Editor's Note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on TheStreet.com.

In early 2003, shares of Denver-based Titanium Metals ( TIE) sold for the equivalent of $1.55 a share. Today, the stock fetches $77. During those three years, the stock has been terrific for buy-and-hold investors. But even if you didn't buy the stock early in Titanium's run, there were plenty of opportunities to make big profits with low-risk trades.

Normally in this space I write about the multiyear investment opportunities that arise from corporate, political and economic events, such as the race by Boeing ( BA) and Airbus to build lighter, stronger, faster planes that has led to accelerating titanium demand.

Today, though, I'd like to get down and dirty in the world of people whose investment horizons extend no more than a month or two: not red-eyed daytraders, but so-called "position" or "swing" traders who look for chances to buy stocks such as Titanium Metals for 20% to 40% gains, and then move on and find another. If buy-and-hold investors are anacondas, eating one big meal every few months, swing traders are tigers, hunting and killing once a week.

How can you become a short-term tiger, while not abandoning your inner anaconda?

It's really not that hard. You'll need four things: A willingness to narrow your investing universe to companies undergoing fundamental change that have stocks that trend well; a subscription to a decent online stock-charting service; a little courage; and an unswerving ability to face up to occasional failure quickly without remorse.

Demand Performance

To get started, let me make one thing clear. A lot of what you think you know about why stocks go up and down is right in the long term but wrong in the short term.

  • Over long periods of time, companies that are undervalued in relation to their future growth prospects, and which grow earnings at a pace greater than the market's expectations, make great investments.

  • Over short periods of time, what makes stocks go up is a group of passionate buyers that are more aggressive than sellers. End of story. Think of it this way: If there are a finite number of shares available, and current holders are reluctant to part with them, then buyers must offer increasingly greater amounts of money to encourage holders to change their minds. Stocks rise when they are most profoundly wanted.

    To swing trade successfully, your mission is to find stocks that are in demand. But not just any rising stocks. The ones with the best chance of actually being successful over the next two to six weeks are ones that are rising on progressively higher volume.

    Makes sense, right? The more buying transactions that are taking place, the more the "story" behind the demand is appreciated -- and the more likely it is that you will find willing sellers when you are ready to offload your purchase at higher prices.

    A Piece of the Action

    Who are these buyers? Most often, they are large financial institutions. Mutual funds. Hedge funds. Pension funds. People with a lot of money. Duh, right? But there's more to it.

    Virtually all of these institutions specialize. For instance, they tend to concentrate on growth stocks, or value stocks, or small stocks, or foreign stocks. The greatest number focus on some shade of growth, but as a glib rule of thumb, the bravest and smartest of the most successful fund managers in the world focus on value. These guys can do open heart surgery on a balance sheet and find life where others see death. These are the guys who bought Apple Computer ( AAPL) at $10 three years ago, or Titanium Metals at $5. It's hard work, and you don't hear about all the times it doesn't work out.

    As a swing trader, you are not looking for value. You are looking for volatility, for action, for a trend. So much of the time, you will be looking for stocks that are sort of "crossover" hits: Shares are being handed off from the value guys to the early-bird growth fund managers, and then to plain-vanilla growth fund managers, and finally to momentum traders. These changes of constituency provide some of the best opportunities for traders, as the number of managers who consider the stock applicable to their investment style widens.

    Other opportunities for swing traders are provided by extenuating circumstances, such as uncertainty over earnings reports or broad market selloffs sparked by random fears. But more commonly, opportunities arise when there is very simply a lull in the buying action, sort of like halftime in a football game or the time between dinner and dessert. The psychology of these lulls is understandable if you think about why the price is rising: When a big fund manager at Fidelity decides to take a 5% position in a stock, he or she may buy 20,000 shares every day for a week or more, driving up the price, and then back off and wait for a while to see if it will settle down before buying again. That's when you pounce.

    Swing-traders love to buy stocks near one-year or all-time highs, because there are no long-frustrated holders anxious to sell as the price finally gets back to their break-even points. It's these lulls that provide the most low-risk swing-trade entries. In other words, you want to buy when a stock is ambling along a lofty plateau for days or weeks -- not when they're shooting higher day after day.

    A Swinger's Checklist

    So now let's use these principles to find stocks to swing-trade. Here's a checklist for the job:

  • Ensure that the intermediate-term action of the broad stock market is bullish. (Major indices should be above their average prices for the past 30 weeks.)

  • Focus on stocks whose entire industrial sector (e.g., truckers or semiconductors) is on the move.

  • Focus on stocks whose capitalization group (e.g., small- or mid-cap) is on the move.

  • Focus on stocks that are trading near all-time or multiyear highs but have backed off a little in the past few days or weeks.

  • Focus on stocks whose trading volume is increasing along with share price.

  • Give preference, when forced to break ties, to stocks that are advancing up out of long bases, or are in periods when the shares have traded within a narrow range.

  • Also give preference to stocks whose underlying companies' fundamentals and valuation are generally supportive of higher prices. For instance, all of these small-cap stocks are in nice, smooth uptrends and are in industries that the Street finds attractive: L.B. Foster ( FSTR) makes rails, ties and steel tubes for the railroad and mining industries; Ladish ( LDSH) makes forged metal components for the aircraft construction industry; Wabtec ( WAB) makes braking systems for locomotives and boxcars. As they trade up and then go sideways for short periods, they should all make good swing-trade candidates.

    According to a stock screen at Bigcharts.com, a few others that looked good at the start of this week, or would work on pullbacks, were lumber grower Deltic Timber ( DEL), cement-maker Cemex ( CX), real-estate developer Simon Property Group ( SPG), insurer Assurant ( AIZ) and Mexican broadcaster Grupo Televisa ( TV).

    You are looking for the market's strongest stocks that have the least volatility. According to a stock screen at Barcharts.com, top candidates right now include shoe-store chain United Retail Group ( URGI), cable operator Time Warner Telecom ( TWTC) and apparel maker Guess ( GES).

    Successful swing trading starts with a narrowed universe and good ideas. But you must also develop a plan for taking profits and cutting losses.
    At the time of publication, Jon Markman did not own or control shares of companies mentioned by this column.

    Jon D. Markman is editor of the independent investment newsletter The Daily Advantage. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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