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Swing Trade

Warrior
Chapter 2. Introduction to
swing trading strategies and
classic swing trade patterns
Swing Trading Strategies
 Options gap fill strategy
 We look for stocks that have made extreme moves up or down (gappers)
 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

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
Swing Trading Strategies
 Gap fills are everywhere all the time!

Traded SLXP at $88 for 100% win!


Swing Trading Strategies
 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
 Breakout with a catalyst
 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.
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
 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 “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 (pre earnings runner?)

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)
Swing Trading Strategies
 S/R levels are clearly visible

Sometimes they go, sometimes they fail and take multiple trys
Swing Trading Strategies
 This is why we don’t take full size on these types of trades,
we need confirmation. Then we scale in!
Expect resistance at $44
Swing Trading Strategies

Knock, Knock, Knock, Knock.


Who’s there? Buyers that’s who!

Perfect example of using only S/R


with a catalyst for finding a trade.

The stronger the S/R, the stronger


the breakout can be.
Swing Trading Strategies
 Another example of a candle over candle continuation. And why I took a long over the major
resistance level at $98. Strong stock with momentum!
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 and/or support and resistance. 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
 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 did not wait for a proper exit indicator
and I underestimated the strength of the news.
I was gunshy from recent market turbulence
and wanted to take profits, but I left
THOUSANDS of dollars on the table.

This was another trade I found from my scanner.


Each new trade idea gets evaluated
fundamentally and technically before I take it.
OPK trading in a channel, fearlessly.
Swing Trading Strategies
 My software, charting and broker preferences for swing trading/day trading
- eSignal for charting: They offer options for custom formulas as well as high resolution charts with a TON
of indicator and customization options.
- Interactive Brokers and Speed Trader for my trading platforms. Interactive Brokers offers super low
commission for trades, possibly the best in the industry, and they have great options analytics, however,
they are not suited for scalping/day trading
- Speed Trader offers a flat rate commission and a high speed, lightweight platform for day trading and
scalping. This is my preferred broker for gap and go strategies. There options analytics and order setups
are lacking for swings, when compared to Interactive Brokers.
- Most of my scanning is done via Trade Ideas Pro. I use them for day trading, swing trading and position
trading. The software they offer is second to none in the market and is the most powerful I have come
across.
- TAS Profile Scanner/Market Profile Indicators – I use them to help me determine support/resistance
levels, entries, and for quickly determining congruence on multiple time frames.
- For breaking news and upcoming economic events, I use Benzinga Pro. They are a real time, breaking
news source that often times gives us a competitive advantage over competition when finding entries in
trades moving based on news.
- For fundamental trade ideas, I use a combination of EquityFeed news scanners to find SEC filings and
earnings releases; and believe it or not, Yahoo Finance and Google to track down basic company
fundamentals and news releases.
- To learn to trade with an understanding of fundamentals on stocks, you need to know how to interpret
news certain valuations. Fundamentals typically apply to more long term investors, however there are
applications for swing traders as well at times.
TAS Indicators w/ eSignal

 For swing trading I use TAS boxes and Market Map the most.
TAS Indicators w/ eSignal
 TAS Indicators are used by a ton of institutional traders, they help us understand
what “big money” is looking at, and can often give us an edge.

TAS Market Maps show us the


areas of contention and the
squeeze zones. Why is this important?
Buyers vs. Sellers and volume!

TAS Boxes show us the major support


and resistance levels
Swing Trading Strategies
 SEC filings & earnings reports (more on this in a later chapter)
 News
- When evaluating news, attempt to validate it through various sources.
Consider the validity. Often times, stale news/rumors will already be priced
into the stock.
- Check the options volume on a stock at the time the news was released. Was
there a spike in volume? If not, this could mean that the news was really just
a rumor. Oftentimes, insiders will purchase options on a stock before or
during a major news release.
- Don’t over estimate the value of the news. Chance are, once you get wind of
something major, it has already made its way through the big money and you
will end up holding the bag.
- When trading news plays, be sure to check the charts! If we find a solid news
play that coincides with a great chart setup near key technical levels, then
we may give it more preference over a news play with no technical setup.
Swing Trade Warrior
 Questions, comments, concerns?