(By Dave Goodboy) I'm a stock screening maniac. All day, every day the market
is open, I am running my various stock screening programs in real time. I search across time frames, sectors, indexes, and exchange-traded funds (ETFs) in an effort to locate companies prepped to continue trending in the same direction or about to bounce/fall. In other words, I'm looking for solid trading set-ups that can be exploited for profit
I utilize a variety of traditional technical indicators mixed with several proprietary ones to locate these opportunities. I like to short-term day trade as well as longer-term swing trade. The criterion used to identify tradable stocks depends on the time frame used.
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My bread and butter trading method is swing trading with a holding time of seven days or more. I have discovered that buying weakness in solid, up-trending stocks is much better than simply buying on upward momentum. It's not only my experience that indicates this fact, it's extensive studies done by market researchers continually indicate that the edge lies in buying weakness -- not strength -- in the stock market, so what I look for is a stock that has fallen off its highs for 5 to 8 days in a row.
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The major caveat is that it has to be above its 200 day moving average, despite falling sharply. In most cases, the 200 day moving average will become my stop level, and I'll average in two to three times with my purchases, as it's impossible to tell exactly when the bounce will occur. If it hasn't happened in seven days after the first entry, my trading system closes the trade and starts looking for other opportunities. If the trade does become profitable by the 3rd third entry, then I'll hold it with trailing stops for as long as possible and capture profits. Although many trading axioms are wrong, holding winners and cutting losers is one that remains extremely relevant.
While this trading method makes perfect sense as a pure technical entry tool, I tweak it by looking at the fundamentals of the stock prior to deciding to buy. Just like only buying above the 200 day moving average acts to prevent catching a falling knife, knowing why a stock is falling can prevent unwanted losses.