Considering a Stock for Swing Trading

[JLJ 10]

I've had my eye on a particular stock that's tripled in price in the past year or so. It had no P/E for quite a while and now I look back and the P/E is 184 - the average for its industry is 17. Not a good P/E but at least they're finally making money. I'm considering buying some because their price has gone up consistently for the past year or two - it's actually tripled. Should I just forget about buying this (for swing trading) because of this P/E?

[MadMarketScientist 11]

My thought would be this.

 

You didn't share the stock symbol that I saw - that would help to get more opinions.

 

But, if the only reason you're buying is because it has gone up a lot for the past year, than I would say you don't have nearly enough reason to be buying. You sound like you are looking at this like a fundamental play, not one based on technical analysis.

 

If that's the case, I would think you'd want to have a lot more analysis on WHY you think it will continue to go up for a swing trade, besides the fact that it has been rising. Granted, momentum does count for a lot, and there could be many very valid reasons it has climbed, and could continue to do so, but I think your analysis should be much deeper than it is so far.

[sevensa 10]

I've had my eye on a particular stock that's tripled in price in the past year or so. It had no P/E for quite a while and now I look back and the P/E is 184 - the average for its industry is 17. Not a good P/E but at least they're finally making money. I'm considering buying some because their price has gone up consistently for the past year or two - it's actually tripled. Should I just forget about buying this (for swing trading) because of this P/E?

 

What do the rules in your trading plan say? Do they allow you to buy it?

[JLJ 10]

the stock is ANN.

I wasn't even attempting to look at technical analysis for this, more fundamental. And you're right that I've only taken a superficial look. My next step, I suppose, is to learn more about the company and the industry to discern why the stock has gone up and whether that's likely to continue.

No one has said, yet, that I should rule it out simply because the P/E is 184 and the average for its industry is 17. To my newbie mind, that does not sound good.

[JEHs 10]

the stock is ANN.

I wasn't even attempting to look at technical analysis for this, more fundamental. And you're right that I've only taken a superficial look. My next step, I suppose, is to learn more about the company and the industry to discern why the stock has gone up and whether that's likely to continue.

No one has said, yet, that I should rule it out simply because the P/E is 184 and the average for its industry is 17. To my newbie mind, that does not sound good.

 

I Think most here are technical traders, that is, they trade from chart patterns, support/resistance that sort of thing. I would guess not to many here would even give PE a thought.

 

If the stock is in an uptrend, then you would think long; downtrend think short. PE doesn't matter.

 

Now if your looking for a stock with good fundamentals that you might want to buy and hold for the long run... that's another story. That, in my opinion, is not trading. That is investing, and I guess I quit thinking of the stock market as a place to invest money a long time ago, but that's just me...

[JLJ 10]

Thanks everyone for your feedback. Part of my confusion is that I was thinking simplistically that day traders look at technical analysis and investors look at fundamentals. I don't yet know how to assess a stock for swing trading.

It had not occurred to me that technical analysis was the way to go when contemplating buying a stock I might hold for a matter of months. I thought TA was more for day traders.

I see there's a section on TL for Swing Trading, so I'll start reading that to bone up. Thanks, folks, for your patience with my painfully basic newbie questions.

[MadMarketScientist 11]

Arguably, using technical analysis on longer term charts is even more powerful because you don't get some of the day to day or hour by hour noise you get with day trading. So you can definitely take a swing or position trade off of technicals.

 

It's simply a matter of bumping up the timeframes you're looking at -- it's like someone looking at a chart on a 1 minute, 5 minute, 89 tick chart, etc... vs. looking at it on a 4 Hour, daily or weekly chart. By doing that, many times the same technical approach works, it's just the time horizon has changed considerably.

 

As for the way I look at things, my specific approach which may not fit your criteria, the last time I had a buy signal on ANN was the break of $16+ and it had a nice run, right now I would only be looking for a new buy once it pulled back to the 18.50 - 19.00 range and bounced off that level before entering -- otherwise for me on a swing basis it hasn't met my criteria yet for a new buy.

[JLJ 10]

This is very helpful. Thank yoouuuu!

[Dinerotrader 10]

I annotated the chart with the places I see as S/R (support/resistance) levels and some more obvious trendlines. I normally trade close to the S/R levels trying for a reversal or breakout so I wouldn't be taking any positions right now on this. I could imagine price making its way back down towards the lower resistance level and trendline and then making another run up and I would look to play that if it occured. Many ways to play this and make money if you are willing to be patient for a low risk high reward trade setup. Base your analysis on support and resistance first and build off that. Also keep an eye on what the ES (S&P futures) are doing because if it is continuing to make lower lows you'll have a hard time making long positions work on any stock no matter the technical or fundamentals. My

 

[JLJ 10]

thanks! You guys have given me a lot to think about and digest.

[AmCan1 10]

JLJ,

 

Another thing you can do is find yourself a good swing trading 'system.' There are some good ones out there. Don't spend a fortune on one though. The idea is to come up with a simple set of trade rules and then apply your rules to good swinging markets. You could take a look at your stock in question and look for setups in that stock that fit the rules of your swing trade system. Maybe you do have something but you might be surprised to learn that the best trade is a short not a buy. Or not. Swingtraders should be flexible enough to go both ways, no pun intended.

 

The idea is, that if you have a hard and fast rule set, that gives you an edge in the market and puts the odds in your favor on every trade, then your biggest job will be to control your risk (take small position sizes as you build up your account because swing trades are larger and require more room to breath) and execute your tradeplan according to your system accurately. You'll lose some trades for sure, but that's ok. The edge of your system will take over and grow your account as you win more than you lose, so long as you keep your risk very small as it relates to your overall available trade capital. I hope that makes sense. Good luck!

[JLJ 10]

Hope this isn't a dumb question, but what is a trading 'system' and where would you find one? I understand that people devise their rules based on months - or years - of back testing and practice trades, but are you saying there's something pre-fab you can buy? Can you give an example?

[natedredd10 10]

Beware of the man who tries to sell you an ATM machine at a discount...They will of course always give you a "deal" on such machinery.....

To me on this chart you are making a rookie mistake that every stock chart is either a long or short...

Most stocks, if randomly picked from a basket are "wait and see" in reality and you have to sit in the weeds like a marine sniper for your target knowing what you are shooting at.

I wouldn't do anything here other than wait and see if the chart bull flags, especially if people getting scared risk wise at the index.

[WorldTrader 10]

Hope this isn't a dumb question, but what is a trading 'system' and where would you find one? I understand that people devise their rules based on months - or years - of back testing and practice trades, but are you saying there's something pre-fab you can buy? Can you give an example?

 

JLJ,

There are so many you can buy, the best bet is to see if you can find some good feedback on this site and others. A swing trade system should be easy but effective. Try to have a 2 to 1 win ratio. I saw a you tube video that I posted on another thread. Just go on You Tube and search swing trading forex.

Don't buy anthing right away, do some research and get some feedback. Make sure you have a solid money back guarantee or trial.

I know there are some swing trade rooms out there.

[AmCan1 10]

JLJ, a trade system is a package of indicators, sometimes custom, that help identify trade setups that have a winning edge in the market. They usually come with rules that tell you the entry, target, stop and perhaps even a trade mgt plan that has you moving your stop to reduce risk and/or lock in some profit as the trade progresses. The good ones print the actual trade setups right on the chart and are simple to learn and use. They should never be blindly trusted though. Even if they work most traders still need to do foundational work to learn the system and manually backtest it to gain confidence and see for themselves that it works (or not).

 

There are some real good ones but its hard to find them amongst a bunch that really are not that good (being diplomatic here). There is one in particular that I personally really like for stocks and forex called the Ultimate Swing Trader. I hope that the readers on TL don't think I am spamming or promoting here .. lol.. I'm not. You asked me a question so I'm merely trying to answer you straight forward with my personal opinion. Hope it helps.

[AmCan1 10]

By the way, I think WorldTrader gave good advice too. You really need to find one that gives you an edge that you can prove. If you can win 2 out of 3 on average, over a lot of trades, and, if you control your risk, never risking more than 2% of your trade capital on any one trade (and maybe 1% is even better), then you could prosper with that type of 'trade system.' One thing for sure, it helps remove the human element. The system acts as your objectivity and reduces your trades down to high probability setups.. if it's a good trade system, that is. The chart posted earlier of ANN looks to me like a good swinging stock, by the way.

[cuttshot 11]

JLJ...I will take AmCan and worldtraders comments a step further. Most systems out there are going to based off of technical indicators like MACD or Stochastics to name a couple. Before you go out and buy a system you will want to do some basic research to learn a little about the basics of technical analysis.

 

You will want to get a feel for what basic indicators like the ones I mentioned above are telling you. Also look to see what it is traders are looking at when they load up a chart. Using a system without an understanding of the basics will just lead to frustration.

 

If you are a reader and motivated to get a background on technical analysis take a look at Technical Analysis of the Financial Markets by John J. Murphy. It is a large book but does cover many of the basic principles of technical analysis.

[AmCan1 10]

Great advice by Cuttshot. I have the John Murphy book. I think it belongs in every trader's library. And if I can now humbly add something to Cuttshot's advice, I would also encourage you to look for a trade system that is based on price action. Indicators always lag the market. They definitely have value and the more you know about them the better as there are many different kinds. I like a system that uses price action to base its trades from but uses a very select few indicators to confirm the price action and possibly even to calculate the size of the trade; its targets and stops. Still though, unless you follow Cuttshot's advice and learn as much as you can, it's probably all going to be a foreign language.

[cuttshot 11]

AmCan,

 

Yes I agree price action is king. In fact I like my charts to be very clean. By that I mean very few indicators on them. However, it seems like most trading systems on the market today are a combination of mulitple indicators. You are almost forced to dive in and study some of these indicators to understand what works and what doesn't. As the markets go more and more electronic traders are turning to different technical approaches. It is very important to have a system that you understand and that fits your style.

[JLJ 10]

thanks everyone. you've given me a lot to think about.