The Top Five Stocks For Novice Swing Traders (GT,HIG,JOY,ETFC …

Swing trading falls between short-term intraday trading and long-term fundamental-based investing. Swing traders hold a specific position for a few days or weeks expecting price momentum, cyclic, or trend reversal patterns to materialize. The focus is not on the fundamental or intrinsic value of a stock, but rather on price trends and patterns over a shorter term.

Swing trading requires timely identification of sufficiently volatile stocks that have potential to move in the short-term. It does not require thorough knowledge of fundamentals and is easy to learn and practice. Swing trading makes a good fit for novice and retail traders who are just starting out. (See related: Introduction to Swing Trading and The Daily Routine of a Swing Trader.)

Right Market and Right Stocks

A common misunderstanding is that a continuous bull or bear market makes a good fit for swing trading. However, the word “swing” literally means “fluctuate up and down repeatedly.” Instead of continuous one-way momentum, the prices of stocks suitable for swing trading should exhibit frequent oscillations between broadly defined high and low levels. Ideal levels can be ascertained by the individual trader, according to his own criteria. The swing trader would enter into long/short positions in such identified stocks and square them off for a profit once the defined profit target/stop-loss level is reached. The overall market may return to the same levels over the trading duration, but the intermittent price fluctuations between defined levels are a mandatory feature for swing trades.

In essence, swing traders will not look for windfall gains with one single trade over a long investment period with one-way momentum. They would rather take multiple positions with frequent buy/sell trades, seeing profits in small chunks multiple times.

Let’s see some of the stocks that best qualify for swing trading. The following graph indicates the last year price swings of the stocks under discussion. Plotted on relative price movement, all graphs start at zero and show how the prices have fluctuated over the one-year period.

Graph courtesy: Google Finance

For swing trading, one should observe:

How many times the graph has moved back and forth from the zero line (frequency of swings) and
By what magnitude (% change over given timeframe, e.g. a month).

Here are five stocks from diverse sectors that fit the criteria:

1. MGM Resorts International (MGM): MGM is in the hospitality business. It owns and operates casino resorts, which offer gaming, hotel, convention, dining, entertainment, retail, and other resort amenities. The stock has a daily trading volume of around 500 million shares and a high beta value of 2.2. The most recent one-year performance shows a high magnitude of price swings and multiple instances of reversion to the support and resistance levels, which makes it ideal for swing trading.
2. E*Trade Financial Corp (ETFC): E*Trade is a financial services and an online brokerage company with a daily trading volume of around 300 million shares and a high beta value of 2.14. Over the last one year, ETFC has shown multiple crossings around the zero line, indicating repeated price swings, making it a trader’s delight for swing trading.
3. Goodyear Tire and Rubber (GT): Goodyear is a world-renowned manufacturer of tires and rubber-related chemicals and material. The company also operates a commercial truck service. The stock has a daily trading volume of around 270 million shares and a high beta value of 2.08. The most recent one-year performance shows high price swings each month, with overall year-to-year price levels retained at the same level (0% change).
4. Hartford Financial Services (HIG): Hartford operates as a holding company for its several subsidiaries that offer insurance and financial services in the US. The stock has a daily trading volume of around 425 million shares and a high beta value of 2. Hartford’s stock shows movements of relatively high magnitudes over short periods of time, making it suitable for swing trading.
5. Joy Global (JOY): Joy Global Inc. manufactures and services high productivity mining equipment and parts for the extraction of coal, ores, and other minerals. The performance of this stock, with cyclic swings of high magnitudes at recurring intervals, makes it an ideal candidate for swing trading. Joy Global has a daily trading of around 100 million shares and a high beta value of 2.0, indicating a good level of volatility with high liquidity. The latest one-year performance saw a minimum 5% monthly swing in stock prices consistent with repeated crests and troughs.

The Bottom Line

Swing trading has emerged as one of the best strategies for novice traders, as it is easy to learn and does not require a high-level of trading experience or fundamental knowledge. With many free online stock screening tools available on multiple financial portals, one can easily identify stocks that have high liquidity, high volatility, and frequent reversions with cyclic patterns. Along with profit targets, novice traders should implement stop-loss levels to avoid unwanted losses. Traders should also be cautious about brokerage charges that may eat into profits with frequent trading.

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The Top Five Stocks For Novice Swing Traders (GT,HIG,JOY,ETFC …