Research Notes

Swing Trading Intro

- Target stocks for swing trading

o Large cap stocks
o High volume stocks
o Stocks with range bound trends
- Look for trend reversals using 9,13 and 50-day Exponential Moving Averages (EMA)
- Bullish approach: Buy normalcy, sell mania
- Bearish approach: short normalcy, cover depression
- Establish channel lines for profit taking

Technical Indicators

Categories:

- Trend (lag)
- Mean (lag)
- Reversion
- Relative Strength (lead)
- Volume (lead/lag)
- Momentum (lead)

Popular Indicators:

- Simple Moving Average (SMA)

- Exponential Moving Average (EMA)
- Moving Average Convergence Divergence (MACD)
- Bollinger Bands
- Stochastics
- On-balance Volume

Daily Routine

- Combination of fundamental and technical analysis

- Premarket research
o Review economic calendar
o Look for potential trades, catalysts, breaking news, etc.
o Overall market sentiment (indices futures)
o Sector sentiment
o Review current holdings
- Profit from momentum
Catalysts

o SEC Filings: SECFilings.com, EDGAR database

 S-4 (Mergers/Acquisitions/Exchange Offers)
 13D (Group or company acquires more than 5% equity shares of a company)
 Must be disclosed within 10 days of transaction
 8K (Notice to the public of events, including, bankruptcy, the resignation of
directors, or changes in the fiscal year)
- Mergers, takeovers, buyouts, acquisitions
- Sector plays
- Chart breakouts or breakdowns
o Triangle pattern
o Channels
o Wolf waves
o Fibonacci retracements
o Gann angles

- Check Level II quotes

- Determine entry price based on current market, support/resistance
- Determine exit strategy
o Stop loss
o Limit sell
o Trailing limit
- Finviz.com, stockcharts.com
- Oscillators track momentum & help identify reversals when they begun to diverge from an
existing trend
- Candlestick reversals are characterized by indecision candles or candles that show a strong shift
in sentiment.
o Bullish engulfing – Price falling in downtrend, strong up candle
o Bearish engulfing – Price rising in uptrend, strong down candle, ex. Marubozu (meaning
shaven head)
o Indecision candles – Small body, large upper/lower wick, ex. Hammer, Spinning top, doji
(meaning blunder)
 Trade in direction of close

High Probability Trades: 5-Step Test

For high probability trades there are three main attributes

1. Discipline
2. Knowledge/Research
3. Thoroughness

STEPS
 1. Trade Setup – Trend needs to be present
a. 200-day EMA
b. 500-day EMA
2. Trade Trigger
a. Consolidation near support
b. Bullish engulfing pattern near support
c. 9, 15 and 20-day EMA patterns – Triple crossover, etc.
d. Entry point can be based on prior support/resistance levels
3. Stop Loss
a. 97% of prior swing low price
b. Average true range stop loss
c. Trailing stop loss (Amount/Percentage)
4. Price Target
a. Entry vs Profit Target
b. Pattern Size
c. Channel boundaries
5. Risk-Reward Ratio
a. Profit potential at least 1.5 times risk (loss with stop loss)
b. If risk < profit potential, then avoid the trade

Once entry point and stop loss are determined, then you can calculate your position size. You should not
allow the market value of your position to exceed 10% of your total portfolio.

Another simple test that can be used to determine if a stock is at a good buy/sell price is to determine
the intrinsic value using the Graham Number. It is used as a general test when trying to identify stocks
that are currently selling for a good price. The 22.5 is included in the calculation to account for Graham's
belief that the price to earnings ratio should not be over 15 and the price to book ratio should not be
over 1.5 (15 x 1.5 = 22.5). Book value per share (BVPS) can be calculated from price/book ratio. Simply
divide the current share price by the P/B ratio.

Graham Number (intrinsic value) =

Exit Strategy - Protect profits, reduce losses

Holding Period

Swing Trading – hours to days

Position Trading – days to weeks

Market Timing

Calculate support & resistance levels

Determine entry, exit, risk-reward ratio (1.5:1 or 2:1)

If there is high momentum, you can exceed your exit price, but you must a protective stop, ex. Trailing
stop

Use indicators to determine stop prices

Scaling Exit

Shift stop up when trade moves into profit

If holding a large position, a staggered exit can be beneficial. Ex. Sell 1/3 of position at 75% of profit
target. Sell 1/3 of position at 100% of profit target. Sell last 1/3 at higher target or set trailing stop.

Level II Quotes – Market Makers

A market maker is an individual market participant or member firm of an exchange that also buys and
sells securities for its own account, at prices it displays in its exchange's trading system, with the primary
goal of profiting on the bid-ask spread, which is the amount by which the ask price exceeds the bid price
of a market asset.

UBS (UBSW)

Deutsche Bank (DBAB)

JP Morgan (JPHQ)

Goldman Sachs (GSCO)

Credit Suisse First Boston (FBCO)

Nomura Securities (NMRA)

The “Ax” is the term used to describe the market maker dominating price action for a security.

Level II Quotes can:

- tell you whether buying is retail or institutional

- show institutional buyouts/accumulations
- be deceptive by manipulation of order sizes and timing