A few weeks ago I came up with an interesting swing trading system. And no, I’m not ready to reveal the exact details of it just yet, but I’ll describe the general concept later in this post.
After fine-tuning the parameters, and sort of testing in-sample and out-of-sample data (I say sort of because I’m sure I’m not doing it up to standard), I ran it by a friend who knows a bunch more than I do. He gave it a thumbs up as well. So it looked pretty good. It had a 57% win rate and a CAR/MDD ratio of .73.
So I did some initial paper trading with it, and the results also looked good. So I executed my first trade: Radius Health Inc (RDUS). It met my system’s criteria, and I also did some fundamental analysis on it to make sure the stock had a decent chance of performing.
I entered the trade on January 15th, 2015 at $40.20/share. I have noticed that the buy day on this system is often a down day, but testing revealed that trying to buy at the close of a down day instead just buying the open degraded results. So I wan’t surprised to see the first day in the red.
But then it started drifting lower and lower. Just drifting, mind you.
And then on January 21st, Radius announced a secondary offering of shares, and the price started to plummet. In fact, the next day the stock actually dipped below my stop-loss point on intraday trading, before eventually recovering. Fortunately I don’t have a “hard stop” for this system, or I’d be out. Instead, the stops and profit targets are based on the close of the day, and action is taken on the open of the next day. Less stressful that way.
Then on the next day, it started heading up again. The stock made a 12% leap on the 27th, and a another sizable chunk yesterday (the 28th). As a result, it hit my profit target with one day to spare!* I closed out the position this morning at $46.08, for a pre-commission gain of 14.6%. Not bad for 9 days of trading!
So what is this swing system based on? Well, it occurred to me that stocks that perform well even while the general market is having a short-term pullback are likely to rocket upward when the market returns to positive territory. So I wait for the market to take a little stumble, and then find stocks that had a bump up during that time period. That bump often leads to a down day on the buy, as I mentioned, because people take profits on that day. But the next few weeks often show a steady trend upward. It’s almost like an idiot’s form of fundamental analysis. “If people will drive this stock’s price up even during a bad market, there must be something special about it.”
Now the fact that Radius had such a dramatic turnaround during my brief period of ownership has nothing to do with the swing trade system I came up with. That was just luck.
Or was it? 🙂
By the way, you should always check for imminent earnings reports when executing swing trades that typically last a couple of weeks or more. It’s one thing to intentionally trade based on earnings reports, and quite another to be surprised by it. You don’t want your swing trade to get caught in bad news. I did a spot check of this swing trade system over the past six months, and more than a few of the more dramatic losses were traded during an earnings report.
* This particular system has a profit target, stop loss AND a maximum duration. If it hasn’t hit the stops after 10 days, I close the position and count my money.