While I typically focus on value investing, there is a swing trading strategy I like that uses a combination of GuruFocus' All-in-One Screener and Interactive Charts. This strategy involves a technical analysis tool called Bollinger Bands (or BB for short). Before we get into the thick of the discussion, let us get a couple of definitions out of the way.
What is swing trading?
Swing trading is a speculative trading strategy where a tradable asset is held for a period longer than a day, but typically weeks or months and not as long as a buy-and-hold investment strategy based on fundamentals. It aims to profit from short- to medium-term price movements in a security using favorable risk-reward metrics. Swing traders primarily use technical analysis to identify trading opportunities and typically hold positions for more than one trading session, but usually not longer than several weeks. This trading style is less risky than other forms of short-term trading as it relies on technical analysis and involves holding positions for a short period of time, reducing the risk of being stuck in unliquidated positions. However, proper identification of entry and exit points is crucial to manage the risk of capital loss.
What are Bollinger Bands?
Bollinger Bands are a technical analysis tool developed by John Bollinger in the 1980s for trading stocks. They consist of three lines – the upper, middle and lower band. The middle line is usually the 20-day simple moving average (sma) and the upper and the lower lines are also 20-day simple moving averages plus or minus 2 times standard deviation of the price in the past 20 days.
The upper and lower lines are positioned on either side of the moving average band. The bands widen when there is a price increase and narrow when there is a price decrease, making them a volatility indicator that changes with increases or decreases in volatility. They are used to determine whether prices are high or low on a relative basis and can help identify potential profit targets. Bollinger Bands are based on standard deviation and adjust to volatility swings in the underlying price, making them applicable to the trading of various securities. Traders use Bollinger Bands to evaluate price action and a stock's volatility, and they can be used to confirm signals given with other indicators. GuruFocus has the Bollinger Band indicator available on its interactive charts page for stocks.
The strategy: Swinging with BBs
Traders can use BBs to identify entry and exit points. One common approach is to buy near the lower Bollinger Band and set limit orders to sell near the upper band. This strategy can be more profitable than the buy-and-hold method for securities that move sideways. Swing traders can also look for potential trading opportunities using the Bollinger Bands bounce trading strategy. This involves buying near the lower band and selling near the upper band, particularly when the bands show a "hook" or a change in direction, indicating a potential swing trading opportunity.
Tootsie Roll
For example, the following chart shows a swing trading strategy with candy company Tootsie Roll Inc. (TR, Financial). A six-month timeframe is shown. Looking at the past trading history, the strategy is simply to buy when the stock hits the lower band and sell when the stock hits the upper band. As of late December, the stock was trading near its lower BB, so it may have been a good time to buy. I think a selling opportunity will come in the early part of the new year and result in a modest profit.
All-in-One Screener
I personally like to trade when the fundamental setup is favorable. The security I am trading should be at least modestly undervalued (this way I avoid getting stuck with an overvalued stock if the trade does not work out.) I can use the All-in-One Screener to screen for stocks that are undervalued and trading close to the lower Bollinger band.
Below are the details for a screen I use for the strategy.
| (Note: you will need a subscription to GuruFocus to access the full screener. You can get a no-risk trial for GuruFocus by using the following referral link: https://www.gurufocus.com/?affid=a6c9d252cc9279741fed32062f2008fd. |
The screen first identifies a stock as undervalued and then identifies a stock which is trading between 70% to 110% of the lower line of the Bollinger Band. The screen then outputs a list of candidates, from which I then manually identify probable opportunities.
| Filters | |||||
| Field | Operator | Value | |||
| Is Preferred Stock | = | 0 | |||
| Optionable Stock | = | TRUE | |||
| Display Multiple Classes in One Region | = | 0 | |||
| Market Cap ($M) | >= | 1000.00 | |||
| GF Valuation | IN | [4,2,3] | Modestly Undervalued | Possible Value Trap, Think Twice | Significantly Undervalued |
| Price-to-20-Day-Lower-Band | Between | [0.7,1.1] |
Some other candidate stocks I have identified with this screen are as follows:
Walt Disney
The Walt Disney Co. (DIS, Financial) made a big move up during November, bounced down from the upper BB and now looks like it is bouncing down on the lower BB. I anticipate the stock will move to the upper BB in the new year, delivering a modest profit. Again, Disney is rated as "significantly undervalued" by GuruFocus, so even if we get stuck in the trade, the fundamentals are on our side.
AON
AON PLC (AON, Financial) is another stock I am watching. The insurance broker plummeted on news of an acquisition of another company. This is frequently the case when a company makes a large acquisition. GuruFocus rates the stock as modestly undervalued. Note the Bollinger Bands have really widened, which shows an increase in volatility. I expect the bands to narrow in the coming weeks and the stock to eventually come back to the upper BB, so we are able to exit. However, in this case, I would wait till I see some clear signs of the stock moving back up for example a series of green candlesticks before buying and the overall Bollinger Band has started to narrow.
Other stocks that came up on the screen include Starbucks (SBUX, Financial), NetEase (NTES, Financial), Nike (NKE, Financial) and Coca-Cola (KO, Financial).
Conclusion
Swing trading with Bollinger Bands is, in my opinion, a useful strategy for fun and profit. It is a short-term trading strategy that takes advantage of the unique tools offered by GuruFocus. The advantage of GuruFocus is that you can quickly screen for good candidates using the All-in-One screener, which has unrivalled fundamental and technical screening tools, and then use the interactive chart to analyze the target stock of interest. Its best to use Bollinger Bands with other indicators like moving averages and relative strength indicators.
Also put the fundamentals on your side, by using this strategy together with fundamentals. By restricting this strategy to a subset of undervalued stocks, we put a margin of safety in our favor. Even if a stock surprises and falls further and takes time to reach our sell target, the fundamentals can save us from making too large a mistake and we can simply wait for the price to catch up with the fundamentals.
