Swing Trading Weinstein s Theory of Relativity to Profits

When Stan Weinstein was first featured in the famous book, "Market Wizards: Interviews with Top Traders", by Jack Schwager, he stood out as a trader with the highest win/loss ratio. He finally revealed his method in his only book, "Secrets For Profiting in Bull and Bear Markets," for the long-term investors. This informative book covers many aspects of trading, including rules of do's and don'ts as well as a single methodology in finding the right stocks with setups to enter and exit.

This book is mainly for investor and speculator (or trader as he termed it). Investor is a person who holds a position at least 3 months while a speculator trades 2-3 times a month. This is basically not for day traders but is at least the swing and positions traders.

His method requires a few simple indicators and tools to make the method work, including:
1. 30-week moving average indicator
2. Relative strength ranking indicator
3. Volume indicator
4. Trendline drawing tool

Here are the rules he laid in finding the right stocks:

1. Identify what stage the market is in. What stage it is the market in? In the chart below, Weinstein categorizes the stages of the market, uptrend, consolidation, and downtrend, consolidation and repeat again. Stage 1 and 3 is consolidation phases while stage 2 and 4 are trending phases.

2. Search the sector with strength. Compare the sector to the overall indexes such as Dow Jones Industrial Average or the S&P 500. See image below.

The first task is the search the best sector that is outperforming the indexes (for long while underperforming the indexes for shorts). Comparing this using the charts and compare to find where the strength lies. If the index is weak or getting weaker (by either moving sideways or downwards) while the sector is getting stronger (trending upwards). The image above shows the divergence in strength between sector and index.

1. Once the sector has been found showing strength (in bull market) or weakness (in bear markets) compared with the index, the next step is to check the charts in that sector to find the strongest stock. First by checking (refer to Figure 3 below to view each of these steps):

a. What stage the individual stocks are in: stage 1, 2, 3 or 4.
b. The 30-week moving average is used in identify the stages, direction of the trend, and the criteria to setup to take a position.
c. The RS reading is used to sort out the strong stocks from the weak. Any stocks above 0 are qualified, but the higher the positive number, the stronger it is.
d. Use the trendlines to identify the breakout points.
e. Resistance (for longs) or support (for shorts) is identified as possible obstructions to the stocks trending movement. The less the resistance/support, the more likelihood that the stock will make big moves without major problems.

2. Taking the entries on the best candidates by identifying high volume at breakout and entry level where the trendlines are drawn. By having a high volume breakout will determine if the stock will have enough interest to continue higher. This is an important criterion to take a position. With little or no volume, the breakout cannot be trusted. Remember a stop loss must be place when the position is taken. The stop loss should be below the last correction low (see chart below).

3. Exiting position happens when either the stage has changed from trending in one direction to another. The stops are placed just below the last correction low. So as the stock moves higher to new high, the stop is moved to the last low.

This is simple but effective method for long-term investors who do not and cannot dedicate full time to studying or watching the market. This method can be done in a couple of weekends and can be checked once a week if not more to keep abreast of the new market price action.