Table Of Content

P1: JYS FM JWBT029-McCall October 29, 2008 15:6 Printer: Yet to come The Swing Trader’s Bible i P1: JYS FM JWBT029-McCall October 29, 2008 15:6 Printer: Yet to come The Swing Trader’s Bible Strategies to Profit from Market Volatility MATTHEW McCALL MARK WHISTLER John Wiley & Sons, Inc. iii P1: JYS FM JWBT029-McCall October 29, 2008 15:6 Printer: Yet to come Founded in 1807, John Wiley & Sons is the oldest independent publish- ing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and market- ing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future. For a list of available titles, please visit our Web site at www.Wiley Finance.com. ii P1: JYS FM JWBT029-McCall October 29, 2008 15:6 Printer: Yet to come Copyright C⃝ 2009 by Matthew McCall and Mark Whistler. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: McCall, Matthew, 1976– The swing trader’s bible : strategies to profit from market volatility/ Matthew McCall, Mark Whistler. p. cm. – (Wiley trading series) Includes bibliographical references and indexes. ISBN 978-0-470-30826-4 (cloth) 1. Investment analysis. 2. Portfolio management. 3. Stocks. I. Whistler, Mark. II. Title. HG4529.M383 2009 332.64–dc22 2008028073 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1 iv P1: JYS FM JWBT029-McCall October 29, 2008 15:6 Printer: Yet to come Contents Acknowledgments ix Preface xi CHAPTER 1 Determining Your Trading Style 1 Why Swing Trading is a Better Alternative to Day Trading 2 How to Successfully Implement Winning Trades 5 CHAPTER 2 The First Rule of Profitability: Stop Loss 9 The End Should Always Come First 9 Occasionally Unforeseen Disaster Strikes 10 Hard Stops as a Profit Tool 12 Using Trailing Stops to Increase Profitability 15 CHAPTER 3 The Second Rule of Profitability: Commonsense Fundamentals 19 Careful with ETFs, Indexes, and Option Valuation 20 Common Sense is King 20 Ratios Matter 21 Exuberance is Never Fundamental Common Sense 26 CHAPTER 4 The Third Rule of Profitability: Technical Analysis 29 What is Technical Analysis? 29 The Basic Chart 30 Introduction to Basic Technical Analysis Indicators 32 v P1: JYS FM JWBT029-McCall October 29, 2008 15:6 Printer: Yet to come vi CONTENTS The Importance of Technical Analysis 38 A Beacon in the Night: The Chart is Your First Alert 39 Self-Fulfilling Prophecy 39 CHAPTER 5 Strategy 1: Take the Trends to Pieces 43 Note on Fundamentals and Trend Trading 43 Riding the Envelopes 44 Profits through Pitchforks 52 CHAPTER 6 Strategy 2: The RSI Indicator 55 Choosing an RSI Setting 55 RSI Swing Trading Strategies 56 Implementing the RSI Strategies Step by Step 60 Bringing It All Together 61 CHAPTER 7 Strategy 3: MACD and Stochastic 65 Understanding MACD 65 Swing Trading Strategies Using the MACD 67 Stochastic 74 How to Trade the Stochastic 76 CHAPTER 8 Strategy 4: The Tier II Play 81 Follow the Leader 81 Market Cap in Tiers 82 Example in Action 84 What to Look Out for: Hidden Correlations 84 Where to Find Tier II Plays 85 CHAPTER 9 Strategy 5: ETF Sector Rotation 89 Asset Class Money Rotation 89 Market Cycles 91 Short-Term Sector Rotation 95 Dow Theory 98 P1: JYS FM JWBT029-McCall October 29, 2008 15:6 Printer: Yet to come Contents vii CHAPTER 10 Strategy 6: The Macro-to-Micro Play 101 Step-by-Step Macro-to-Micro Approach for Swing Traders 103 The Daily Macro-to-Micro Trade Strategy 103 CHAPTER 11 Strategy 7: Profit from Exuberance Premium 107 Technicals Tell a Ton 108 Identifying Exuberance Premium 109 Technical Entry and Risk Management 113 CHAPTER 12 Strategy 8: Japanese Candlestick Charts 115 Single Candlestick Patterns 116 Wrapping Up Candlesticks 125 CHAPTER 13 Strategy 9: Option Primer and LEAP Options 127 Brief Explanation of Options 127 Puts and Calls 130 LEAP Options 130 CHAPTER 14 Strategy 10: Piggyback Strategy Using ETFs and Mutual Funds 133 Finding International Swing Trade Ideas 134 Piggybacking Mutual Funds 139 CHAPTER 15 Strategy 11: Scanning for Swing Trade Ideas 143 Establishing a Daily Scan List 144 CHAPTER 16 Strategy 12: Swing Trading a Market Sell-Off 153 Shorting Stocks: Profit When the Market is Falling 154 Introducing Short ETFs 157 P1: JYS FM JWBT029-McCall October 29, 2008 15:6 Printer: Yet to come viii CONTENTS CHAPTER 17 Strategy 13: Swing Trading the Megatrends 165 Why Trade a Megatrend? 165 How to Trade a Megatrend 167 Current Megatrends 172 The Next Major Megatrend 175 CHAPTER 18 Strategy 14: Return on Assets and Return on Equity 177 Balance Sheet and Income Statement 177 Return on Assets 179 Return on Equity 179 CHAPTER 19 Strategy 15: Covered Call Options 183 What is a Covered Call? 183 Buying Stocks at a Discount 185 Deep in the Money 185 CHAPTER 20 Strategy 16: Straddles as a Profit Tool 187 Consolidation is Key 187 Straddles 190 CHAPTER 21 Strategy 17: Bull and Bear Spreads 195 Spreads: The Nuts and Bolts 195 Spreads in Action 199 Last Words 203 Notes 205 Bibliography 209 Index 211 P1: JYS FM JWBT029-McCall November 4, 2008 18:19 Printer: Yet to come Acknowledgments T hank you so much to Kevin Commins, Meg Freeborn, Pamela van Giessen, and John Wiley & Sons, Inc., for making this book possible. Also, thank you to Sandy Whistler and Ed Juhan for being incredi- ble parents and to Karen, Mike, and Ryan Eck; Paul, Lauren, and Alexis Whistler; and Eddie Kwong, Larry Connors, Danilo Torres, Nick Collard, and the rest of the TradingMarkets.com team. All have helped make this book possible in some form or another. Thank you to Leigh Stevens; even the third book is due to your help from the start. ix P1: JYS FM JWBT029-McCall November 4, 2008 18:19 Printer: Yet to come x P1: JYS FM JWBT029-McCall October 29, 2008 15:6 Printer: Yet to come Preface T rading and investing are among the most exciting and rewarding pur- suits around, there’s no doubt about it. Where else can you make all of your dreams come true, while having direct control over every step of your fate? Not too many places. However, trading and investing provide one of those special situations, where with enough hard work and understanding, all of our futures can become as bright as our most vivid dreams of greatness. It’s not easy, though, investing in financial markets. After all, anytime there’s money on the line for almost anything in this world, emo- tions come into play as well. However, with a solid repertoire of proven tools, there’s no mountain any of us can’t scale. With this in mind, The Swing Trader’s Bible is many years of culled experience between us—both of whom work within financial markets professionally. Friends for many years, we wanted to create an easy-to-read, simplified book to help investors and traders of all levels move toward profitability within the ever-changing sea of investment markets. The lessons within the very book in your hands are those of trial and error, the result of many years of hard work. We are proud to share with you the trading strategies that we believe will give you the best opportunity to become successful and fulfill your dreams. A concept that resonates throughout the book is simplicity. We are not trying to reinvent the wheel or teach nuclear fusion. Our goal is to share with you strategies that can be learned through some good old- fashioned hard work. We hope that you are able to immediately apply the strategies to your day-to-day investing. What you’re reading isn’t just theory by any means whatsoever. The strategies outlined in The Swing Trader’s Bible are the same methods we use every day. Remember, it is not easy to reach your goals as a trader; however, greatness is attainable if you have the knowledge of the right strategies. xi P1: JYS FM JWBT029-McCall October 29, 2008 15:6 Printer: Yet to come xii P1: JYS FM JWBT029-McCall October 29, 2008 15:6 Printer: Yet to come The Swing Trader’s Bible xiii P1: JYS FM JWBT029-McCall October 29, 2008 15:6 Printer: Yet to come xiv