Swing Trade Warrior Chapter 2. Introduction to swing trading strategies and classic swing trade patterns

Options gap fill strategy We look for stocks that have made extreme moves up or down (gappers) We don t really care why they made the move (earnings, news, etc), unless it is for bankruptcy, criminal investigation, or a buyout/m&a We find the trade on our scanners 99% of the time We evaluate the news/why it gapped down On something that moves with enough volatility to gap down $22, we don t want to hold long stock (risk management) We check options liquidity and pricing We want to be long on this trade using call options because they will be cheap and provide us with the best R/R and still give us the ability to manage our risk from additional gaps to the downside. Max risk is DEFINED using this strategy.

When a stock gaps, a high percentage of the time, it will make an attempt at filling that gap. Sometimes it is partially filled, and sometimes it is completely filled. We only want to capture that first, initial push toward the gap as shorts cover and buyers come back in. The longer we wait, the more of a chance it fails. Remember, this gapped down for a reason after all. URBN already filled this gap and then some! GILD loves to fill gaps

SSYS filling the massive gap after our entry

Gap fills are everywhere all the time! Traded SLXP at $88 for 100% win!

For the gap fill strategy, we want to choose the NEAREST strike at the current price, right as it appears the stock will begin to move into the gap. This would be an ATM strike. We also want to consider liquidity. We don t want to be the only ones buying these options, we want to see OI and other volume already trading. In the case of SSYS, I had to look out to the June expiration in order to find sufficient volume (MINIMUM being 500 contracts traded at that nearest ATM strike) In June, the only strikes that were available at the time were June $60 & $65 calls, even though we bought when SSYS was trading around $56. The closer, ATM strike will be more expensive, but will allow us to profit sooner from any moves into the gap. This expiry/strike combination provided us with the most volume at the closest strike and gave us plenty of time before theta/time decay becomes an issue, and with enough liquidity that we can get out of the trade safely and not be forced to take a bigger loss should things go against us. When trading gappers, we want the move to occur sooner than later. If the sell off continues, the stock can see another gap down, if the stock makes new lows throughout the day, instead of rejecting the lows, we want to stay away from it. Strong stocks often have a moment of weakness that we try to capitalize on. We use options to trade these because we can t possibly lose more than we paid in premium. If we held stock and the stock continued gapping down, our losses would be exponential. The more speculative the trade, the less I want to expose my equity to it. But, that doesn t mean I don t want to be there to capitalize on a quick sharp reversal. Often times we see things drop hard and sharp, and the harder and sharper the drop, the likelier we are to see a hard and sharp reversal.

Breakout with a catalyst We seek to find trades that have just released news of something big and have a multi day potential to run in store for them (M&A, FDA approval, new board member/ceo, activist investor stake, etc) It is critical that we thoroughly evaluate and conduct our due diligence when investigating the veracity of the news/catalyst. The old saying is very true, buy the rumor, sell the news. The breaking news release sounds amazing, but don t just jump in for a swing trade until you know for sure what the real potential for the news is. How many Ichan stake rumors have we scalped in chat that turned out to be bogus? More than not The breakout with a catalyst trade can be done with options or stock. Keep in mind, the IV of the news will be factored into the premiums almost instantly. So we need to know the strength of the catalyst and whether or not it is sustainable.

Example: GILD, released news multiple times in a two week window. First was discount pricing on their Hepatitis C drug, which meant more sales potential. The second round of news included CVS endorsement of a different GILD drug that would also boost sales. We took two trades on these breakouts with these catalysts. Both were good for 100% wins in short time using options. Why did we use options here?

There are all kinds of catalysts, news, hype/fear, earnings etc.

Reversals & technical setups using support and resistance These trades are stocks that have become extended to the downside and may be ready for a reversal or dead cat bounce, and also stocks that are ready to move through key support/resistance levels A dead cat bounce is defined as: a temporary recover from a prolonged decline, followed by a continuation of a downtrend. A short lived bounce as shorts cover and buyers come in thinking that a bottom has been reached. Dangerous to hold without using live stops/profit stops. Calling the top/bottom on any security is difficult. Be sure to take your profits early. For stocks moving past significant support and resistance levels, keep an eye on daily volume and price action. Look for stocks to move past these key levels with enough volume to sustain the move.

Reversal example: Facebook (pre earnings runner?) Note on the date of entry, we saw a break of the 50 moving average, that was our long entry signal. This was the first bullish reversal indicator following a 10 day sell off in the stock. Waited for bullish moving average break and got candle over candle confirmation next day. Sell off continued (dead cat bounce confirmed as well)

S/R levels are clearly visible Sometimes they go, sometimes they fail and take multiple trys

This is why we don t take full size on these types of trades, we need confirmation. Then we scale in! Expect resistance at $44

Knock, Knock, Knock, Knock. Who s there? Buyers that s who! Perfect example of using only S/R with a catalyst for finding a trade. The stronger the S/R, the stronger the breakout can be.

Another example of a candle over candle continuation. And why I took a long over the major resistance level at $98. Strong stock with momentum!

The best swing trades come from clean moves on strong stocks moving up or down in a clear trend, blowing through moving averages and/or support and resistance. The moves aren t extended and they are consistent through varying market conditions. One of my favorite confirmations is seeing a close at or above a recent moving average. Why? This tells us that buyers are in control and others (including shorts) will begin to take notice. Coming off solid earnings, quiet mover to the upside in down/choppy markets. Solid support identified and strong volume push up right through the 20ma. These are the trades that my favorite scanner looks for. The nobodies that quietly slip through the cracks! Look how fast that $30 area was rejected by buyers. That tells us that sellers are thin by this point.

Some of the easiest, and quickest trades for swing traders come out of continuation patterns. The most common of these is known as the candle over candle pattern. When one trading day candle closes above the other it is a bullish magnet for a continuation of a run. These trades are easy to spot. The run can be based on earnings, news, technicals or fundamentals from a strong company. A perfect example of a continuation pattern setup can be found in OPK. At what point in this trade do we see a candle over candle? How about every day following their new release. I took a trade on OPK on the candle over candle move up through recent resistance around $10.50, and after a small pull back. This showed that the stock had consolidated and was ready to make new highs. Once we broke through the $10.50 level, the candle over candle pattern signaled continuation on a MASSIVE scale. Showing no signs of slowing until nearly a week and a half later when the trend line was violated.

OPK on its massive continuation We got long at $10.55 and rode this trade for a.68c average win. This trade was my biggest failure of the year! I did not wait for a proper exit indicator and I underestimated the strength of the news. I was gunshy from recent market turbulence and wanted to take profits, but I left THOUSANDS of dollars on the table. This was another trade I found from my scanner. Each new trade idea gets evaluated fundamentally and technically before I take it. OPK trading in a channel, fearlessly.

My software, charting and broker preferences for swing trading/day trading - esignal for charting: They offer options for custom formulas as well as high resolution charts with a TON of indicator and customization options. - Interactive Brokers and Speed Trader for my trading platforms. Interactive Brokers offers super low commission for trades, possibly the best in the industry, and they have great options analytics, however, they are not suited for scalping/day trading - Speed Trader offers a flat rate commission and a high speed, lightweight platform for day trading and scalping. This is my preferred broker for gap and go strategies. There options analytics and order setups are lacking for swings, when compared to Interactive Brokers. - Most of my scanning is done via Trade Ideas Pro. I use them for day trading, swing trading and position trading. The software they offer is second to none in the market and is the most powerful I have come across. - TAS Profile Scanner/Market Profile Indicators I use them to help me determine support/resistance levels, entries, and for quickly determining congruence on multiple time frames. - For breaking news and upcoming economic events, I use Benzinga Pro. They are a real time, breaking news source that often times gives us a competitive advantage over competition when finding entries in trades moving based on news. - For fundamental trade ideas, I use a combination of EquityFeed news scanners to find SEC filings and earnings releases; and believe it or not, Yahoo Finance and Google to track down basic company fundamentals and news releases. - To learn to trade with an understanding of fundamentals on stocks, you need to know how to interpret news certain valuations. Fundamentals typically apply to more long term investors, however there are applications for swing traders as well at times.

TAS Indicators w/ esignal For swing trading I use TAS boxes and Market Map the most.

TAS Indicators w/ esignal TAS Indicators are used by a ton of institutional traders, they help us understand what big money is looking at, and can often give us an edge. TAS Market Maps show us the areas of contention and the squeeze zones. Why is this important? Buyers vs. Sellers and volume! TAS Boxes show us the major support and resistance levels

SEC filings & earnings reports (more on this in a later chapter) News - When evaluating news, attempt to validate it through various sources. Consider the validity. Often times, stale news/rumors will already be priced into the stock. - Check the options volume on a stock at the time the news was released. Was there a spike in volume? If not, this could mean that the news was really just a rumor. Oftentimes, insiders will purchase options on a stock before or during a major news release. - Don t over estimate the value of the news. Chance are, once you get wind of something major, it has already made its way through the big money and you will end up holding the bag. - When trading news plays, be sure to check the charts! If we find a solid news play that coincides with a great chart setup near key technical levels, then we may give it more preference over a news play with no technical setup.

Swing Trade Warrior Questions, comments, concerns?