Swing Trading Strategies & Stock Picks Since 2003

For those just joining us, Part 1 is right here.

For Part 2, I am going to show you what one of my momentum screens found as a decent trade set up on October 19, 2009 for the morning of October 20, 2009. The stock that was screened was FUQI (FUQI International, Inc.). Remember that all four parameters mentioned in Part 1 were met. What did not precisely occur was that the pattern did not result in the perfect Gartley pattern shown here.

As one can see from the E-Signal Chart of FUQI for that date, normally the two most important factors of this five-factor model are the retracement (0.618) and the momentum reversal. Remember, we are entering after what we consider the confirmation of a bullish reversal (volume is up on the buy side and a bullish (close greater than open) candle exists at the reversal point (which we have and which is confirmed by the price momentum). Does this mean it is an absolute lead-pipe cinch that we will see a reversal? NO, but the statistics of the neural net model (which looks for the repeating characteristics of those patterns) sees a 60% or higher likelihood of profitability, with a profit factor of $1.60 profit/$1 loss, then it meets the minimum criteria for trading FUQI on that date had a 1.62/1 61.0% set profit ratio and percent win parameters.

One other helpful characteristic of this set up is the fact that there are a number of Fibonacci ratios related to that last reversal that are in confluence with the 0.618 retracement. You can see that on this chart provided by Ensign (which is also an E-Signal product). Generally speaking, one tends to get percentages of bullish reversals above 60% of the time when that happens.

The last element of discussion has to do with volatility and risk. In this particular case, FUQI is very volatile, as one can see in this chart. The 7-day average true range is $1.57, meaning that 200% of that 7-day average true range is 3.14. Based on the previous day's (October 19, 2009) close, the stop is 21.96 (25.10 - 3.14). That is basically taking 12.5% risk on that one position! Remember, I said in part 1 that I wanted a 99.5% chance of not being stopped out, and that 16 years of data suggested statistically that I needed 200% of the 7-day average true range to do that. When one puts stops too close to entry, one may die a death of a thousand cuts if one does not give a trade (particularly a swing trade) room to breathe. I typically see trade that risk 5% of the initial position equity a large majority of the time.

How do I manage that? I trade what I call equity blocks (which contain three equally sized positions). These blocks allow me to spread the risk over three different stocks so that if one goes sour, the other trades will tend to counterbalance the risk of the first one. I will get into more of the risk parameters in a coming post in this series. Clearly one can see that I am putting a fair amount of capital initially at risk on a percentage basis, but that gets adjusted fairly quickly in the trading process.

What I have just done is to set up the trade that needs now to be analyzed at the intra-day level with a real example of a volatile stock, FUQI.

This may be one of the shortest blog entries I have ever made in this or any other blog, but I want you to absorb the basics and then if you have questions, you can ship them along to me. I do not mind answering them, since understanding the basics is important if one is to administer and follow a trade plan. One is taking some fairly decent-sized risks when one swing trades, but that is the nature of the game. How one adjusts for that risk is important, and as one will see in the following posts, the taking of profits at various points and moving stops is essential in managing risk. If a trader does not manage risk, sooner or later, risk will manage the trader right out of business. That is not only true of trading, however. The same thing occurs if one ran a fast-food restaurant. If one misjudges demand, numbers of employees, operating costs, and other factors, the fast-food joint is toast. As a trader, one must learn how to manage one's own risk parameters to keep the "doors open" at your trading platform.

Later this week, we will dive into the intra-day nitty-gritty. Sorry for the delay in this post.