Swing Trading, Weinstein’s Theory of Relativity Profits

When Stan Weinstein was first profiled in Jack Schwager’s famous book Market Wizards: Interviews with Top Traders, he was featured as the trader with the highest win-loss ratio. He finally revealed his method in his only book, The Secrets of Profiting in Bull and Bear Markets for Long-Term Investors. This informative book covers many aspects of trading, including the do’s and don’ts and a single methodology for finding the right stocks with entry and exit settings.

This book is mainly for investors and speculators (or traders as he called it). An investor is a person who holds a position for at least 3 months, while a speculator trades 2-3 times a month. This is mostly not for day traders, but at least for swing and position traders.

His method requires a few simple indicators and tools, including:

  1. 30-week moving average indicator

  2. Index of relative strength rating

  3. Volume indicator

  4. Trend line drawing tool

Here are the rules he set for finding the right stocks:

  1. Determine what stage the market is at. What stage is the market at? In the table below, Weinstein classifies the market stages as uptrend, consolidation and downtrend, consolidation and retracement. Stages 1 and 3 are consolidation phases and stages 2 and 4 are trend phases.

  2. Search the sector with force. Compare the sector to general indices such as the Dow Jones Industrial Average or the S&P 500. See the figure below.

The first task is to find the best sector that outperforms the indices (for the long sector, and for the shorts – below the indices). Comparing it with charts and comparing to find where the strength is. When the index is weak or getting weaker (moving sideways or down) while the sector is strengthening (uptrend). The image above shows the divergence in strength between the sector and the index.

  1. Once a sector is identified as showing strength (in a bull market) or weakness (in a bear market) relative to the index, the next step is to check the charts in that sector to find the strongest stock. First, check (refer to Figure 3 below to see each of these steps):

a. What stage the individual shares are in: stage 1, 2, 3 or 4.

b. The 30-week moving average is used to identify stages, trend direction and criteria for taking a position.

c. The RS indicator is used to separate strong stocks from weak stocks. Any stock above 0 qualifies, but the higher the positive number, the stronger it is.

d. Use trend lines to identify breakout points.

d. Resistance (for long shorts) or support (for short shorts) are identified as possible obstacles to the movement of the stock trend. The lower the resistance/support, the more likely the stock will make big moves without major problems.

  1. Select entries on the best candidates by identifying high volume at the breakout and entry levels where the trend lines are drawn. A breakout of high volume will determine if the stock has enough interest to continue rising. This is an important criterion to take a position. With little or no volume, the breakout cannot be trusted. Remember that the stop loss must be placed when the position is opened. The stop loss should be below the last low of the correction (see chart below).

  2. Exiting a position occurs when either one of the stages changes from a trend in one direction to another. Stops are placed just below the last low of the correction. Therefore, when the stock rises to a new high, the stop is moved to the last low.

This is a simple but effective method for long-term investors who do not and cannot devote all their time to studying or observing the market. This method can be done over a couple of weekends and checked once a week if not more often to stay up to date with new market price action.

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