As a swing trader, there are several general concepts that I apply. These include waiting for entries and exercising strict money management techniques such as setting initial protective stops, trailing stops and taking partial profits. Below we will expand upon these concepts by walking through stocks mentioned recently in my nightly column "Landry's Stock Trading Outlook."

If you are new to swing trading or my column,  you might first want to read the column archives for the past few weeks to get a feel for my trading style. Further, you might also want to read Ten Tenets Of Swing Trading, Bow Ties, Trading Pullbacks and my other articles on swing trading under Money Management, Trading Indicators, Strategies, and Patterns.

No Tickie, No Tradie

As I discussed in Ten Tenets Of Swing Trading, if there is "no tickie" then there should be "no tradie." This means waiting for follow through in the direction of the trade. Therefore, unless stated otherwise, for longs this means that the stock must trade above the prior day's high and for shorts this means that the stock must trade below the prior day's low. This general rule will often keep you out bad trades.

Don't Bank On It

Here's an example of why you should wait for entries. Notice Golden State Bancorp (GSB | Quote | Chart | News | PowerRating), mentioned on 01/04/01 as a pullback,  traded sharply lower on the following day. We ignored this trade because it did not trade above our entry. Also notice that the stock continued to implode over the next few days. As you can see, by simply waiting for an entry, a losing trade was completely avoided.

Don't Just Do It

He's another example of why you should wait for an entry. On 01/18/01, Nike Inc. (NKE | Quote | Chart | News | PowerRating) was mentioned as a potential pullback. The entry for this position was above the 1-2 prior day's highs* (b). Notice that on the following day (01/19/01) the stock implodes (a). However, a losing trade was avoided because it never traded above the entry (b).

Protective Stops On Every Trade!

Because every trade has the potential to be a losing trade,  I always use protective stops. This protective stop is normally placed below the low of the setup (for longs) or above the high of the setup (for shorts). If this is more than 5% away from the entry price, no more than 5% should be risked.

Bisys Group (BSYS | Quote | Chart | News | PowerRating), mentioned on 01/03/01 as a potential pullback, provides a good example of why protective stops are a must. An entry is triggered (a) and we go long. Because the low of the setup (in the case, the 01/03/01 low) is more than 5% away from our entry, we place a protective stop at 50 (b) for a risk of approximately 5%. The stock reverses and we get stopped out on the following day (b) for a loss. 

Note: Although the stock did come back over the next few days, I can assure you that they won't always do this. Use protective stops.

Take Partial Profits

A simple money management technique I follow is to sell half of my position as soon as my profits exceed my initial risk. I then move my stop to breakeven on my remaining shares.*

Amerada Hess (AHC | Quote | Chart | News | PowerRating), mentioned on 01/04/01 as a first pullback/Bow Tie, provides a good money management example. The entry (a) was 1/16th above the day's high, good for the following day. On the next day, the entry is triggered as the stock trades 1/16th above the prior day's high (70 3/8). An initial protective stop is immediately placed 1/16th below the low of the setup (b) at 68 15/16 for a risk of 1 7/16.  The stock trades through our profit target and we exit half of our shares at 71 13/16 (c). The stop is then raised to breakeven (a) on the remaining shares. Two days later the stock sells off and stops us out (d) of our remaining shares for a scratch trade. As you can see, without money management, this slightly profitable trade (overall) would have resulted in a loss.

Here's another example of why money management is so important. Schering-Plough (SGP | Quote | Chart | News | PowerRating) was mentioned as a potential short on 01/10/01. The stock triggers on the following day at 51 7/8, 1/16 below the prior day's low (a). An initial protective stop is placed at 51 (b) giving us a risk of 2 1/8 points. The same day the stock drops and we exit half of our shares at 49 3/4 (c) for a profit of 2 1/8. We immediately lower our protective stop on our remaining shares to breakeven--the same as our entry (a). The following day the stock gaps open and we are stopped out for a slight loss on the remaining shares. Again, without money management, this modestly profitable trade (overall) would have resulted in a loss.

Trail 'Em If You Got 'Em

If you are fortunate enough to have taken your half profits and moved your stop to breakeven, you should then trail that stop on your remaining shares. As an example, notice Neuberger Berman (NEU | Quote | Chart | News | PowerRating),  mentioned on 12/21/00 as a deep pullback, traded higher over the next 4 days. By trailing a stop below the prior two lows, the majority of these profits were captured. As you can see, even simple trailing stop techniques can be quite effective.

Take 'Em If You Got 'Em

As a swing trader, windfall profits are often few and far between. Therefore, you should lock in all or a significant piece of your profits when parabolic moves occur. After all, large moves occur as players dog pile onto a market as it becomes obvious to the masses. You've got to ask yourself, once it's obvious, and the last players are entering the market, who's left? 

Notice Aflac (AFL | Quote | Chart | News | PowerRating), mentioned on 01/17/01, triggered on the following day (a). Then on 01/19/01 the stock implodes and has its largest one day range in years (b). When you are fortunate enough to be on the right side of such a large move, you should lock the majority if not all of your profits.  In fact, as this article is "going to press" (01/22/01), the stock is already trading up nearly three points.

Summary

There's a lot  more to trading stocks than just finding setups. You must wait for entries and exercise strict money management. This involves using initial protective stops, taking profits and trailing stops. By waiting for entries many bad trades can be avoided. By using initial protective stops, losses are kept to a minimum when a bad trade does occur. And, by taking profits and trailing stops, gains can be captured. The above techniques, while no means exhaustive, should help you when focusing on swing trade setups mentioned nightly in my Stock Market Outlook.

*Traded this stock as a pullback, the entry would be above the prior day's high. Traded this stock as a Trend Pivot Pullback, the entry would be above the 01/17/01 pivot high (labeled (b) in the chart).

**Larry Connors has dubbed this "2-for-1" Money Management.

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