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If you are looking to explore your options in the stock trading you will find informative articles, insights and reviews on stock brokers and investments.

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5 Parameters to Consider for Swing Trading

“The trend is your friend until the end when it bends.” How many of you have heard this quote? Those who already have, then we are sure that they must already have heard about swing trading too, and those you haven’t, don’t worry! We will decode it for you.

For starters, swing trading is a trading style that helps us to capture short to medium-term gains for a period of a few weeks in any stock or financial instruments. Swing traders usually use technical analysis for picking up stocks for swing trading!

But wait! Swing trading shouldn’t be confused with day trading. The main difference between day trading and swing trading is the holding time. Yes! The positions in day trading are closed within the day, whereas the positions in swing trading can be carried forward and held for a few weeks to a month.

Having understood what swing trading means, in today’s blog, we will discuss the five main factors that one should consider for swing trading are

1. Breakouts

As discussed above, swing trading refers to trading with the trend. Thus, the breakout from a range, chart pattern, important resistance and support zones, or reversal candlestick patterns are some technical tools that swing traders should pay attention to.

2. Volume

Volume is an essential tool for swing traders as it helps them analyze the strength of a new trend. The main reason behind this is that a trend with high volume will be stronger than one with weak volume. In addition, more traders buying or selling gives a better basis for the price action.

3. Liquidity

One of the most basic rules for swing trading is that traders should only trade liquid stocks. Of course, the daily minimum you select is arbitrary, but the most helpful example is 500,000 shares per day.

4. Relative Strength

One should select those stocks that are relatively stronger than the sector or the index for swing trading. This measure helps us identify both the strongest and the weakest securities or any asset classes within the financial market. Usually, the stocks which display strong or weak RS over a given period tend to continue going forward.

5. Volatility

Volatility is one of the major factors for selecting stocks for swing trading. Volatility helps us to measure how much the stock price will move. Traders can use volatility indicators such as Bollinger bands or ATR to gauge how volatile the stock is. Swing traders should select those stocks for trading that are volatile. Large moves are generated by volatile stocks and give us a reasonable window for stops and profits.

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Trading with Relative Strength - 3iresearch

Do you know that relative strength can help us in trading in stronger stocks? Yes! You heard it right. Relative Strength is a momentum strategy that helps us in identifying strong stocks for trading as compared to the Index. With the help of Relative Strength, traders will look for those companies which have outperformed their peers or the index either by rising more or falling less as compared to the peers or index.

Relative strength helps us in predicting that the trends currently displayed by the stocks will continue for long enough and we can realize a positive return. However, traders should note it is different from the Relative Strength Index.

So, without further delay let us understand what is meant by Relative Strength and how we can trade with it:

What is Relative Strength (RS)?

Relative Strength refers to the measurement of the stock’s performance as compared to its benchmark or another stock. RS compares the performance of stock “X” vs “Y”, measured over a period. For example, “X” may increase more or less than “Y” in a rising market or “X” may fall more or less as compared to “Y” in a falling market. It is one of the tools for momentum investing.

This measure helps us in identifying both the strongest and the weakest securities or any asset classes within the financial market. Usually, the stocks which display strong or weak RS over a given time period tend to continue going forward. One should note that RS analysis can be applied to any domestic or international stocks, stock indexes, fixed income indexes, currencies, commodities, and any other asset classes.

You must have heard about beta and alpha when studying statistics in school? If not, let us recap these concepts in this context. Don’t worry we won’t be too statistical!

Beta and Alpha? Why are we talking about them here?

Beta is a measure of volatility relative to a benchmark, and it’s actually easier to talk about beta first. It helps us in measuring the systematic risk of a security or a portfolio compared to an index like the Nifty 50.

Whereas the Alpha is the excess return on an investment or a stock after adjusting for market-related volatility and random fluctuations. Alpha is one of the major risk management indicators when it comes to analyzing mutual funds, stocks, and bonds. In a sense, it tells investors whether an asset has consistently performed better or worse than its beta predicts. So alpha more than 0 means that a stock has outperformed and less than 0 means that a stock has underperformed after adjusting for volatility.

One should note that the high beta stocks would be more profitable but are also riskier. The high beta stocks could also have a negative alpha which means that although more volatile their trends compared to the Nifty50 could be downward. So when alpha is compared among the stocks it provides us with a relative strength measure and stock lists can be ranked by alpha to show which stocks are the strongest.

Calculation of Relation Strength

Now let us come to the calculation of RS. RS is calculated by using the below formula for comparing a stock’s price change to a change in index prices. 

RS= Stock’s Price / Index’s Price

For calculating the RS of one stock to the another where N is the first stock and N2 is the stock we are comparing it to is as below:

RS= N Stock’s Price/ N2 Stock’s Price

One should note that the period of both the assets should be the same such as one day or one year.

Difference between Relative Strength and Relative Strength Index

As we said at the beginning that RS is different from RSI. Relative Strength Index (RSI) is a momentum indicator that measures the magnitude of recent price changes for evaluating overbought or oversold conditions in the price of a stock or other asset. 

The main difference between relative strength and RSI is a difference of perspective. The relative strength tells us about the value of a stock in comparison to another stock, index or sector, whereas the RSI tells about the performance of a stock in comparison to the recent performance of the same stock.

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6 Tenets of Dow Theory – The Modern Study of Technical Analysis

6 Tenets of Dow Theory – The Modern Study of Technical Analysis

Charles H. Dow was the father of the Dow-Jones financial news service in New York.

He was an experienced journalist and the founder & first editor of Wall Street Journal which is one of the most authentic & famous financial publications in the world.

He had invented some postulates on the basis of his observation to understand the market behavior which later became the building block of today’s modern technical analysis.

It was his work only that has now become famous & known as Dow Theory, the basic building block of modern technical analysis. This is the reason he is also known as the father of Technical Analysis.

He also discovered the Dow Jones Industrial Average while doing his research in his journey. Charles Dow was the first person to create an index that measures the overall price movement of U.S. stocks in the market.

He observed many things by doing experiments & observing the market, but he never invented something which is known to be ‘Dow Theory’.

The only thing which he was doing at that time was writing editorials based on his observations & findings in the market in Wall Street Journal but he never claimed his work as Theory.

The term ‘Dow Theory’ was first used by his friend, A.C. Nelson in his book ‘The ABC of Stock Speculations’ in 1902, after the sudden death of Charles Dow in the same year.

The books which Nelson wrote were based on the works & findings of Charles Dow in his Journal editorials which were published in Wall Street Journal. After Dow, his successor named William Peter Hamilton headed the Wall Street Journal & continued to write editorials using the postulates of Dows Theory.

He also wrote a book Stock Market Barometer, in 1922 describing basic elements of Dow theory. After the death of Peter Hamilton in the year 1929, Alfred Cowles (III) successfully implemented the Dow theory into the practical profitable trading in 1934.

Cowles used statistical methods to determine if Hamilton could ‘beat the market. He also developed an index that was a predecessor of today’s S&P 500.

Cowles determine that Hamilton could not outperform the market & concluded that the Dow Theory of market timing results in return that lags the market.

Cowels study provided a foundation for the Random Walk Hypothesis (RWH) & the Efficient Market Hypothesis (EMH).

In 1998 some researchers reexamined the work of Cowel using more sophisticated statistical techniques.

An article by Brown, Goetzmann, and Kumar concluded that Hamilton could time the market very well using Dow Theory & his method is still valid that works very well in sharp market declines and considerably reduced portfolio volatility. After Hamilton’s death, Robert Rhea further did the research & summed up the previous works & came with a single theory that had become known as Dow Theory.

In 1932, he wrote a book called The Dow Theory: an Explanation of its Development and an Attempt to Define its usefulness as an Aid to Speculation.

He has explained the theory in detail using the articles of Hamilton & formalized it into a series of hypothesis & theorems. This gave birth to what we know as The Dow Theory.

Hypothesis Based on Dow Theory

1. The primary trend is inviolate. 2. The average discount everything. 3. Dow Theory is not infallible The first hypothesis deal with the manipulation in the market. Rhea believed that the secondary or the minor trend of the market can be manipulated by market manipulators but the primary trend is inviolate.

The second hypothesis, that averages discount everything, is because the prices which we see is the result of people acting on their knowledge, expectations, or interpretation of the information. That means these information or news has already been known to the market & based on that people are reacting.

The third hypothesis is that Dow theory is not infallible. It can be fail if it is not applied in proper way. Neither Dow, nor Hamilton or Rhea claimed that they found a magic formula for profit in the form of Dow Theory.

Dow theory have a 6 tenants

Price     Discount Everything except act of god

Prices know it all. All possible information and expectations are factored into prices beforehand.

Market     have a three different trend

The PRIMARY TREND: It can be as long as years and is the ‘main movement’ of the market.

The INTERMEDIATE TREND: lasting between 3 weeks to several months, retraces the last primary move some 33-66% and is difficult to decipher.

The MINOR TREND: is least reliable, lasting from several days to few hours, constitutes of noise in market and may be subject to manipulation.

Market     have three different phase

Be it the bull trend or the bear trend, either ways there are three well-defined phases for each. For an uptrend, the phases are Revival of confidence (accumulation), Response (public participation), Over-confidence (Speculation) . The three defined stages of the Primary Bear Trend are Abandonment of hope (Distribution),  Selling on decreased earnings (doubting),  Panic ( distressed selling )

Averages     must confirm

Initially, when the US was a growing industrial power, Dow had formulated the two averages. One would reflect the state of manufacturing and the other, the movement of those products in the economy. The logic was that if there is production, then those who move them about should also be benefiting, and hence new peaks in the industrial average needed to be confirmed by the peaks in the transportation average. Today, the roles have changed, but the relations remain among sectors and so does the necessity of confirmation.

Volumes     confirm trends

Dow was of the belief that trends in prices could be confirmed by volumes. When the movements in price were accompanied by high volumes, they would depict the ‘true’ movement of the prices.

Easier     to continue trend rather than trend reversal

Irrespective of the day-to-day erratic movement and market noise that may be witnessed in prices, Dow believed that prices moved in trends. Reversals in trends are hard to predict unless it’s too late due to the nature and difference in magnitude of trends. However, a trend is believed to be in action unless definitive proofs of reversal emerge.

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3i Research | Best Technical Guidance & Creative Ideas

3i research and analyze various sectors within the stock markets and develop  fundamentally important research ideas