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How to Find the Best Stocks for Swing Trading (2023)

How to Find the Best Stocks for Swing Trading (2023 Guide)

Learn how we find swing trading stocks and produce triple digit returns every year. We cover sector analysis, stock screening, technical indicators, entry and exit strategies, and more in this 2023 guide.

carnivore trading logo design by genovius 2022 07 scaled e1675336061455

How to Find the Best Stocks for Swing Trading

Table of Contents

 

Whether you’re an advanced trader or just beginning to swing trade, this stock analysis guide has something for you.

There’s so much I love about trading. More specifically, what I love about the trading process and what it does to people. To be a great trader, you have become great at analysis, learn how the economy works, and overcome psychological hurdles that 80% of the population never will.

My point is this: finding the best stocks to swing trade takes effort. This isn’t something you can learn overnight or automate with AI. But you CAN do it! And we here to show you how.

To find great swing trades, you need a strategy and an analysis process. We’ve broken ours down into three steps.

1 Choosing Your Sectors

Half of our success depends on being in the right sector. Start with macroeconomic research: What’s the economy doing, what’s the Fed doing, and what’s happening in geopolitics? Build a shortlist of the top 3-5 stocks in sectors you like.

2 Stock Screening & Technical Analysis We know the top stocks in our sector, now we screen these stocks for technical indicators and chart setups we like.
3 Entry & Exit Strategy Buy your stocks at a good time and know when to exit. Make sure you scale into your winners and cut losers quickly.

Let’s dive in to each.

Finding the Best Sectors to Trade In

Why is sector analysis so important that it comes first? In our experience, 60% to 70% of a stock’s performance can be directly attributed to the sector it’s in. Many traders and researchers have come to similar conclusions.

William O’Neil, inventor of the famous CANSLIM strategy, stated “37% of a stock’s price movement is directly tied to the performance of the industry group the stock is in. Another 12% is due to strength in its overall sector. Therefore, half of a stock’s move is due to the strength of its respective group.”

Mebane Faber, of Cambria Investment Management, wrote “buying the sector/industry groups with the largest gains outperformed buy-and-hold over a test period that exceeded 80 years. This strategy worked for 1-month, 3-month, 6-month, 9-month and 12-month performance intervals.” Faber also found that performance could be improved by adding a simple trend-following requirement before considering positions.
Source

In short, we cannot overstate the importance of being in the right sector at the right time.

When determining which sector(s) are hot, we factor in:

  • News of the Day (Fed announcements, economic environment, geopolitical issues, etc.)
  • Technical Indicators (Price action and relative strength)

News of the Day

What kind of news affects stock traders?

First and foremost is the Fed. They’re the ones that provide the gasoline (liquidity) that runs the engine of the economy and that liquidity supersedes everything else.

The Fed sometimes wants things to contract because they’re afraid of inflation. Sometimes the Fed wants things to expand because they’re worried about growth going or high unemployment.

The Fed sometimes wants things to contract because they’re afraid of inflation. Sometimes the Fed wants things to expand because they’re worried about growth going or high unemployment.

Number two is the economic environment. What’s happening with the economy? Is it growing or contracting? Some of that’s interrelated with what the Fed’s doing.

It’s easier to make money in a bull market powered by a growing economy. Several swing trading strategies that look great when backtested simply don’t work during a bear market.

Third is geopolitics. Wars, trade disputes, breakdowns in unions, and civil unrest all cause uncertainty in the market.

Uncertainty makes everyone reluctant to invest – companies slow down hiring, consumers hold off on travel or major purchases, and investors delay decisions as they wait for things to settle down.

Indicators

Beyond fundamental research, there are technical indicators that tell us when a sector is ready to move. The most important one our system monitors is price action. Oftentimes we’ll see a sector start to move and won’t know why. The greatest economists in the world can’t predict every trend every time, and if you’re not watching for price action, you’re going to miss it things. You’ll wake up and realize that prices started moving in the biotech industry six months ago and you weren’t there. Now you’ve missed most or all of that action.

We use a simple trend following system at Carnivore Trading. We don’t try to impose our will on the market because we can’t. We read what the market tells us to do, and the price action tells us which sectors are ready to move. The mistake many traders make is looking at the fundamentals and saying, “I’m going to invest based on these fundamentals even if the price action doesn’t confirm it.”

We flip that around. We want the price action to tell us what’s working, and then we look at the fundamentals to see if they confirm that price action. When we have our sectors, we start looking at the best stocks in those industries, as informed by relative strength.

Uncertainty makes everyone reluctant to invest – companies slow down hiring, consumers hold off on travel or major purchases, and investors delay decisions as they wait for things to settle down.

Key Takeaways

  • Effective sector analysis combines fundamental and quantitative data points. Inform your analysis with the news of the day, technical indicators, and chart patterns.
  • Trade only the strongest sectors or sectors that are reversing hard. Find the top two or three relative strength names in that sector.
  • Relative strength is more important than P/Es in sector analysis and stock trading. Valuation methods are ineffective for traders because they take too long to be confirmed.
  • Buy quality stocks that are going up. Don’t bottom feed on cheap stocks. They are cheap for a reason.
  • Swim with the tides of the market – as defined by the 50 day and 200 day moving averages.

Choosing Which Stocks to Trade

Once we know which sectors we want to be in, we’re ready to find our stocks. We’ve done our macroeconomic research, now we’re looking at the corporate level.

We’re looking for the highest quality stocks in the sector(s) we think are going to do well. Because we can buy anything in that sector and do okay, but if we’re buying the best quality stock in that sector, we’re going to do a lot better.

We take the top two to five stocks in these sectors and drill down into fundamental analysis and technical analysis. We’re asking questions like:

  • Do these stocks meet some or all of our technical indicators?
  • Are these stocks in a chart pattern that we like?
  • How much overhang does the stock have?
  • What competitive advantage does the company have in its market?

Swing Trade Indicators

There are five indicators we monitor to determine the strength of a market trend:

  • RSI (Relative Strength Index)
  • MACD (Moving Average Convergence/Divergence)
  • A/D (Accumulation/Distribtuion)
  • OBV (On-Balance Volume)
  • ROC (Rate-of-Change)

During a bull market, 4/5 or 5/5 of these indicators meet our criteria. Throughout a bear market we consistently see less than 3/5 indicators meet our criteria. Moving Averages and Volume are also indicators worth mentioning.

Indicator What It Is How We Use It
RSI Measures the number and size of a market’s positive and negative closes over a set number of periods (usually 14). It’s represented as an oscillator (a chart that moves between zero and 100). We look for bullish or bearish divergences between the RSI line and the price chart. Asset prices hitting new lows while the RSI hits higher lows is bullish. Prices hitting new highs while the RSI does not is bearish.
Moving Averages The mean of a market’s price movements over a given period. MAs are categorized by the time period they cover: short is 5-50, medium is 51-100, and long is 101-200 days. The most important MAs for swing traders are the 50 day and 200 days. We’re looking for crossovers between MAs, called MACD.
MACD A momentum oscillator appearing on the chart as two lines oscillating without boundaries. The crossover of the two lines give trading signals similar to a two moving average system. This is one of five trend models we use to determine the strength of a market trend.

A/D

This line gauges supply and demand of an asset or security by looking at where the price closed within the period’s range and then multiplying that by volume.

In general, a rising A/D line helps confirm a rising price trend, while a falling A/D line helps confirm a price downtrend.
OBV The on-balance volume assesses buying and selling pressure in the market. It adds volume on days when the market rallies and subtracting volume on days when the market closes lower.

Chart Setups (Technical Analysis)

There are several chart patterns we need to account for, but the four most common setups we look for are:

  • Ascending Triangle
  • Channel Up (Righteous Uptrend)
  • Cup and Handle
  • Downtrend Reversal

Click the accordions below for more information on each.

Ascending Triangle

At Carnivore, we love seeing things like the Ascending Triangle pattern. In this bullish trading pattern, the top be moving up as well (it doesn’t have to be flat). What’s important is that the lower trend line is moving up like depicted below. The trend lines create an angle, closing the gap at a “resolution point” and resolution date. It’s easy to see and to understand.

When the Ascending Triangle pattern is tightening, and the stock is visibly coiling in front of you, it’s getting ready to explode! If the right fundamentals are in place, market tone is positive, and the sector is strong, this setup chart pattern predicts explosive moves up. Check out two examples of this pattern from our Daily Reports, along with the technical indicators we monitor.

asceding triangle with moving averages and indicators

ascending triangle example with indicators

Channel Up (Righteous Uptrend)

We love this pattern because it’s easily identifiable and these stocks are trading “just the way they should,” as Carnivore CEO Dutch would say.

While they appear to be going up nice and slow, you can expect a breakout sooner or later. But be careful: this pattern can break up or down, and often it’s down. Make good use of price targets and timeframes here.

This pattern does not produce as many explosive breakouts as others on this list, but it also doesn’t cause as much heartburn.

channel up rising channel

Cup and Handle

There are two parts to this pattern: the cup and the handle. The cup forms after an advance and looks like a bowl. After the cup takes shape, a trading range develops on the right-hand side and the handle is formed. A subsequent breakout from the handle’s trading range signals a continuation of the prior advance.

Ideally, the depth of the cup should retrace 1/3 or less of the previous advance. However, with volatile markets and over-reactions, the retracement could range from 1/3 to 1/2. In extreme situations, the maximum retracement could be 2/3.

The cup can extend from 1 to 6 months, sometimes longer on weekly charts. The handle can be from 1 week to many weeks and ideally completes within 1-4 weeks.

There should be a substantial increase in volume on the breakout above the handle’s resistance.

cup handle pattern example for finding stocks

Downtrend Reversal

Some stocks have been so destroyed that they’re washed out.

The wash-out is complete when virtually everyone has given up on the stocks, the volume indicators show that everyone has been selling like crazy, and those indicators cannot go much lower.

You want to enter these, especially if they’re off 80 or 90% from their high prints, and they are in a good or popular sector, as this one is, in the “future” of energy.

This stock could go lower, and maybe by a lot, but it seems to be rallying here and might be good for a trade, but we use it as an example for the Washed Out Coming Off the Bottom Pattern.

finding stocks downtrend change

Stock Screens

What’s the best screening platform for creating and monitoring your stock watchlist? We’ll cut to the chase – the best traders use multiple platforms. Set up multiple screens, check them regularly, and look for stocks that appear in multiple lists.

Just like our technical indicators, we don’t rely on just one screen to find great trades. By using multiple platforms, we have at least one screen that could produce winners in every market. A stock that shows up on multiple screens is more likely to breakout than a stock that only shows up in one.

The screeners we use religiously include:

  • VectorVest
  • MarketSmith’s Growth 250
  • MarketClub
  • SeekingAlpha Top Stock Picks

Obviously you don’t need to use this exact set of tools to be a successful swing trader. But these are the software screens we’ve built our internal tools around and I believe our results since inception speak for themselves.

Key Takeaways

  • Use RSI, MACD, A/D, OBV, and ROC criteria as your trading signals.
  • Don’t rely on a single indicator. You want to see multiple indicators that meet your criteria before entering a trade.
  • Don’t limit yourself to one stock analysis tool. Use multiple screens and take note of stocks that appear in multiple places.

How to Enter & Exit Your Trades

Mindset Requirements:

  • Scale into winners
  • Cut losers quickly
  • It doesn’t matter how often you’re right, just how much you make when you’re right

Technical requirements:

  • Stop-losses
  • Target price
  • Resolution date when possible

Scaling Into Winning Positions

Drive this next bit so deep into your head that you feel it touch your soul. You may pick more losers than winners. That’s ok, as long as you make the most of your winners. You do that by scaling into winning positions – aggressively!

This is the most important thing you can learn if you want to be a successful swing trader.

Dutch has a great analogy about this. He says “Making money in stocks is like surfing.”

The surfer looks for a good wave like the trader looks for a winning stock.

He may paddle into 6 or 7 waves and pull back at the last minute because it isn’t forming right. Those waves are the stocks you buy that don’t go up – they go down and you sell them quickly.

When the surfer finds the right wave, he paddles HARD into it and rides it. He MILKS that wave for all its worth. If it were a stock, he would add to his position over and over and over again as it goes up.

Let’s look at an example with big round numbers for easy math. 

We find and buy 10 stocks we like. We invest $10,000 into each.

Let’s say 2 of them go sideways and do nothing. We leave them alone but keep an eye on them.

7 of them go down. They go down 7% before we bail on them. Only 1 stock breaks out and up like we want. Sounds terrible, right? But how much did we actually lose?

Losing stock Invested % Loss $ Loss
1 $10,000 7.00% $700
2 $10,000 7.00% $700
3 $10,000 7.00% $700
4 $10,000 7.00% $700
5 $10,000 7.00% $700
6 $10,000 7.00% $700
7 $10,000 7.00% $700
Total loss $4,900

We’re down $4,900, ouch. But we took the money we pulled out of our losers and added to our winning position every $2. How much did we win by doing this?

Winning Stock PX Invested Shares Sale Proceeds Profit
Initial Buy $10 $10,000 1,000.00 $24,000.00 $14,000.00
Add $12 $5,000 416.67 $10,000.00 $5,000.00
Add $14 $5,000 357.14 $8,571.43 $3,571.43
Add $16 $5,000 312.50 $7,500.00 $2,500.00
Add $18 $5,000 277.78 $6,666.67 $1,666.67
Add $20 $5,000 250.00 $6,000.00 $1,000.00
Add $22 $5,000 227.27 $5,454.55 $454.55
Sell $24 $28,192.64

$28,192, boom! That $4,900 doesn’t sting so bad when we’re walking away with over $23K profit.

That’s a 20%+ return on our whole portfolio value. Then we do that over and over again throughout the year. If you find 4-5 winners like that, you’re at 100%+ returns for the year.

But let’s say our winning stock was less successful and we sold at $18 – that’s still a $12,553 gain for a $7,600 profit after accounting for our losers! Add to your position every $1 instead of $2, or cut your losers off at -5% instead of -7%, and your gains increase dramatically.

Some of the winners will be bigger or smaller than those examples, but you get the idea. That’s how we trade stocks, and that’s how we did +321% in 2022.

Technicals

Now that we’ve drilled into the mindset you need about winning and losing trades, let’s touch on the technicals.

Before entering a trade, you need:

  • Entry point
  • Stop-loss
  • Profit target

Your entry point, or the price you buy the stock at, is determined by the chart setup you’re using and its support and resistance levels. What you consider a favorable entry point depends on the strategy you’re using.

The profit target is where you want the stock price to go before you sell it. Like your entry point, price targets depend on the size and shape of the chart pattern. For example, trend channels show where the price is likely to reverse. If you buy near the bottom of the channel, your price target will be near the top of the channel.

A stop-loss order is the price that you automatically exit a trade if it isn’t going your way. Stop-loss orders are how you manage risk in your trades and prevent small losses from turning into big losses. A stop loss is usually set slightly below a recent swing low in long trades, and slightly above a recent swing high in short trades.

The difference between your profit target and your entry point is the approximate reward of the trade; the difference between your entry point and your stop out point is the approximate risk.

Consider a reward-to-risk ratio of two-to-one is your minimum standard when considering a trade. You want your upside to be at least twice the value as your downside in trading.

Entry and exit strategies warrant their own guide, so we’re building that for our readers now. Join our mailing list to be notified when it’s released. We don’t spam or share useless info, I promise.

How do we determine entry points, stop-losses, and profit targets? Internally, we use a system called BITE. BITE is unique in that the system takes Vector Nostradamus’ (another internal system) stock picks and delivers a target price, a target time frame, and a behavioral-based stop-loss. BITE is based on short term levels of significant support and resistance. For us as swing traders, it is projecting a breakout or breakdown point in price and time.

Key Takeaways

  • Cut your losers quickly and use that money to scale into your winners aggressively.
  • How much you make when you’re right is much more important than how often you’re right.
  • Never enter a trade without a clear profit target and stop-loss. Your potential profit should be at least twice as much as your potential loss.

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