How to Find Great Swing Trades (2020)

Posted September 19, 2020

New Video Covers Two More Signatures of a Great Swing Trading Opportunity!

Its important to understand what an ideal swing trading opportunity is when trading stocks. (As a reminder, swing trading involves holding a stock overnight while day trading involves getting in and out the same day.)

The 80/20 rule does not apply to stock trading. Its more like the 90/10 rule.

In other words, 10% of “good swing trading opportunities” will deliver 90% of the profits during a year. So its really important to focus on the top 10% of the opportunities that fit the profile in your swing trading strategy.

Swing Trading vs Day Trading and Investing

Unlike day trading, each swing trade has much more upside potential. When swing trading, we also have a stop-loss in a good trading plan which limits our risk versus most buy and hold strategies (investing) where you generally hang on to a losing position as long as your thesis is still in tact even if it drops 40% or more.

When swing trading, we don’t wait five years for Tesla to finally break out of a trading range to make money with buy and hold strategies while sitting on a loss (after 4 or 5 years the stock could start going down if things don’t work out which is too often the case).

Instead, we can play the wide channel using channeling stock strategies during those consolidation years and then play the great trending patterns with a tight stop-loss during years on many top growth and UPOD stocks.

Each year we have plenty of top growth stocks trending strongly during any given portion of the year. This article goes over how we find great swing trading opportunities for customers.

Of course, we want to be sure we are good at swing trading so we can do better than buy-and-hold while limiting our risk in our aggressive portfolio with a stop-loss which is another key advantage of swing trading. This article covers many important aspects of our strategy to find great swing trades on top growth stocks especially.

Our Perfect Swing Trading Opportunities in a Nutshell

To us, the perfect trading setup is a great growth stock in a very strong long-term uptrend, a narrow consolidation that is long enough with good symmetry and then a recent or upcoming catalyst as the price reaches an ideal technical entry point within or above the consolidation pattern.

There is no stronger trend and consolidation pattern than a high tight flag.

So it comes as no surprise that the 2 biggest winners last month were TSLA and ZM for our customers. Both stocks were in strong high tight flag patterns before an explosive move higher.

Both stocks reached our target entry point and soared over 55% higher within 2.5 weeks while holding a very tight 2.5% stop-loss. Those using our targets on ZM got out with about a 57% profit in less than 2 weeks. Both stocks reached our profit target and then pulled back more than 30% quickly.

We used the parabolic exit strategy taught in the high tight flag course on TSLA to take our final shares off over $500 pre-market for a more than 35% profit a couple weeks ago before it fell more than 30%.

This is the kind of move you do not see too often but it happens much more often when you know how to find a great swing trade.

How Not to Find a Great Swing Trade

Before I go into how we found these opportunities and timed the trade, lets go over what we avoid when looking for a great swing trade.

Low priced stocks. Penny stocks and stocks under $20 are normally lower probability swing trades with more risk. Every back-test we have performed shows a lower win rate on stocks under $20 when swing trading. Low priced stocks are also often halted, more prone to sudden secondary offerings after hours (or even during the day), have much more slippage and erratic moves. Taking a wider stop-loss and having a lower win rate almost guarantees failure over the long-term unless you are able to manipulate the stock.

Using pure technical trading strategies without looking at fundamental factors. Occasionally, we will trade a stock purely on the technical pattern but the technical pattern has to be nearly perfect. Otherwise, results just are not nearly as good over the long-term. We want to find a great technical pattern with great fundamental factors to match when finding a good swing trade. We want the fundamental factors to be real, not just a story or talking head pushing the stock on TV.

Going long stocks below a downward-sloping 200 day moving average. Again, studies show that this leads to a lower win rate when swing trading. Nearly all low priced stocks are below a declining 200 day moving average. They may pop briefly but then suddenly crash. Not good. Especially when you are holding a stock overnight.

“Reversion to the mean” trades. The best stocks in the strongest long-term, multi-year trends tend to make very large gains when the technical and fundamental factors are ripe. They also tend to hold up during these times when they are trending because there is so much demand from institutional money managers. These managers generally do not buy low priced stocks and add on the way up essentially in a multi-year uptrend. Trading against the long-term trend tends to have lackluster results overall versus trading in the direction of the multi-year trend.

Buy a stock just because its up a lot. Many traders will chase a stock on the way up. A stock needs time to consolidate gains in most cases before it can start another leg higher. Chasing generally leads to losing over time. A stock needs time to define its support and resistance levels and prove it can hold up well enough to offer another high probability long trade.

How We Find Great Swing Trades

Instead of chasing, we find swing trades with the following factors

We want stocks in a great long-term trend and above a rising 200 day moving average in most cases. The best ones have been in an uptrend for years. Price makes little difference.

Expensive is good. If the stock moves 60% within 2 weeks (TSLA and ZM for instance), it does not matter if the stock is $5 or $1,500. The higher priced stock has a better chance of success because its been successful in the past. That is why its selling for $100s of dollars and not $5. Nowadays, you can buy fractional shares so you can more easily take advantage of the best opportunities on higher priced stocks.

Exceptional fundamental factors. The best swing trades are on stocks with earnings and sales growth above 20% for years and then accelerating growth. Also, they tend to beat earnings expectations and have rising future expectations at the time it reaches a good technical entry point.

Another type of stock we like to trade is just an obviously undervalued stock with recent big earnings beats and sharply rising earnings estimates. For these, you can just check the biggest earnings beats each day on the Zacks earnings calendar and then look at the trend in estimates on Yahoo Finance. Other data providers will have this information as well. We like to focus on stocks that recently beat by 5% or more on the top-line and 30% or more on the bottom-line with a sharp increase in forward guidance.

We wait to see how a stock consolidates and gauge the strength of the underlying trend leading into the consolidation. Most consolidation patterns need to form over about 5 weeks or more. Stocks in the strongest trends leading into the consolidation can have a shorter consolidation and still pique our interest such as the high tight flag pattern and the best earnings gap plays.

The best opportunities are on stocks that have been trading for at least 1.5 years. Recent IPOs tend to be choppy and require a wider stop-loss and are just less reliable traders in most cases.

The best opportunities tend to be in industries that are red hot at the time. We want to see great technical patterns on other stocks in the same or similar industry making strong moves out of those patterns ideally. We want the industry to have a high relative strength (which is different than RSI) versus other industries. This simply means that more money is flowing into the industry versus other industries overall.

Although not required, its better if the stock has a low float and high short interest. If a lot of market players are short the stock, many will have to cover if the stock starts to go a lot higher. You cover a short position by buying back the shares in the open market which adds fuel to a rally.

We want to see a recent or upcoming significant catalyst that should drive the stock higher. The consolidation pattern defines the price range of a stock. Sellers take over near the top of the consolidation pattern by overwhelming the buyers to send the price lower. Buyers start to overwhelm the sellers near the bottom of the consolidation to drive the price back up. If a new significant bullish catalyst comes along, the new range will generally be higher. The stock has to trend higher to find that new upper price limit. Great stocks over $20 are being acquired by institutions and they have to buy over days, weeks or months generally. Their immense buying power can fuel the uptrend for a long time.

Its great to have a catalyst, but if more selling than buying demand materializes when the market opens for the stock, the stock will not move in our direction. So we want the price action and technicals to be in our favor as well. The price needs to break a key resistance to confirm the price direction back to the upside. This resistance is usually the top of the pattern or a key swing point within the consolidation.

Finding Great Swing Trades Involves a Recipe

Think of the above ingredients as a recipe. Its a recipe for success in finding great swing trades. Like other recipes, its usually no good if we leave out ingredients.

You can find stocks with 20% or more sales and earnings growth using a multitude of free screeners online. Yahoo Finance, FinViz or your online broker will usually have a screener that will be good enough. You can also add a return on equity above 15% to the screen.

After screening for the best stocks and adding others with big earnings beats and guidance raises, we can put those in a watch list with our online broker or stockcharts.com for instance.

Once we do that, we can see if the stock is in a multi-year uptrend by looking at a 2 year and five year chart. We can also be sure its above a rising 200 day moving average. We can remove those below a declining 200 day moving average or are not in a multi-year uptrend. Sometimes, stocks consolidate for a couple years before another leg higher so we can check a five year chart on our brokerage platform.

Now we can check for bullish consolidation patterns on the stocks that are left. Common ones are the earnings flag, double bottom or cup with handle pattern. The strongest pattern is the high tight flag. In fact, we screen for these daily using a simple price strength screen which can be done quickly on Finviz.

Once we find our technical entry points in the patterns, we can look for new or upcoming catalysts each day that could drive the price higher. If the price reaches the entry point with a catalyst, we can think about using a good trading plan for that technical pattern and type of stock.

In Summary

As with most things in life, the key to success is focus. Focusing on just the best growth stocks and UPOD stocks (under promise – over deliver) in the best technical trends. In fact, we find most everything else a waste of valuable time.

Again, its the 10% or even 5% of all good swing trades that will make us most of our profits this year. So why trade anything but the best opportunities that fits the type of swing trade you are looking for that could be a real home run trade?

We only have so much time and energy each day so we dedicate that to the most promising opportunities.

Just by focusing on the best stocks, trends and consolidation pattern entry points, you could have made more than over 100 day trades over the past month.

The fresh catalyst is important too. In the case of TSLA, good news was coming out of their Europe operations and battery day was coming up after a big earnings beat.

ZM had earnings coming up after they smashed their earnings expectations the prior three quarters and most of big tech had huge upside surprises earlier in the quarter. Both stocks were in high tight flag patterns – the most bullish pattern within multi-year uptrends with explosive and accelerating growth.

So the lesson is to always have the best stocks with strong, consistent and then accelerating growth that over-deliver in the best technical patterns on your watch list. Focus is a key to success when swing trading.

Of course, you need a great strategy to get in at a good technical entry point and get out with a profit before the stock pulls back. And, of course, a good plan to cut losses short if the trade goes against you.