Isolating Longer-Term Swing Trades in the Stock Market
Swing trading is about taking trades that align with a solid strategy and that have a good risk/reward ratio, but swing trading is also about perspective. You can zoom out on a chart and a get a much different perspective, just as you gain a different perspective by zooming in.
By changing our perspective, we open ourselves up to more trades, and to seeing opportunities that we may not have seen otherwise. For example, many of the strategies I use can be applied to long-term trades as well as short-term trades.
On our Facebook page I recently wrote:
The Stock Market Swing Trading Video Course can be used to isolate potential trades both in the short-term and the long-term. For example, I used the reversal strategy to load up on gold stocks at the end of 2016, right as it was bottoming from a correction.
This was a long-term pattern, but these longer-term patterns can be extremely useful for isolating potential trades. Look at a multi-year chart of GLD (gold ETF). It broke out of its downtrend in early 2016, signaling the trend was now up. The reversal strategy dictates that we then wait for a pullback into the specified percentage area and then wait for a specific price pattern to form. We had one false start around the 60% area, but the next buy signal near the 75% level has resulted in a strong move to the upside…getting us in right near the bottom of the correction. That signal in gold could have been used to isolate a whole bunch of trades in the gold mining stocks have rallied substantially since that buy point.
Just another way to utilize one of the strategies covered in the course.
Let’s look at this big up-move and correction in the gold ETF (GLD). If you view that big rally as one move up, then a correction lower is a buying opportunity as it pulled back into our designated retracement area and formed the correct price pattern to trigger a long trade.
This is a long-term pattern, which means it could take many months for the price to reach a profit target based on this type of long-term pattern. But it highlights the flexibility of the strategy, which can even be used to make investment trades, not just swing trades.
That is one perspective, which provided a big reversal trade opportunity to the upside in gold (reversal trade because the price made an aggressive trend shift to the upside, and we are now buying on the pullback based on the premise that that uptrend will continue).
Commodities or Sectors Can Highlight Opportunities in Individual Stocks
When a commodity (or a sector ETF) forms a tradable pattern, then it is highly likely that you will be able to find a lot of trades in stocks related to that commodity (or sector).
As that trade was forming in gold, I started buying gold stocks. For example, I currently own IAMGOLD (IAG, or IMG on the Canadian exchange). Pull up a chart of it. It had a strong run higher, pulled back into our percentage buy zone, and had two very clean consolidations which provided fantastic buying opportunities below US$3.50 (the second one was a bit better because the selling momentum had slowed by that point and price was in a more ranging environment instead of free fall).
This stock is approaching a conservative exit point, but if the strength of that initial rally makes you believe the stock could rally above its 2016 high (I am in that camp) then there is still quite a bit more upside to participate in. Therefore, this is a potential swing trading stock, but also an investment stock where I may be holding it for a year or more as long as gold remains strong. While these longer-term trades take longer to reach the target, the reward:risk ratios on trades like these can be astronomical.
I prefer swing trading the stocks as opposed to GLD, as GLD is prone to constant price gaps which can mess with your stop losses.
Trade Short-Term or Long-Term, It’s Up to You
So that is the long-term perspective…or at least how I see it. But what about the short-term perspective? Even though the long-term perspective indicated that late 2016 was a buying opportunity, toward the middle of 2016 we had a short-term reversal to the downside, which indicated selling momentum. If you had spotted a trade in a gold stock at that time, which provided a reversal trade to the downside, you could have profited nicely from the decline in gold that ensued. But by late 2016, if you were still short, zooming out on your chart a bit notified you that the price had entered a long-term buy region. So short-term traders could have capitalized, and long-term traders could have capitalized. BUT, being aware of the broader picture would have definitely helped our trader who was short, in this case, realize that a big rally was likely coming.
Of course, that is just my perspective. You may agree or disagree, and that is fine. Currently, on a shorter-term perspective GLD looks to be within a downtrend and the price is just pulling back at the moment. What do you see? Ultimately that is the important thing.
All we can do is look at the chart, absorb the information and then apply a strategy we are using as best we can. There will always be someone else with a different opinion, and we may even have conflicting opinions inside our own head. Before taking a trade, be clear on what your outlook is, that way you will have the confidence to stick with your trades. We know we will be wrong sometimes, and that is ok. If we are taking trades with solid reward:risk ratios and thinking through our trades before we take them, then the profits will come.
Final Word on Isolating Longer-Term Swing Trades in the Stock Market
Here are main takeaways:
–Different time frames may change your perspective. Be aware of those different perspectives because they may help you make better trading decisions.
–If you have a trade setup in a commodity or sector ETF, it is highly likely you will find trading opportunities in stocks related to that commodity or sector (and then you can pick the best trades from the ones you find).
Look at various perspectives, decide which one you are most comfortable with, wait for the trade setup that aligns with that perspective, and then take the trade. That’s all you can do.
If you are making good informed decisions and you are trading with a solid reward:risk ratio, over many trades you should be seeing positive results.
Losing trades WILL happen. Don’t risk more than 1% of your trading account on a trade (risk = difference between entry price and stop loss price, multiplied by the number of shares). There is always a risk in trading, and you can lose much more than you expect (even when you think you are only risking 1%). Don’t risk real capital unless you know what you are doing and have proven yourself profitable in a demo account.
By Cory Mitchell, CMT
Disclosure: This article should not be viewed as investment advice, and is not a recommendation for you to buy or sell. These are trade examples of a specific strategy. Past performance is not necessarily indicative of future performance. Unless expressly stated, I don’t have positions in the stocks mentioned..they are just examples for educational purposes.