.
Also, I will be following this up with more on selling signals and technical indicators, so stay tuned if that is something that interests you.
