If you want to swing trade stocks, you need a formula, and ideally a routine you can execute over and over again: rinse and repeat. Here’s what that looks like.
Trying to wing it by picking random stocks you read about or see in the news isn’t going to cut it. You’ve probably tried this already. While the market occasionally rewards random trades, if it feels like luck, it probably is. If there is no system in place to capitalize, just hope, winners are luck and poor results are eventually inevitable.
If you are sick of relying on luck and hope, here is the swing trading formula to follow.
- Understand market conditions. Conditions are the headwind or tailwind to our trades. Trying to buy stocks in poor market conditions is like swimming against a strong current. You’ll likely lose everything (and possibly more) that you made during the good market conditions.
- It isn’t quite as simple as looking at the major indices—S&P 500, Nasdaq 100, etc.—to determine market conditions. Because there are microcosms of the market, called Sectors, and within those, Industries.
- Certain sectors or industries may be strong while the rest of the market is weak. Conditions within those strong sectors/industries are good! Trading stocks outside of those industries isn’t advisable because the conditions aren’t good.
- The market isn’t always black-and-white (good or bad), so our capital exposure increases as conditions improve and decreases as they worsen. This allows us to capitalize during good periods, and protect our capital and gains as good conditions slow and then ultimately reverse.
- The strategy. A strategy provides the framework for when to enter a stock, how to control risk (where to exit a losing trade), and how to manage the trade while it is open.
- A strategy must align with the stocks we trade (discussed a bit later in the Finding Trades section). For example, one of my favorite strategies in the Complete Method Stock Swing Trading Course focuses on high-momentum stocks. Applying it to a random stock discussed on the news probably won’t work so well. But if I find stocks that are moving well for the strategy, it works amazingly.
- Notice how this is flipped compared to how most people trade: I trade a strategy and find stocks that suit it. This produces more consistency because the same strategy is being used all the time on stocks that work well for that strategy. Most people are interested in a stock, and then try to find a way to trade it. The method varies each time, and how the stock moves varies as well, which leads to very inconsistent results.
- Risk management. This is how risk is managed, including position sizing. Risk is how much we are willing to lose of our account on a single trade. It is a function of defining our entry and exit points. From there, we can determine how many shares to buy (or short) so that, if our maximum-loss exit point (stop-loss) is reached, the loss is manageable and represents only a small portion of our account.
- Finding trades, also called scanning, is how we find stocks that suit our strategy. Depending on the strategy and the scanning method, this doesn’t need to take long. A few of my strategies take almost no time at all to scan for…about 20-30 minutes once every week or two. This creates a small list of stocks to watch, and then we monitor them for our entries. This does not require watching stocks all day, because we can simply set orders at the price we want to enter at. I typically do this near the market close or in the evening after the stock market close.
- Routines are our framework for doing things. They build consistency. We want our routines to suit our lives, so we have a better chance of sticking with them. Life can be messy, so it isn’t always possible, but we want to create and stick with routines as much as possible.
- Routines may include the days and/or times when we scan and/or place trades.
- What time of day we can check our positions (so we aren’t glued to the screen).
- The sequence of events we follow before scanning or placing trades. This may include doing some mental preparation to make sure we are focused on the correct things, reviewing the setups or entries we are looking for, going through a checklist before placing a trade, scenario planning for how the trade could unfold and accepting all outcomes by reinforcing the plan for each.
This is a better way to swing trade than randomly picking stocks and hoping they run in your favor. With this method, we define what we will trade and how. We have a plan to capitalize if the price moves in our favor, and we limit risk if it doesn’t. We trade stocks that suit our strategy, and only in market conditions that make it likely we can actually make money from those stocks. Tough conditions are avoided, keeping our gains and capital intact for the next batch of nice setups in good conditions.
If this sounds like a good approach to swing trading—it is—check out my Complete Method Stock Swing Trading Course, as it covers the approach in detail, including multiple strategies and lots of examples to learn from.
By Cory Mitchell, CMT
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage. Past results don’t necessarily predict future results.