Landry Lessons, Parts 1-3

Dave Landry Swing Trading Course, Part 1

To those new to swing trading, this course contains a brief introduction to my approach to the markets. It is not intended to be a complete methodology. Rather, it’s a base upon which on upon which one can build.

Swing Trading Defined

Swing trading is simply short-term trading. Positions are held, on average, for 2 to 7 days. Under ideal conditions, positions can be held much longer, creating the occasional “home run”. My style of swing trading is momentum based. This means that I first seek to identify a trend and then look for a place to enter. Although I do have some transitional patterns (early trend), I do not attempt to pick tops or bottoms.

 Trading Pullbacks

I believe “The Trend Is Your Friend” is the truest market adage. And, the best way to enter trends is on pullbacks. Therefore, momentum pullbacks and variations thereof are my favorite patterns. They consist of a market in a strong trend (a) that has begun to correct (b). An entry is triggered when the trend begins to resume (c) and a protective stop is placed below the low of the setup (d). As the trend continues, partial profits should be taken (e) and the stop on the remaining shares should be trailed higher (f).

Let’s break it down:

Identifying Trend

The great thing about stocks that are trending is that they leave clues behind. I have dubbed these clues “Trend Qualifiers”. They include base breakouts, gaps, laps, wide range bars, strong closes, new highs, and how much a stock moves over a given period of time on a percentage or point basis. The behavior of moving averages can also be used to help determine trend.

 Let’s look at an example of trend qualifiers.

1. The Nasdaq Biotech Ishares (IBB) gaps to new 1-month highs out of a low-level base. Notice the move is on a wide range bar and the stock closes well (in the top of its range).
2. The stock gains over 20% in 16-days as the trend gains strength.
3. Notice that this strength began with a wide range bar higher that closed strongly.
4. Also notice that the stock is hitting new multi-month highs during this period.
5. The stock has an orderly pullback.
6. The trend resumes.
7. The stock has an extreme wide range bar higher. Although this is a sign of strength, at this point, you have to begin to question if the move has exhausted itself. This is normally a good time to take some profits and tighten your stop on your remaining shares.
8. The stock gaps to 1-year plus highs.
9. The stock reverses and closes poorly. At this point, you have to begin to question if the trend has ended and a new trend in the opposite direction is emerging.

Now let’s look at the same chart with the moving averages. My favorite moving averages are a 10-period simple and a 20 and 30-day exponential. These are explained further under chapter XX Bow Ties.

1.      The moving averages are sloping downward.

2.      The moving averages come together and turn up. This action forms a “Bow Tie” (see chapter XXX).

3.      Notice that there is “daylight” between the stock’s lows and the moving averages (i.e. the lows are greater than the moving average). This is a sign of strength as the stock gains momentum.

4.      Notice that the slope of the moving averages is positive (up).

5.      Also notice that the moving averages are in “proper order”—the faster moving averages (shorter periods) are above the slower moving averages (longer periods).

The Trend Should Be Obvious

I’m amazed at how many try to make a trend exist where there is none. The trend should be obvious. Quite simply, it the right side of the chart is higher than the left, then it’s in an uptrend. Conversely, it the right side of the chart is lower the left, then it’s in a downtrend. Said another way, if you can’t draw a big arrow pointing in the direction of the trend, then it’s probably not a trend.

The Correction

The correction (i.e. pullback) can be defined in terms of width (number of days since the new high was made) and depth (how far the stock pulls back). In general, the width should be 2-7 bars. More than that and it’s possible that the stock is losing momentum. As far as depth, too deep and it’s possible that the trend has ended and a new trend (i.e. reversal) is emerging. Conversely, if it’s too shallow it’s possible that the stock has corrected enough. Therefore, “depth” can be arbitrary. And, it can vary greatly depending on the price and volatility of the stock. Higher priced and more volatility stocks can have deeper corrections before their trend resumes. Whereas the same move in a lower priced or less volatile stock would be viewed as a trend reversal.

Entries

By placing your entry above the market for longs, you will only get filled if the stock begins to move in the intended direction. Of course there’s no guarantee that it will continue to move in your favor but at least you won’t get filled if a rally never materializes.

As a general statement, for longs, entries should be around 10 cents above the prior day’s high. This allows some wiggle room should the stock barely get past the prior day’s high (a possible target for market makers) before reversing.

Keep in mind that where you enter will also depend upon market conditions. In very good conditions, you might actually look to enter early if it appears that the trend is resuming (i.e. an intra-day rally or reversal).  Conversely, in poorer conditions, you might look to enter the stock at higher level. Further, you might even want to let it trigger and wait to see if continues to follow through before entering (i.e. a second entry).

Good luck with your trading,

Dave Landry

Dave Landry Swing Trading Course, Part 2

The Art Of The Initial Protective Stop

Placement of the initial protective stop is as much of an art as it is a science. Too close and you will almost surely guarantee yourself a loss as the “noise” of the market will stop you out. Placing it further away will increase you chances of a winning trade should the trend resume, but obviously increases your risk if it doesn’t.

When trading pullbacks, the low of the pullback is the obvious place for a protective stop. However, because this is common knowledge, it becomes a target for market makers.  Therefore, I like to use a somewhat looser stop (especially if the low of the pullback is fairly close), taking into consideration the volatility and price of the stock (higher priced/more volatile stocks require a looser stop).

The following table is a general guideline for where initial protective stops could be placed (from the entry) based on the price of the stock. This should help to keep you from being stopped out prematurely. Keep in mind that tighter stops can be used on less volatile stocks. Conversely, more volatile stocks will require looser stops

            Stock Price      Protective Stop (amount risked)           

            $10-$15           $1

            $15-$20           $1-$1.50

            $20-$30           $1.50-$2.00

            $30-$50           $2.00

            $50-$70           $2.50

            $70-$100         $3.00

            >$100              $3-$4  

Money Management

Initial Profit Taking

On most swing trades, the profits will be small and have the potential to quickly erode. Therefore, as soon as your profits (a) are equal to or greater than your initial risk (b), you should lock in half of your profits and move your protective stop on your remaining shares to breakeven (c) -- (near your original entry).

Locking in half of your profits and moving your stop to breakeven when your profits are greater than or equal to your initial risk, will help to generate income for your account. This income will help to pay for the inevitable small losses associated with swing trading. Further, barring overnight gaps, this gives you, at worst, a breakeven trade and a chance at a home run on the remaining position.  Larry Connors, in Connors On Advanced Trading, has dubbed this simple, yet effective, form of money management 2-for-1 Money Management.

Keep in mind that this is just a basic money management system. You can (and should) build from here. Also, conditions will help dictate where profits should be taken. For instance, in strongly trending markets where the sector and stock are also in gear, you might look to let profits ride a bit on the first loaf after the profit target is hit (e.g. trail a stop intra-day on the first half). Conversely, in choppy markets, you might look to take profits more quickly and move you protective stop to breakeven.
 

Trailing Stops

Stops can be trailed higher on a point or pattern basis. Using a point basis, one would simply follow the guidelines outlined in the table on page XXXXX, provided of course, the volatility of the stock is taken into consideration. For pattern based trailing stops, one could place their stop beneath support levels or beneath recent lows. For instance, placing a stop below a two-to-three bar low can often catch the majority of a strongly trending market.

My goal with every swing trade is to have it turn into a longer-term play. Therefore, if I am fortunate enough to capture a short-term move in a stock and have already taken partial profits, I will trail a somewhat looser stop on the remaining shares. Ideally, this will allow the stock enough room to have and orderly correction (or form a base) and then resume its uptrend. Each time a stock the stock does this, I then tighten to the level of the last base/correction.

Good luck with your trading,

Dave Landry 

Dave Landry Swing Trading Course, Part 3

In Part 3 of this lesson, I'd like to answer some frequently asked questions I receive from readers:

Q&A

Q. When trading pullbacks, how do you know that this pullback won’t be the last?

A. You don’t. You have to keep playing the stock as if the trend will last forever. Hopefully, you won’t get triggered on a pullback that turns into a major reversal. Or, at worst, you’ll get stopped out with a modest loss. The good news is that markets often offer many opportunities before they eventually fail.

Q. You didn’t mention ADX as a determinate of trend. Do you still use ADX?

A.  In my first book, I felt that I had to quantify trend for those new to trading or those who needed more of an objective type analysis. Inadvertently, I think too much emphasis was placed on the indicator. I don’t use ADX to quantify a trend for a potential setup. I “eyeball” a chart and look for Trend Qualifiers. I do use ADX for research purposes, especially when working on contra-trend market timing signals. However, on a day-to-day basis, I simply prefer looking at the charts.

Q.  Do you use actual or mental stops?

A.  If I am distracted or have many positions on, I will place an actual stop. If I can watch a screen and not be distracted, I will use mental stops. I will look to exit after my mental stop is hit. In other words, I will “trade out” of the position. In some cases, I end up risking slightly more than intended and in other cases the trend resumes I end up with a winner. Mental stops do require discipline though. I’m amazed at the number of people who ask me for advice on what to do with a position after they have losses of 5, 10 and even 15-points or more. For these people, they should place actual stops in the market. This makes controlling losses a passive decision and not an active one.

Q. Do you carry stops overnight (i.e. good till canceled orders)?

A. No, I allow the stock to open and then place my protective stop. This allows me to “trade out” of adverse moves. Again, this requires discipline. If you find yourself being a “deer in the headlights”, hoping for a stock to come back, then you’re much better off carrying the stop overnight.

Q. You mention that the low of the pullback is a target area for market makers. Can you elaborate?

A. Yes. The “textbook” place to put your initial protective stop is right below the low of the pullback. However, if this is fairly close to the entry, for instance, less than those parameters given in table XX, then there is a high likelihood that it could be hit.

Q. You mentioned that the initial protective stop should be varied depending on volatility of the stock but you didn’t define volatility.

A. It’s beyond the scope of this text to get into complex volatility measurements. The good news is, one of the best ways to gauge volatility is to simply “eyeball” the chart. A hot technology stock that moves several points a day is volatile. And, you’re kidding yourself if you think you will be able to trade that stock with a tight stop. Conversely, REITs or certain utility stocks that might only trade several points in a week are not. Therefore, on stocks like these, tighter stops can be used.

Q. You seem to imply that people use too tight of stops to capture swing moves. Are there cases where a tight stop can be used?

A. Yes, if everything is “in gear”—the market is rallying, and the sectors and most stocks in it are rallying, then a stock should trigger and not look back. In these cases, you could use a tighter-than-normal stop and be willing to re-enter or find a better candidate if stopped out. Also, there are patterns (e.g. Witch Hats, Gatekeepers, etc.) where you can look to enter intra-day on the first signs of a reversal and use a fairly tight stop. If you are right, there’s the potential to be right big. But if you are wrong, you only risking a small amount.

Q. Doesn’t “2 for 1” money management have a negative expectancy since you are really only getting “1 for 1” at your initial profit target?

A. If you got stopped out on every winning trade after you took the initial profit at breakeven, they yes, it would have a negative expectancy because you are risking twice as much as you are making. However, by trailing a stop higher on the remaining shares, you position yourself for a potential home run. And, one or two home runs will take care of a lot of losing trades. Also, as mentioned in this chapter, this is a basic money management system. Use it as a base to build upon. For instance, this system can be “beat” by using simple techniques like taking profits early in choppy markets and letting them ride in momentum markets.
 

Good luck with your trading,

Dave Landry