Swing Trading CHAPTER 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 Strategies Options 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 cheap and provide us with the best R/R and still give us the ability to manage our risk from additional gaps to the downside. Max risk is DEFINED using this strategy. Swing Trading Strategies When 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 Strategies Gap fills are everywhere all the time! Traded SLXP at $88 for 100% win! Swing Trading Strategies Breakout 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 Strategies Example: 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 Strategies Reversals & 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 Strategies Reversal 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 support identified and strong volume push up right through the 20ma. These are the trades that my favorite scanner looks for. The nobodies that quietly slip through the cracks! 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 Strategies Some 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 Strategies OPK on its massive continuation We got long at $10.55 and rode this 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 two ways to trade this, conservative or aggressive.