My name is Anders Bøgebeck. My mission is to help you become a better investor and trader. Why is this important? We are not only helping ourselves by becoming financially free. Along the way we help society by either allocating capital the right places or creating better products and services. That's why I want to help you achieve the life you desire!
Have you ever wondered which parameters are important when picking swing trading candidates? In this post, I will reveal my thought-process on how to pick stocks for swing trading with big potential. This is the index:
1. The importance of market leaders
The first thing to do is to know where big money wants to enter. Pension funds, hedge funds, investment banks and wealthy individuals will bet on the growing industries or hot industries. The stock market is like a big betting table for companies. There is really a big side-game going on called the "financial economy". You need big buyers stepping in for your trades to be succesful. No-one wants to bet/own a stock that has lost 80% of its value in a couple of days. The sentiment for such a stock is "abandon it" and it will never rally. When big money have determined a growing industry, they will look for a market leader. The market leaders will be the ones having the largest capitalization. How can you quickly determine that in practice? Go to https://finviz.com/ and hit "Groups" on the top bar. Under the "Group" selection box select "industry". This will give you a bar chart of the performance of each industry. Look at the performance 1 year back. This will give you the big picture. By the way, finviz.com is a great tool in general. This should give you a bar chart like the one below.
Click on the top performing industries. This will give you a list like the one below. Sort by "Market Cap". The top results are the hottest stocks for big buyers at the moment a.k.a. the "market leaders".
Now take these markets leaders for the top 5-10 industries and create a list with their symbol names. This will give you about 30 stocks.
2. Backtest your potential portfolio
To verify that a portfolio of these stocks have performed well, go to http://portfoliovisualizer.com and click on "Backtest Portfolio". Insert the symbol names. This will look like this:
As you can see in the metrics for backtesting the portfolio it has been very succesful on a risk-adjusted basis. So we are not looking solely on return but also the risk we have put on. It has great Sharpe, Sortino and Treynor ratios. Now we know, that this is a strong portfolio.
3. Create a watchlist and time your trades
We have found out, that these are strong and hot stocks. You want to have a piece of these. Remember that big capital will not favour dying industries / unpopular stocks. Now we are looking for a great entry. Go to your favourite analysis software and create a watchlist with all the symbols. Make sure the stock is uptrending and basically buy the dip. The dip could be at the 20-day exponential moving average or the 50-day moving average. I would not go aggresively in at the 9-day exponential moving average. You want to sell when the price is 2-4 times away from your stop loss. This is important in order to compound your capital.
4. Don't forget risk management
Finally, don't forget to allocate 1-2 % of your account size on each trade and always trade with a hard stop loss. You will be wrong on a lot of trades, but remember that the probabilities are on your side! Happy trading.
|Different ways to use PE ratios when valuating stocks||How to build the best stock portfolio with Portfoliovisualizer||Why fundamental analysis is not working in the stock market|