Swing Trade

In addition to trading along with the prevailing trend, another strategy I like to use is trading a breakout on a swing basis. It would definitely add to the probability of the trade being profitable if the stock was already trending in the direction of the breakout, but it doesnt always have to work that way. For me, the things I look for in a swing trade would be:

Ø  A momentum move that I expect to last anywhere from 3 days to 3 weeks

Ø  A break above or below an important inflection point such as a previous hi/lo or a moving average

Ø  The breakout/breakdown occurs on higher than average volume

Ø   High short interest, say over 20% (not necessary, but definitely adds some juice to a breakout higher)

A nice example of this is DNKN. As you can see from the chart below, once the stock breaches its short term trendline it explodes higher. The big spike in volume shown below has to do with the recent secondary but it was very well received and obviously there was a ton of demand. This nicely coincided with a break higher over its short term trendline and followed yesterday with a high volume day with the stock closing near its highs. Given what has occurred with similar moves in the recent past, and what was explained above as signs of a swing trade, I would expect a continuation higher in the days ahead.