As a swing trader, one of the most important decisions you'll make is choosing which stocks to trade.
You can learn all the winning swing setups in the world, but if you trade the wrong stocks, you're going to lose money.
So we've put together 9 simple tips that can help you steer clear of the ticking time bombs, and keep you focused on the winners.
(if you'd like to learn about our swing trading program, click the green button)
1) Don't Get Hyped Over Hype. Price Action Is What Really Matters to Swing Traders.
Many swing traders focus exclusive on companies that are always in the news with product announcements, press releases, and CEO interviews.
That's great for entertainment purposes, but we make our money on price action.
For example, IBM (IBM) puts out a lot of news, but its stock doesn't move all that much.
IBM has a beta of 0.95, meaning that if the market moves 1%, IBM will move just 0.95%.
So why trade it?
Focus on stocks that make significant moves on multi-day to multi-month time frames.
So if you want to trade a stock that moves faster than an IBM, you could look at high-beta names like Beyond Meat (BYND), Uber (UBER), Snap (SNAP), Amazon (AMZN), Advanced Micro Devices (AMD), or Netflix (NFLX).
According to swing trading expert Sami Abusaad, "momentum is important. I look for high-momentum stocks that I believe are set to move in the next day or two."
Sami's also not afraid of international stocks from regions like India and China. "It's all about the chart, as long as the stock fits my volume requirements" says Sami."
2) Watch the Calendar for Trading Opportunities
While price action is more important than news, news can drive price action.
So if you're long or short a stock, know what's on the calendar.
It's good to know if your names are reporting earnings, appearing at conferences, have executives appearing on TV, unveiling new products, or can be impacted by economic news.
For example, if you're long Apple, you better know when it's reporting earnings and when it's showing new products.
As you can see in this chart, Apple gapped up big on earnings (the circle), and it had a wide-range bar on the iPhone 8 release. Being aware of the calendar would have kept you on alert for big moves:
And these days, more and more corporate executives are getting chatty on Twitter (TWTR) -- perhaps most notably Tesla's (TSLA) Elon Musk -- so you should be monitoring their Tweets too!
In August 2018, Elon Musk sent Tesla's stock pricing skyrocketing after saying he was considering taking the company private.
Am considering taking Tesla private at $420. Funding secured.— Elon Musk (@elonmusk) August 7, 2018
3) You Can Swing Trade Penny Stocks, But Be Careful
Many traders, particularly beginners, are attracted to penny stocks and small caps.
While these kinds of stocks can give us the volatility we need to make real profits, they offer less liquidity than better-known large-cap stocks.
They may also subject to manipulation and negative one-time events like secondary offerings.
However, the fact that they can move so much so fast may make the potential reward worth the risk, particularly for advanced traders.
Sami will trade any stock with a price above $1 with average daily volume around 500K shares a day, so long as there is a quality pattern.
Keep in mind that Sami is a highly-experienced trader with a disciplined approach to risk management.
Sami recently produced a video about swing trading penny stocks which you may find interesting:
4) Be Aware of Your Typical Holding Time
Pick stocks to trade that match up with your intended holding time.
We recommend going through your trading history to see the time frames of your most profitable trades.
If you tend to make the most money on a 1-month time frame, then focus on stocks that make large moves on that time frame.
The same goes for 1-week trades... and 1-year trades.
5) Follow the Leading Stocks... and the Losers
Quite often, the best-performing stocks in the market can go a lot farther and move a lot faster than the critics claim.
Therefore, always know which stocks are crushing the market on an extended basis, because they'll give you regular trading opportunities on both pullbacks and breakouts.
Chipmaker Nvidia (NVDA) has been one of the best performing stocks of the post-crisis bull market. It has regularly led both the technology sector and broader markets, so it has been a go-to stock for swing traders:
And on the flip side, track the worst names in the worst sectors.
The laggards that look "cheap" often get cheaper since they typically suffer from bad earnings and negative news.
According to Sami, "stocks showing relative weakness to the market and multiple time frame alignment (bearish daily/weekly/monthly charts) work best on the short side."
6) It's Okay to Be Late to the Party
You don't have to arrive at the party perfectly on schedule.
You can be a little late and still capture most of the fun.
Don't try to time exact bottoms (or tops if you're going short).
When a stock makes a major move, you can miss the first 20% and still make a lot of money.
Take a look at this weekly chart of Facebook:
In an ideal world, you would have bought it under $20 in late 2012:
But you could have bought it much higher -- at $40, $50, or $60 -- and still made money.
It's better to wait for a setup to fully complete and give you a strong signal than rush in early, trying to catch the absolute lowest price.
7) Be Careful with Falling Knives
One of the single biggest reasons traders blow up their accounts is that they rush to catch falling knives.
They'll see a leading stock gap down 20% after earnings, and buy it right on the open.
Then, the stock will drop another 20% in a week, and the trader is left asking "what now?"
Resist the urge to throw your money at stocks posting big declines.
Commonly, these names need to settle a bit before offering a fresh buy setup.
Taking a look at Twitter, you can see how many times the stock gapped down huge, only to decline further:
(if you are specifically interested in trading gaps, we suggest our Advanced Gap Strategies course)
8) Watch Stocks With High Short Interest
Stocks with very high short interest can often make sudden upside moves that blow shorts out of the water. These can be some of the most powerful swing trade opportunities imaginable.
This is especially common with new IPO names that shorts perceive as mere fads.
For example, in late 2014, GoPro (GPRO) and Ambarella (AMBA) were heavily shorted, and had enormous rallies as shorts were forced to cover.
Take a look at this Ambarella monthly chart:
Many traders believed Ambarella was just another overvalued, trendy tech stock, and so it was heavily shorted.
The shorts were eventually right... but not until the stock went from $7 to $129!
More recently in 2019, Snap (SNAP) was heavily shorted... and it more than tripled by July:
All stocks eventually came back down to Earth, but those initial rallies destroyed the shorts, and made a lot of money for buyers.
So keep some heavily-shorted stocks on your radar. They can make enormous rallies on positive news, like better-than-expected earnings.
9) Monitor the Market Cycle
At the beginning of a bull market, even the lowest-quality stocks (think bad earnings, weak sector, low relative strength, low stock prices) can make gigantic moves in very short periods of time.
But as the cycle moves on and the initial bottom-fishing is done, the easy money has been made and swing traders must be choosier when picking their spots.
In a bear market, embrace short selling and watch closely for "bear market rallies," which are fast and furious moves that deflate quickly.
P.S. Earnings Season is still going strong. Be sure to check out this FREE Earnings Season resource: