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How To Buy a Stock For a Swing Trade?

Trader with multi-monitor computer setupHere are some tips on choosing a stock to swing trade. This approach is more for the "technical analysis" oriented trader/investor, rather than the "fundamental analysis" approach trader.

Determine the Trend and Trade in the Same Direction!

The first thing that you should do when choosing a stock to swing trade is to determine it's trend. Whether you use technical indicators like ADX, MACD or just a Simple Moving Average, it is imperative that you are on the same side of the dominant trend. It is very easy to repeat this often quoted mantra but quite difficult to actually implement this in real-life trading. The general tendency for most traders is to pick tops and bottoms. If you are guilty of doing this, you must stop now because sooner or later, your luck is going to run out and you will be stuck with a dud in your hands. Picking tops and bottoms are for gamblers, not traders. Those who catch "falling knives" (pick bottoms) get bloody hands while those who stand in front of locomotives (pick tops) get crushed to a pulp. Don't become a statistic. Stay in the game as long as possible until you learn the ropes.

Trade Issues with High Liquidity or Volume

Liquidity in this case refers to the high trading interest reflected by the volume traded both at the buy side as well as the sell side. As a guide, stick to stocks which trade an average volume of at least 500,000 shares a day. This will enable you to initiate or liquidate small positions of around 1K to 10K shares without losing much in terms of slippage. Slippage refers to how far away, from when you initiated the order to buy or sell, your order is filled. Trading 10K shares on a stock with average volume of 10 million shares a day is hardly a problem but it is quite a challenge to do the same, in the open market, with a stock that trades only 100K shares a day. It will take some time and patience to slowly move size in a thinly traded stock.

Avoid Stocks with High Short Interest

If you intend to buy a stock with a very high short interest, in anticipation of a short squeeze, my advise would be to think again. Shorts are some of the most savviest traders out there and if they have built up a huge short position, it is for a reason. A reason which may not be apparent to the general public yet. However tempting it may be, this is one situation that you should carry out your fundamental analysis "due diligence" very thoroughly and not be swayed by the potential of a short squeeze.

For those intending to join the shorts, it may not always be possible to do so, as it depends on how high the short interest is and whether there are anymore shares to "borrow" in order to initiate a new short position. The stock may also be on the Reg SHO list if there is some form of naked shorting being carried out.

Watch the Actions of the Company's Officers

A public company which is plagued with problems often finds many excuses and reasons to talk about anything but itself as a reason for it's stock not performing well. More often than not, the louder a company complains about the short-sellers, the worse are the internals of the company. Those companies that bitch and moan about the short-sellers trying to hammer their stocks down are usually companies that are far too worried about their short term stock price movements and are looking for an excuse to give to their shareholders. A smart CEO will be out there telling his shareholders the hard facts about the company's performance and is willing to put his money on the table. A smart CEO will let the company's numbers speak for themselves. A good place to find great insights into companies and useful, tradable information is TheStreet.com, where former hedge fund manager, Jim Cramer shares his trading ideas before he acts. Click here for a free trial.

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