How to find the right stocks for swing trading

Swing trading allows you to capture a much larger portion of a market movement compared to day trading, but also leaves you open to overnight risk.

Compared to day trading, swing trading definitely has its advantages and disadvantages. If you have the tools to swing trade occasionally, you can at least pull the trigger when the odds are in your favour. In this article I show you how to find the right stocks to swing trade.

Using the tailwind in your favour

As a rule of thumb, stocks that have been rising steadily will continue to rise and vice versa. As a consequence of this trading principle (which you don't have to buy into, many don't) it is logical to focus our swing trading efforts on stocks that are moving in the direction we want to trade.

If we want to swing trade on the long side, we want to find stocks in Exness mt4 that are moving in the direction we want, and vice versa. There is no reason to reduce our expected value by trying to catch falling knives.

We start from the top down. That is from the top of the stock market. The first thing we should determine is a directional bias: should we go long or short? We decide this by analysing the price performance of the entire stock market, in this case the S&P 500.

Below is a weekly chart of the $SPX. At this point, the index has been in an uptrend for almost a year, but we have just seen a pretty significant pullback below the 20-week moving average.

The index has still not made a lower weekly low, so the trend is not yet broken. However, this is a reason for caution; we should not be too aggressive in any of our positions. Against this backdrop, we should continue to focus on making cautious long trades when the opportunities present themselves. Now that we are long biased, we want to buy stocks in the strongest sectors. So let's take a look at all the major sectors.

The Major Sectors

I judge this by relative strength and price action. I look for sectors that are outperforming the S&P 500, are in an uptrend and are technically bullish.

The relative strength indicator I use is actually built into every platform. You can use any security as a benchmark. I only use the S&P 500, the de facto stock market benchmark. The indicator is called "relative strength".

By the way, when I refer to relative strength, I am not referring to the Relative Strength Index (RSI), but to the strength of the price movement of one security relative to another. In this case, we are comparing the relative strength of sectors with the S&P 500.

We can easily see that the information technology sector, as represented by the XLK ETF, is the best performing sector, as evidenced by both its clear outperformance against the index and its strong upward trend.

The Utilities (XLU) and Gold Mining (GDX) sectors also have decent outperformance. I don't care for the utilities stocks because they don't move enough, so we will look for long setups in the technology and gold mining sectors.

Through this simple filtering process, we have just significantly increased our chances of a successful swing trade.