Introduction 1
About This Book 2
Foolish Assumptions 3
Icons Used in This Book 3
Where to Go from Here 4
Part 1: Getting into the Swing of Things 5
Chapter 1: Swing Trading from A to Z 7
Understanding What Swing Trading is (and Isn’t) 8
The differences between swing trading and buy-and-hold investing 8
The differences between swing trading and day trading 11
What Swing Trading is to You: Determining Your Time Commitment 12
Swing trading as your primary source of income 12
Swing trading to supplement income or improve investment returns 13
Swing trading just for fun 14
Sneaking a Peek at the Swing Trader’s Strategic Plan 14
The “what”: Determining which securities you’ll trade 15
More “what”: Trading stocks consistent with your values 17
The “where”: Deciding where you’ll trade 18
The “when” and the “how”: Choosing your trading style and strategy 19
Building Your Swing Trading Prowess 24
Chapter 2: Understanding the Swing Trader’s Two Main Strategies 25
Strategy and Style: The Swing Trader’s Bio 26
Two forms of analysis, head to head 26
Scope approach: Top down or bottom up? 29
Styles of trading: Discretionary versus Quantitative 29
Wrapping Your Mind around Technical Theory 30
Understanding how and why technical analysis works 31
Sizing up the technical advantages and disadvantages 33
The two main approaches of technical analysis 34
Appreciating the Value of the Big Picture: Fundamental Theory 37
Understanding how and why fundamental analysis works 37
Surveying the fundamental advantages and disadvantages 39
Looking at catalysts and the great growth/value divide 40
Chapter 3: Focusing on the Small Stuff: The Administrative Tasks 45
Hooking Up with a Broker 46
Choosing a broker 46
Opening an account 49
Selecting Service Providers 50
Providers to do business with 51
Providers to avoid 55
Starting a Trading Journal 57
Creating a Winning Mindset 59
Part 2: Timing is Everything: Technical Analysis 61
Chapter 4: Charting the Market 63
Nailing Down the Concepts: The Roles of Price and Volume in Charting 64
Having Fun with Pictures: The Four Main Chart Types 65
Charts in Action: A Pictorial View of the Security Cycle of Life 68
The waiting game: Accumulation 68
The big bang: Expansion 70
The aftermath: Distribution 71
The downfall: Contraction 73
Assessing Trading-Crowd Psychology: Popular Patterns for All Chart Types 74
The Darvas box: Accumulation in action 75
Head and shoulders: The top-off 76
The cup and handle: Your signal to stick around for coffee 78
Triangles: A fiscal tug of war 80
Gaps: Your swing trading crystal ball 81
Letting Special Candlestick Patterns Reveal Trend Changes 84
Hammer time! 85
The hanging man 86
Double vision: Bullish and bearish engulfing patterns 86
The triple threat: Morning and evening stars 88
Measuring the Strength of Trends with Trendlines 89
Uptrend lines: Support for the stubborn bulls 90
Downtrend lines: Falling resistance 91
Horizontal lines: Typical support and resistance 92
Chapter 5: Asking Technical Indicators for Directions 93
All You Need to Know about Analyzing Indicators 94
You must apply the right type of indicator 94
Not all price swings are meaningful 94
Prices don’t reflect volume, so you need to account for it 96
An indicator’s accuracy isn’t the best measure of its value 97
Two to three indicators are enough 98
Inputs should always fit your time horizon 98
Divergences are the strongest signals in technical analysis 99
Determining Whether a Security is Trending 100
Recognizing Major Trending Indicators 102
The compass of indicators: Directional Movement Index (DMI) 102
A mean, lean revelation machine: Moving averages 104
A meeting of the means: MACD 109
Spotting Major Non-Trending Indicators 112
Stochastics: A study of change over time 112
Relative Strength Index (RSI): A comparison of apples and oranges 115
Combining Technical Indicators with Chart Patterns 118
Using Technical Indicators to Determine Whether to Be In or Out of the Market 119
Chapter 6: Trend Following or Trading Ranges 121
Trading Trends versus Trading Ranges: A Quick Rundown 122
Trend Trading 124
Finding a strong trend 124
Knowing when to enter a trend 126
Managing risk by determining your pain threshold 129
Trading Ranges: Perhaps Stasis is Bliss? 129
Finding a security in a wide trading range 130
Entering on a range and setting your exit level 131
Comparing Markets to One Another: Intermarket Analysis 132
Passing the buck: The U.S dollar 133
Tracking commodities 135
Watching how bond price and stock price movements correlate 137
Putting Securities in a Market Head-to-Head: Relative Strength Analysis 139
Treating the world as your oyster: The global scope 139
Holding industry groups to the market standard 141
Part 3: Running the Numbers: Fundamental Analysis 145
Chapter 7: Understanding a Company, Inside and Out 147
Getting Your Hands on a Company’s Financial Statements 148
What to look for 148
When to look 149
Where to look 150
Assessing a Company’s Financial Statements 151
Balance sheet 152
Income statement 156
Cash flow statement 159
Analyzing More Than Just Numbers: Qualitative Data 162
Valuing a Company Based on Data You’ve Gathered 164
Understanding the two main methods of valuation 164
Implementing the swing trader’s preferred model 165
Chapter 8: Finding Companies Based on Their Fundamentals 169
Seeing the Forest for the Trees: The Top-Down Approach 169
Understanding the basics of the top-down approach 170
Sizing up the market and examining the technical picture 171
Assessing industry potential 178
Starting from the Grassroots Level: The Bottom-Up Approach 180
Using screens to filter information 181
Assessing your screening results 186
Deciding Which Approach to Use 187
Chapter 9: Assessing a Company’s Stock: Six Tried-and-True Steps 189
The Six Step Dance: Analyzing a Company 190
Step 1: Taking a Company’s Industry into Account 191
Scoping out markets you’re familiar with 192
Identifying what type of sector a company is in 193
Step 2: Determining a Company’s Financial Stability 196
Current ratio 197
Debt to shareholders’ equity ratio 197
Interest coverage ratio 198
Step 3: Looking Back at Historical Earnings and Sales Growth 199
Step 4: Understanding Earnings and Sales Expectations 201
Step 5: Checking Out the Competition 203
Step 6: Estimating a Company’s Value 206
Gauging shares’ relative cheapness or expensiveness 206
Figuring out whether the comparative share-price difference is justified 207
Part 4: Planning the Trade and Trading the Plan 211
Chapter 10: Fail Fast: Managing Risk 213
Risk Measurement and Management in a Nutshell 215
First Things First: Measuring the Riskiness of Stocks before You Buy 216
Looking at liquidity: Trade frequency 216
Sizing up the company: The smaller, the riskier 217
Assessing the beta: One security compared to the market 218
Avoiding low-priced shares: As simple as it sounds 219
Limiting Losses at the Individual Stock Level 220
Figuring out how much you’re willing to lose 220
Setting your position size 222
Building a Portfolio with Minimal Risk 226
Limit all position losses to 7 percent 226
Diversify your allocations 228
Planning Your Exit Strategies 232
Exiting for profitable trades 232
Exiting based on the passage of time 235
Exiting based on a stop-loss level 236
Chapter 11: Knowing Your Entry and Exit Strategies 241
Understanding Market Mechanics 242
Surveying the Major Order Types 243
Living life in the fast lane: Market orders 243
Knowing your boundaries: Limit orders 244
Calling a halt: Stop orders 244
Mixing the best of both worlds: Stop limit orders 245
New order types: Algorithmic orders 247
Placing Orders as a Part-Time Swing Trader 248
Entering the fray 248
Exiting to cut your losses (or make a profit) 249
Placing Orders if Swing Trading’s Your Full-Time Gig 249
Considering the best order types for you 249
Taking advantage of intraday charting to time your entries and exits 250
Investigating who’s behind the bidding: Nasdaq Level II quotes 253
Chapter 12: Walking through a Trade, Swing-Style 259
Step 1: Sizing Up the Market 260
Looking for short-term trends on the daily chart 260
Analyzing the weekly chart for longer-term trends 261
Step 2: Identifying the Top Industry Groups 262
Step 3: Selecting Promising Candidates 263
Screening securities 264
Ranking the filtered securities and assessing chart patterns 264
Step 4: Determining Position Size 268
Setting your stop-loss level 269
Limiting your losses to a certain percentage 269
Step 5: Executing Your Order 270
Step 6: Recording Your Trade 271
Step 7: Monitoring Your Shares’ Motion and Exiting When the Time is Right 272
Step 8: Improving Your Swing Trading Skills 274
Chapter 13: Looking at the Scoreboard to Evaluate Your Performance 277
No Additions, No Withdrawals? No Problem! 278
Comparing Returns over Different Time Periods: Annualizing Returns 279
Accounting for Deposits and Withdrawals: The Time-Weighted Return Method 281
Breaking the time period into chunks 283
Calculating the return for each time period 286
Chain-linking time period returns to calculate a total return 286
Comparing Your Returns to an Appropriate Benchmark 287
Evaluating Your Trading Plan 291
Part 5: The Part of Tens 293
Chapter 14: Ten Simple Rules for Swing Trading 295
Trade Your Plan 295
Follow the Lead of the Overall Market and Industry Groups 297
Don’t Let Emotions Control Your Trading 298
Diversify, but Not Too Much 299
Set Your Risk Level 299
Set a Profit Target or Technical Exit 300
Use Limit Orders 301
Use Stop-Loss Orders 301
Keep a Trading Journal 302
Have Fun 303
Chapter 15: Ten (Plus One) Deadly Mistakes of Swing Trading 305
Violating Your Trading Plan 305
Starting with Too Little Capital 306
Gambling on Earnings Dates 307
Speculating on Penny Stocks 308
Changing Your Trading Destination Midflight 308
Doubling Down 309
Keeping Open Positions While You Travel 310
Thinking You’re Hot Stuff 310
Concentrating on a Single Sector 311
Trading Illiquid Securities 312
Overtrading Stocks 312
Appendix: Helpful Resources for Today’s Swing Trader 315
Index 327
