Bottom up and top down are the two strategies to evaluate a stock’s strength or weakness
Swing trading strategy means the identification of stocks that have the potential to showcase short-term momentum for active trading. The short tenure swing is typically between two and 30 days. In the period of high volatility, there is a higher possibility of getting regular swings in the market, hence, better opportunities to trade. This is what is happening in current market conditions.
The stock market has been going up since March 2020 fall, due to high participation from retail investors and availability of cheap capital owing to the fall in interest rates. There has been a concerted effort by central banks across the world to keep liquidity high, which is leading to the increasing momentum in financial assets.
Momentum trading or swing trading is best done in stocks where there is a high chance of the build-up of position. It’s like a car race where one should only bet on the car whose speed is high at the same time it is performing better than the others. This is the concept of relative strength. There are two ways to identify strength or weakness in any stock- bottom-up or top-down. Button up is driven by standalone buying interest in any company due to expected fundamental shift in the future and top-down is selecting the sector first and then moving to the stock, relevant to that sector.
My suggestion to the market participants is to identify stocks that are beneficial in the current shift in business dynamics and ride these stocks on every sign of strength. Similarly, if any stock is showing weakness due to its underperformance vis-a-vis nifty/sensex, the same should be sold immediately. I prefer to use daily signs for strength and early signs for weakness using a two-hour chart duration. You may also use the 21-day moving average and 55-period moving average along with their crossover for confirmation of the trend.
I would also recommend scanning the stock universe using our application StockEdge and try to find stocks that are showing the signs of a buildup of momentum. This can be done by combining various parameters and selecting stocks which are satisfied them. For example, a fundamentally strong stock with good ROE, showing price strength, and trading about a 21-period moving average could be a good momentum play. StockEdge Scans supports users to do such screening for easy output at the end of the day.
The author is Co-Founder and CEO, StockEdge and Elearnmarkets
DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.