The best strategy for consistent winning swing trades follows a simple methodology. It should be repeatable and based on rules. The original article has been updated to include the past weeks’ price action.
We will use a 9-period ema for this article, together with a 20ema. The moving averages and durations aren’t as important as much as where price action takes place.
- Context: we will apply this to the daily time frame.
- Only go long when price action is above the 9/20 ema and both are rising. A slope greater than 30° is ideal. Flat sloping moving averages accompany choppy price action, so we will avoid those setups.
- Only go short or avoid long trades when price action is below the 9/20ema. Look for the 9/20ema sloping downward. A weak stock will print moving averages that slope downward.
On March 22, price action in SAFM broke out of a triangle consolidation on above-average volume. Stops trail the rising moving averages. We would only take long trades, as price remains above the 9/20ema.
Since the beginning of the year, the stock has risen more than 70%. Note the breakout on above-average volume the last week of July. Price action follows a sloping 9/20ema. We look for continuation when the stock eventually pulls back, then resume when the slope is greater than 30°. This is our trailing stop, as a close below the 20ema takes us out of the trade.
In the above example, the stock resumes its prevailing trend after a brief respite. The moving averages are rising, so a breakout and continuation along this moving average trigger a re-entry.
After a bit of research we found out the spike in volume on September 25 were large multiple block trades in excess of 500,000 shares each. We are alert for price action to move “above” this level for the trade to resume. Notice price remained below 164.10 and the moving averages began to flatten. Considering the blocks, we would exit partial positions until we were out of the trade, especially in a position that was up by 33.95% (125.50 > 164.10) and more than 70% YTD.
A few days later Morgan Stanley downgrades the stock. Paying attention to block trades at 164.10 is part of the analysis and something we do every day in real-time. We broadcast updates “LIVE” during market hours.
For more on trading using “blocks” as part of this strategy, consider a membership and join us during market hours as we trade LIVE in the trading room.
The Path to Consistent Winning Swing Trades
Consistent trading comes by taking new positions when the signal triggers. No second guessing, no opinions. Every time price moves above the upward sloping (> 30°) moving averages we enter.
Pullbacks are an opportunity and should be bought once we see a follow-through day. This is a bullish candle after the pullback like we see on September 11. Buyers step in at the low of the day forming a lower wick. The next bullish candle is the follow-through day we seek for confirmation.
Stops trail new entries as before, with any close below the 9ema alerting us to potential changes in price action. A close below the 20ema would stop the position. Note: Friday saw above-average volume.
Here are some nuances you might be overlooking.
Bollinger Bands began to narrow just prior to the breakout in July. First, the bands narrowed then began expanding quickly top and bottom. This condition signals a fast move. We watch the bands closely, alert for any change direction, as we see in the first week of August.
The bottom band turned upward and started to parallel the upper band, which was also rising. Make a note; when Bollinger Bands begin to parallel price action, assume price action will trend.
More examples of stocks we’ve traded this year.
Aerojet Rocketdyne (AJRD) designs, develops, manufactures, and sells aerospace and defense products and systems in the United States.
Technically, price action remained above the 9/20ema after each consolidation pattern. The slope of the moving average continues to rise. Each time price action pulls back we look for continuation days to confirm new entries or a place to add to existing swings. This is a recent swing.
AJRD updated chart, one week later, with the stock up more than +95% YTD. Buyers should appear soon. If we see a follow-through day this week, October 9 – 13 that will confirm continuation. Note this stock is closely tied to Boeing (BA). Watch both stocks for BLOCK TRADES near highs similar to that of SAFM prior to the JPM downgrade.
Applied Materials is from the members watch list. The pullback on Monday and Tuesday was met by buyers. We entered a new swing position on Wednesday and added on Thursday. Volume should be obvious, as institutions make their presence known. We are looking for a flag.
Technically, price action is above the 9/20ema. We are taking bullish trades only, looking for pullbacks to hold near the rising moving averages.
AMAT updated chart October 6, market on close. (MOC). Flag breakout underway. Trailing stops (+4.50).
All of the charts above have one thing in common. Price is above the 9/20ema when we take new long positions.
Applied Optoelectronics, Inc. (AAOI) appears to be forming a rounding bottom, as it consolidates above its 200ma. Telecom has been hot lately. It must break above the trendline and close above the moving averages to trigger a position.
The company designs manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television (CATV), and fiber-to-the-home (FTTH) networking end-markets. It offers optical modules, lasers, transmitters and transceivers, and turn-key equipment, as well as headend, node, and distribution equipment.
What we are looking for in a swing position:
- Price moves above the dashed horizontal line (VBP) resistance. Important.
- Price to exceed $71.29 = bag holders eager to breakeven. If that happens target 74.43.
- Price and the moving averages start trending higher.
- Price remains above 9/20ema.
- MACD remains above its signal line.
- RSI rises towards 70.
AAOI updated chart: note strategies also tell you when to exit. In this case, the stock pulls back but remains at support. We’ll watch again this second week of October, otherwise, we will move on to the next setup.
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And remember, when you start using a strategy based approach absent your opinion, consistent trading will follow. The choice is yours.
For more on mental preparation and trading, read this article by Brett Steenbarger.