Swing Trading For Dummies

363 Pages·2008·4.67 MB·english

by  Omar Bassal

Swing Trading
FOR
DUMmIES
‰
by Omar Bassal, CFA
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Swing Trading For Dummies®
Published by
Wiley Publishing, Inc.
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Hoboken, NJ 07030-5774
www.wiley.com
Copyright © 2008 by Wiley Publishing, Inc., Indianapolis, Indiana
Published simultaneously in Canada
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ISBN: 978-0-470-29368-3
Manufactured in the United States of America
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About the Author
Omar Bassal, CFA is the head of Asset Management at NBK Capital, the
investment arm of the largest and highest rated bank in the Middle East.
There, he oversees all asset management activities for institutional and high
net worth individuals investing in the equity markets of the Middle East and
North Africa (MENA). Prior to joining NBK Capital, Mr. Bassal was a portfolio
manager at Azzad Asset Management, where he managed mutual funds
and separately managed accounts. Mr. Bassal also worked as an analyst at
Profit Investment Management and launched a socially responsible hedge
fund in 2002. He holds an MBA with honors in finance, management, and sta-
tistics from the Wharton School of Business at the University of
Pennsylvania. Additionally, he graduated summa cum laude with a Bachelor’s
of Science degree in Economics, also from the Wharton School. He has
appeared on CNBC and has contributed articles to Barron’s and Technical
Analysis of Stocks & Commodities.
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Dedication
To my mother, my mother, and my mother — Maha Al-Hiraki Bassal. To my
father, Dr. Aly Bassal. And my sisters, Suzie and Sarah. To my loving wife,
Salma, and my brother-in-law, Hisham. And to my beloved nephew, Mostafa.
They have always supported me in easy and difficult times.
Author’s Acknowledgments
I don’t believe any experience could possibly have prepared me for the rigor-
ous schedule required to write a book. I can’t tell you how many weekends,
evenings, and holidays were required to write Swing Trading For Dummies.
The effort was, of course, worth it. But I did miss several episodes of Lost,
The Office, and other shows. Alas, the cost of writing books isn’t measured in
time alone.
Before I turn this section into an autobiography (which I should pitch to
Wiley as my second book, come to think of it: Omar Bassal For Dummies!), let
me thank those who deserve thanks (give credit where credit is due, I’m told,
is the way the kids are putting it these days). I first learned of this opportu-
nity through Susan Weiner, CFA — a skilled and professional investment
writer. Susan told me about a search Wiley was conducting to find an author
for this book. Marilyn Allen, my agent, pitched me to Wiley. I’m honored
Wiley offered me the opportunity to write this book. Thank you, Stacy
Kennedy, for your confidence in me and your buy-in.
Writing the book, as you may have gleaned from my previous comments, was
a grueling, tough process, and Kristin DeMint was an invaluable resource. She
was my project editor and made sure the book progressed. She often joked
that she knew nothing about swing trading. But her “weakness” was in reality
a strength. Not being an expert in the subject meant Kristin could offer help-
ful comments on what might confuse a novice when I made assumptions or
didn’t properly explain ideas. Kristin also kept a watchful eye when deadlines
approached. Oh how I didn’t want to draw her ire. (I’m half joking. She’s
actually a very sweet person . . . as long as I didn’t miss my deadline!)
As my trading mentor, Ian Woodward, once said: Many hands make light
work. In addition to Kristin, many Wiley staff members worked behind the
scenes. Russell Rhoads, the technical editor, ensured I wasn’t making things
up, and other editors — Todd Lothery, Jennifer Tucci, and Elizabeth Rea —
made sure my grammar made cents. (They must’ve missed this part!)
Though not involved directly in my project, per se, my family supported me
throughout. That meant a lot. It’s not something I can put into words — even
as a writer.
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Publisher’s Acknowledgments
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Some of the people who helped bring this book to market include the following:
Acquisitions, Editorial, and Composition Services
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Project Editor: Kristin DeMint
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Acquisitions Editor: Stacy Kennedy Reuben W. Davis, Nikki Gately,
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Proofreaders: Laura Albert,
Copy Editors: Todd Lothery, Jennifer Tucci
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Technical Editor: Russell Rhoads
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Jennette ElNaggar
Cover Photo: © ACE STOCK LIMITED/ Alamy
Cartoons: Rich Tennant
(www.the5thwave.com)
Publishing and Editorial for Consumer Dummies
Diane Graves Steele, Vice President and Publisher, Consumer Dummies
Joyce Pepple, Acquisitions Director, Consumer Dummies
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Publishing for Technology Dummies
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Composition Services
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Debbie Stailey, Director of Composition Services
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Contents at a Glance
Introduction ................................................................ 1
Part I: Getting into the Swing of Things ........................ 7
Chapter 1: Swing Trading from A to Z .............................................................................9
Chapter 2: Understanding the Swing Trader’s Two Main Strategies ........................25
Chapter 3: Getting Started with Administrative Tasks ...............................................41
Part II: Determining Your Entry and
Exit Points: Technical Analysis ................................... 57
Chapter 4: Charting the Market .....................................................................................59
Chapter 5: Asking Technical Indicators for Directions ...............................................89
Chapter 6: Analyzing Charts to Trade Trends, Ranges, or Both .............................117
Part III: Digging Deeper into the
Market: Fundamental Analysis ................................. 141
Chapter 7: Understanding a Company, Inside and Out.............................................143
Chapter 8: Finding Companies Based on Their Fundamentals ................................163
Chapter 9: Six Tried-and-True Steps for Analyzing a Company’s Stock .................181
Part IV: Developing and Implementing
Your Trading Plan .................................................... 201
Chapter 10: Strengthening Your Defense: Managing Risk ........................................203
Chapter 11: Fine-Tuning Your Entries and Exits ........................................................231
Chapter 12: Walking through a Trade, Swing-Style ...................................................247
Chapter 13: Evaluating Your Performance .................................................................263
Part V: The Part of Tens ........................................... 277
Chapter 14: Ten Simple Rules for Swing Trading.......................................................279
Chapter 15: Ten Deadly Sins of Swing Trading ..........................................................289
Appendix: Resources ................................................ 299
Index ...................................................................... 309
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Table of Contents
Introduction ................................................................. 1
About This Book ..............................................................................................2
Conventions Used in This Book .....................................................................3
Foolish Assumptions .......................................................................................3
How This Book Is Organized ..........................................................................4
Part I: Getting into the Swing of Things ..............................................4
Part II: Determining Your Entry and Exit Points:
Technical Analysis .............................................................................4
Part III: Digging Deeper into the Market: Fundamental Analysis .....4
Part IV: Developing and Implementing Your Trading Plan ...............5
Part V: The Part of Tens ........................................................................5
Icons Used in This Book .................................................................................5
Where to Go from Here ...................................................................................6
Part I: Getting into the Swing of Things ......................... 7
Chapter 1: Swing Trading from A to Z. . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
What Is Swing Trading? .................................................................................10
The differences between swing trading and
buy-and-hold investing ....................................................................11
The differences between swing trading and day trading ...............12
What Swing Trading Is to You: Determining Your Time Commitment ...13
Swing trading as your primary source of income ............................13
Swing trading to supplement income or improve investment
returns ...............................................................................................14
Swing trading just for fun ....................................................................15
Sneaking a Peek at the Swing Trader’s Strategic Plan ..............................15
The “what”: Determining which securities you’ll trade ..................16
The “where”: Deciding where you’ll trade ........................................18
The “when” and the “how”: Choosing your trading
style and strategy .............................................................................19
Building Your Swing Trading Prowess ........................................................24
Chapter 2: Understanding the Swing Trader’s
Two Main Strategies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Strategy and Style: The Swing Trader’s Bio ...............................................25
Two forms of analysis, head to head.................................................26
Scope approach: Top down or bottom up? ......................................27
Styles of trading: Discretionary versus mechanical ........................28
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Swing Trading For Dummies
Wrapping Your Mind around Technical Theory .......................................29
Understanding how and why technical analysis works ..................29
Sizing up the technical advantages and disadvantages ..................31
The two main aspects of technical analysis .....................................33
Appreciating the Value of the Big Picture: Fundamental Theory ............34
Understanding how and why fundamental analysis works ............35
Surveying the fundamental advantages and disadvantages ..........36
Looking at catalysts and the great growth/value divide ................38
Chapter 3: Getting Started with Administrative Tasks. . . . . . . . . . . . .41
Hooking Up with a Broker ............................................................................42
Choosing a broker................................................................................42
Opening an account .............................................................................45
Selecting Service Providers ..........................................................................46
Providers to do business with ...........................................................46
Providers to avoid ...............................................................................50
Starting a Trading Journal ............................................................................52
Creating a Winning Mindset .........................................................................56
Part II: Determining Your Entry and
Exit Points: Technical Analysis .................................... 57
Chapter 4: Charting the Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
Nailing Down the Concepts: The Roles of Price and
Volume in Charting ....................................................................................60
Having Fun with Pictures: The Four Main Chart Types ............................61
Charts in Action: A Pictorial View of the Security Cycle of Life ..............64
The waiting game: Accumulation .......................................................64
The big bang: Expansion .....................................................................66
The aftermath: Distribution ................................................................67
The downfall: Contraction ..................................................................69
Assessing Trading-Crowd Psychology: Popular
Patterns for All Chart Types .....................................................................70
The Darvas box: Accumulation in action ..........................................71
Head and shoulders: The top-off .......................................................73
The cup and handle: Your signal to stick around for coffee ..........74
Triangles: A fiscal tug of war ..............................................................76
Gaps: Your swing trading crystal ball ...............................................77
Letting Special Candlestick Patterns Reveal Trend Changes ..................80
Hammer time! .......................................................................................80
The hanging man (Morbid, I know) ...................................................82
Double vision: Bullish and bearish engulfing patterns ...................82
The triple threat: Morning and evening stars ..................................83
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Table of Contents
Measuring the Strength of Trends with Trendlines ..................................85
Uptrend lines: Support for the stubborn bulls.................................86
Downtrend lines: Falling resistance ..................................................87
Horizontal lines: Working to both support and resist ....................88
Chapter 5: Asking Technical Indicators for Directions. . . . . . . . . . . . .89
All You Need to Know about Analyzing Indicators Before You Start .....90
You must apply the right type of indicator ......................................90
Not all price swings are meaningful ..................................................90
Prices don’t reflect volume, so you need to account for it ............92
An indicator’s accuracy isn’t a measure of its value .......................92
Two to three indicators are enough ..................................................93
Inputs should always fit your time horizon ......................................94
Divergences are the strongest signals in technical analysis ..........95
Determining Whether a Security Is Trending ............................................95
Recognizing Major Trending Indicators .....................................................97
The compass of indicators: Directional Movement Index (DMI) ...98
A mean, lean revelation machine: Moving averages .....................100
A meeting of the means: MACD ........................................................105
Spotting Major Non-Trending Indicators ..................................................107
Stochastics: A study of change over time .......................................108
Relative Strength Index (RSI): A comparison
of apples and oranges ....................................................................111
Combining Technical Indicators with Chart Patterns ............................114
Using Technical Indicators to Determine Net Long or Net
Short Positioning......................................................................................115
Chapter 6: Analyzing Charts to Trade Trends, Ranges, or Both. . . . .117
Trading Trends versus Trading Ranges: A Quick Rundown ..................118
Trading on Trends .......................................................................................120
Finding a strong trend .......................................................................120
Knowing when to enter a trend ........................................................122
Managing your risk by setting your exit level ................................124
Trading Ranges: Perhaps Stasis Is Bliss? ..................................................125
Finding a security in a strong trading range ..................................125
Entering on a range and setting your exit level .............................127
Comparing Markets to One Another: Intermarket Analysis ...................128
Passing the buck: The U.S. dollar ....................................................128
Tracking commodities.......................................................................130
Watching how bond price and stock price
movements correlate .....................................................................133
Putting Securities in a Market Head-to-Head:
Relative Strength Analysis ......................................................................134
Treating the world as your oyster: The global scope ...................135
Holding industry groups to the market standard ..........................137
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Swing Trading For Dummies
Part III: Digging Deeper into the
Market: Fundamental Analysis .................................. 141
Chapter 7: Understanding a Company, Inside and Out . . . . . . . . . . . .143
Getting Your Hands on a Company’s Financial Statements ...................144
What to look for .................................................................................144
When to look ......................................................................................145
Where to look .....................................................................................146
Assessing a Company’s Financial Statements .........................................146
Balance sheet .....................................................................................147
Income statement ..............................................................................151
Cash flow statement ..........................................................................153
Not Just Numbers: Qualitative Data ..........................................................156
Valuing a Company Based on Data You’ve Gathered .............................158
Understanding the two main methods of valuation ......................158
Implementing the swing trader’s preferred model ........................159
Chapter 8: Finding Companies Based on Their Fundamentals . . . . .163
Seeing the Forest for the Trees: The Top-Down Approach ....................163
Sizing up the market ..........................................................................164
Assessing industry potential ............................................................170
Starting from the Grassroots Level: The Bottom-Up Approach ............172
Using screens to filter information ..................................................173
Assessing your screening results ....................................................179
Deciding Which Approach to Use .............................................................179
Chapter 9: Six Tried-and-True Steps
for Analyzing a Company’s Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181
The Six Step Dance: Analyzing a Company ..............................................181
Taking a Company’s Industry into Account .............................................183
Scoping out markets you’re familiar with .......................................184
Identifying what type of sector a company is in ............................184
Determining a Company’s Financial Stability ..........................................187
Current ratio .......................................................................................188
Debt to shareholders’ equity ratio ..................................................188
Interest coverage ratio ......................................................................189
Looking Back at Historical Earnings and Sales Growth ..........................190
Understanding Earnings and Sales Expectations ....................................192
Checking Out the Competition ..................................................................194
Valuing a Company’s Shares ......................................................................197
Gauging shares’ relative cheapness or expensiveness .................197
Figuring out whether the comparative share-price
difference is justified .....................................................................198
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