How to Pick Stocks for Swing Trading

Screening software and technical analysis can help you pick stocks to profitably swing trade.
i Hemera Technologies/ Images

William Dunningan, a successful commodities trader and one of the research pioneers of modern technical trading, once suggested that, “If economists are interested in the price of beans, they should, first of all, learn all they can about the price of beans.” Successful swing trading requires an understanding of both the fundamental and technical forces affecting the price of stocks, and most swing traders spend their time analyzing price action. Their analysis leads to the creation of trading systems, which first screen and then actually select specific stocks for trades.

Importance of Volatility

A stock that moves upward and downward in sharp “swings” is not a stock most long-term traders find desirable. For short-term traders, swings produce opportunities for trading over a period of days rather than months or years. Rapid price reversals also allow swing traders to profit from both upswings and downswings by using long and short positions, as appropriate. For these reasons, stocks prone to volatility hold greater interest to most swing traders.

Locating Trades Aligned With Market Trends

A market's bias – either bull or bear -- helps to inform about the trend of most stocks within it. Conforming a strategy to profit from larger trends while also tapping into a market's more volatile candidates can reveal a wider selection of lucrative trading opportunities. Stock screening software is typically used to locate such a pool of candidates by filtering stocks based on both fundamental and technical criteria.

Rules-Based Trading

Swing traders (and their cousins, day traders) almost universally rely on rules-based trading systems to select stocks to trade. Developing a rules-based system allows you to mechanically generate buy and sell signals to act upon. This helps to eliminate the effects of dangerous emotions like fear and greed, which can turn profits into losses. In addition, rules-based systems can be tested against historical market data or simulated markets to demonstrate their validity before you commit actual funds. Rules used to create such systems are born from technical methods and allow you to custom-tailor a strategy according to the market conditions you propose to trade within.

Technical Analysis

Picking specific stocks to trade relying on technical analysis is based on two general approaches: technical market indicators and charting patterns. Technical market indicators are popular because they are easy to use and can be employed systematically. When layered together well, technical indicators may provide effective buy and sell signals from among the pool of stocks generated during earlier screening work. Charting patterns offer another method for identifying good stock trades. Graphing of a stock's price movements produces patterns, and recognizing the formation of a money-making pattern enables you to enter into a profitable position. Rules-based systems can also be designed to detect the start of these desirable patterns, and therefore help you pick stocks to trade in a timely fashion.

the nest