How To Pick Stocks To Swing Trade?

There are literally thousands of stocks available in the marketplace, so how do you choose which stock to swing trade? Deciding what stocks to swing trade is half the battle for a swing trader or any investor for that matter. The actual number of stocks you need depends on several factors, such as available trading capital, risk tolerance level, and trading strategy.

Some swing traders just use technical analysis for buy and sell signals as well as to pick stocks. Others use fundamental analysis to select or eliminate stocks and technical analysis to time buy and sell activity. Few swing traders use both fundamental and technical analysis to select or eliminate stocks from the list of swing trading candidates. You can combine numerous fundamentals and technical tests to narrow your list.

To pick stocks for swing trading, it makes sense to start finding a range of potential companies meeting  certain fundamental criteria. Fundamental analysis uses real data to evaluate a stocks value, by examining its financial and other qualitative and quantitative factors. Technical analysis on the other hand is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Here are some questions that you should ask in order to eliminate and select stocks for swing trading.

Price Range: What price range is this company currently trading? Eliminate all the stocks that are below $10 and above $80. Price range can be adjusted depending on available trading capital,  and risk tolerance level. The lower the price, higher the risk, and need less capital. Some people use the range between $5 and $25 and others use $20 to $150. In my experience you will find better swing trading candidates in the price range of $10 to $80.

Volume: What is the three months average volume traded per day? Look for the stocks with an average of one million shares per trading day or above. Remember that we are looking for stocks for swing trading and the stock price has to move significantly in three to five days in order to make profit. Without enough volume the stock is considered dead and does not fit swing trading criteria.

Profitability: The listed company should be profitable year over year. At least check the last three year’s financial reports if not more. Profit is a business’s ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time.

Stability: Is this company stable? If the company is not stable, dump that stock in the garbage. A sound test of a company’s stability is consistency. Check to see if the revenues and earnings are steady and regular. Erratic reported earnings might be a sign of poor management, questionable accounting, or may be some internal problems. Any of these might affect the dependability of price trends and is not a good candidate for swing trading.

Age: How long has the company been in business? To decide one stock over the other, it is impossible to make a sound judgment without a track record. Growth or reduction in net worth, management’s reputation, earnings consistency, profitability and other information’s are important and it is easier to get that from older companies than newer ones.

Product/Service: Is the company providing a service or a product? Is this product or service in demand? How many competitors does this company have? Is this company a leader in the industry? Is this company falling behind their more aggressive competitors? These are some of the questions you have to ask yourself before investing in any company, and swing trading is no different. Even though swing trading is a short term trading strategy, it makes sense to invest in companies that are competitive and well managed. 

Trading Range: A very narrow trading range indicates low volatility and the broad trading range indicates high volatility. Low volatile stocks have flat trend line and high volatile stocks are too risky, for swing trading you want to find stocks with moderate levels of volatility.

After running your list through the above tests, you should have at least 5 to 10 stocks in your watch list. If your selected criteria is too broad, you will be left with too many stocks and if your criteria is too narrow, you will be left with too few or no stocks. Depending on how many stocks you need, adjust the above criteria.

Do you have a different setup to select stocks? What other criteria do you use to select stock? Lets continue this discussion, please leave your comment below.