Since swing trading is a short term trading method, traders should be open to the idea of short selling, if the market conditions are conducive. For this reason, the swing trading universe of stocks should consist of shares in the Futures & Options list. Traders will enjoy leverage if they trade in Futurers or Options. Even if they wish to trade in the cash segment itself, at leat they will have the advantage of using F&O instruments should they so desire.
Rule 1. The selection of stocks should come from the F&O segment. This is not an iron clad rule, since you may wish to keep some stocks that do not belong o the F&O segment, but the majority of stocks in your list should be from F&O.
From the F&O stocks, you should make a list of about 50 stocks that you will actively track. The stock selection exercise needs o be done once a week. Normally there will be only a few changes from week to week. You can use rank-It to identify stocks for your list. you can also use charts to directly identify stocks for your list. Both procedures are given below.
[LESSON: Use Rank-It! to identify strong & weak stocks.
Open the Rank-It! screen: follow the Scans —> Rank-It! —> EOD menu sequence.
Change the compression to weekly: Click on Compression, then click on weekly. (We will use the weekly time frame, which is the intermediate time frame, to identify our stocks.)
We want to rank the F&O folder, so on the folder list displayed to the left, click on #F&O. Now, click on the Rank-It! button. The process will start. The time taken depends on the speed of our computer. Please be patient.
When the process is complete, a lis of all the stocks is displayed. Each stock has a rank, starting from 1 to 225 or more. The Highest rank is 1. the lowest rank is the last rank. Stocks with high ranks are in strong up trend. Stocks with low ranks are in strong down trend.
From these ranks, select 50 stocks that you will monitor on a day to day basis. Select 20 stocks to represent the primary trend, and, about 30 to represent the intermediate trend. If the primary trend is up, choose 20 strong stocks, from the rank 1 to 75. If the intermediate trend is also up, choose 30 more stocks, from the ranks 1 to 125. If the intermediate trend is down, select 30 weak stocks from the last 80 or 100 stocks.
Explaination: Why not pick the top 20 stocks, or the top 50 stocks ? We suggest that you examine the top 75 stocks and then select 20 from them. You should spread out your selection accross the 75 names. There are many reasons to do so. First, it is quite possible that the top stocks may already be in mature trends. Second, the lower rank stocks, say between 50 to 75 may be improving day by day, moving towards the top ranks. Third, your selection should have a fair sprinking of different sectors. To do this, you have to select from a wide area.
The selection process should focus on stocks with high relative strength, sustained trend and increasing volume. Your choice should be on consistent performers instead of momentum ‘darlings’. These are the stocks favored by smart money. When stocks trend, they become tradable for swing traders since many institutions get involved adding fuel to the stock. Uptrending and downtrending stocks are better swing trading candidates than stocks inside a trading range.
By identifying strong & weak stocks, finally make a list of about 50 stocks that you will work on. You are not going to trade in all fifty. But, this is your universe and you will focus exclusively on it.
NOTE: In the heat of the moment you’ll see stocks you wished you owned, and you’ll be upset that somebody is making money when you are not doing as well. Someone will always be outperforming you, but let’s see where that person is six months or a year or two from now, because today’s darlings usually turn into next year’s dogs.
When this list is made, make a folder with the 50 stocks. Folders can be made in Data management —> Folders —> EOD. If you are repeating this exercise for subsequent weeks, then this folder already exists. You should open this folder and edit it o reflect the new list.
END OF Rank-It! LESSON]
[LESSON: use charts to visually identify stocks for swing trading]
We need trending stocks in our list. When we visually select stocks, we work on the daily chart. The process should identify stocks in visible uptrend or downtrend. Stocks in trading range should be avoided.
Up trending stocks:
Moving Averages should be in proper order. The 10 day simple average should be at the top. The 20 day exponential average should be below the 10 day. The 40 day exponential average should be below the 20 day. Prices should be above the 20 day average.
A clear up trend should be visible. A good uptrend has gaps, laps, wide range breakout bars & breakouts from narrow tight consolidation. Ideally, there should be short pullbacks also. Stocks that pullback are good stocks to trade with.
Relaitve Strength versus the Nifty should be increasing.
Down trending stocks:
Moving Averages should be in proper order. The 10 day simple average should be at the botom. The 20 day exponential average should be above the 10 day. The 40 day exponential average should be above the 20 day. Prices should be below the 20 day average.
A clear down trend should be visible. A good downtrend has gaps, laps, wide range breakout bars & breakdown from narrow tight consolidation. Ideally, there should be short pullbacks also. Stocks that pullback are good stocks to trade with.
Relaitve Strength versus the Nifty should be decreasing.
END OF stock selection LESSON]
An additional exercise can help in filtering out improper candidates for swing trading. For the stocks selected, Also, look at the price history for the stock in question. Does it have a history of large price gaps? Does it seem to trend well when it breaks out from chart patterns? Does the stock move for several days in a row when it breaks out or does it go for one day and soon after reverse course? Questions like these will help you decide if a swing trading approach is best for the stock you are looking to trade.
