In and Out for 2% Gain - Jumei International Holding Ltd
Combining the Best of Swing Trading with the Best of Day Trading to Produce Winning Trades
In his excellent book “The Master Swing Trader,” mentioned in previous articles, author Alan S. Farley describes an excellent way to profit from the fear and greed pendulum. I successfully used his techniques in the past and am in the process of rebuilding my portfolio so am re-reading the book and applying the principles that served me so well in the past. I developed a screen for swing trading that worked well and am attempting to re-create it. Unfortunately I did not keep the exact screen and am finding it difficult to build a new one that works as well as the original one did. Ideally I want a screen that spits out stocks that are trading in a pre-defined range over a specified period of time.
As I got better at Swing Trading, I then applied techniques from Christopher A. Farrell’s book “Day Trade Online,” and created my own system that allowed me to find specific stocks that met pre-established criteria and had predictable patterns.
My Modified Swing Trading Strategy in a Nutshell
In my previous trading days, I developed a cross between a day trading and a swing trading strategy that allowed me to consistently make 2% gains on nearly every trade. Depending on how much I was willing to risk and how long I left the stocks in play, I earned 2% per day, week or month on most of my positions.
Not to be confused with classic fundamental investing, this is purely a trading strategy designed to get in, get out and pocket the proceeds. Like a true day trader, I rarely left my positions in place over night if possible and definitely would not leave my money in the market over a week-end.
Finding the Ideal Stock for Swing Trading - “Average True Range”
The activity for my ideal stock creates a “saw tooth” chart that moves up and down within a range, ideally over a 2-5 day period. It took me a while and I looked through many different trading platforms and online screeners to find one that produced what I needed.
Unfortunately my discount broker does not allow me to screen for what (Financial Visualizations) FinViz calls the “Average True Range.” (Yes I did ask my discount broker and they confirmed it was not available).
My process starts out with deciding what kinds of companies I would not mind holding for a longer term if my strategy does not work as planned. That’s where the fundamentals enter into the process. I only want companies that are going to be around for a while and have demonstrated success in the past.
Now Take the Deep Dive and Find the Pearls
I then do a little more digging to identify the best current candidates for my strategy. At FinViz, I created the following screen that produced 63 candidates for me to dig a little further for the ideal 2 or 3 candidates to place a “swing trade.”
- Average Volume over 1M shares – I need liquidity!
- Mid Cap and Large Cap – I want staying power if I get stuck
- Price between $10 and 50 – Allows for the right sized block trade
- Average True Range over 1 – That’s the key to the strategy
Click on Charts and “Voila” the “Saw Tooth” Emerges but alas, FinViz restricts my view of charts unless I want to sign up for their “elite” service. I’ll pass since I can get all the views I want from my broker.
A Little Extra Work is Worth the Effort – In at $21.50 and Out of JMEI at $21.89
With a little more elbow grease (manually scanning the screened results) I was able to spot a few stocks where I can apply the swing trading strategy developed so long ago.
Moving to where I can get all the views I want at no cost, I see the 5 day JMEI Chart is exactly what I want. The stock is moving up and down around $22 almost like clockwork. In theory at least, I can buy at $21.50 and sell at $22.50 multiple times but will likely only make one trade to avoid becoming a “pattern day trader” at least for now.
Unfortunately I was busy writing and not buying Jumei International Holding, Inc. (JMEI) as planned, so the very first opportunity turned out to be a pure paper play rather than an absolute win. Had I entered and exited as planned, I would have easily gained the 2% daily gain discussed in the article title.
Here is what I “would have done,” had I been paying closer attention to the opportunity last Thursday when I first looked at them:
Buy at the end of the day at $21.50 and set an automatic sell for a 2% gain so my sell price is $21.94 ($21.50/.98). Had I made that trade as planned, I would have been taken out immediately as the stock opened at $22.50 and moved to a high of $22.89. Sure, I would have left some money on the table, but I will take 2% in and out gains all day long!
Since this worked so well on paper, I was ready to make my move when the next opportunity presented itself and will discuss that in my next article. The next time I made “real money,” (Xerox) and was in and out in a day.
Two Winners So Far and More to Come
Two other stocks that came from the screen have produced profits already and I expect to refine the screen and process over the next few months. I will also report on previous trades in the next couple of articles so you see that what I am doing is working so far . . .
Words of Caution
Although this type of trading looks simple when it works, a stock can go against you very quickly so you either need to set hard stops and leave them in place of be available to watch the market and the stock all day long. It is very much akin to day trading but with fewer numbers of trades in a day.