Swing trading is a short-to-medium-term trading strategy designed to take advantage of market movements or trends occurring over a brief period of time. It requires an understanding of the different strategies and tactics used, as well as the ability to judge when best to apply them.
Stock market trading involves buying stocks at low prices and selling them later at higher price to earn profits. Trades may last for a single day or more than one trading day. To make big money in the stock market, it is important to give the markets some time to move in our desirable direction.
In this simple guide, you will learn the basics and various swing trading strategies to trade successfully.
Swing trading gives us both these advantages of being short term and giving enough time to capture the moves. It is a very good method to start with trading, especially for beginners, keeping in view their nil or minimum exposure to the stock markets.
What is Swing Trading
We can define swing trading as a type of trading that focuses on earning profits from short term stock market swings. Swing trade can last from a few days to a few weeks. The swing traders attempt to buy shares at low price and sell at high price or vice versa. Thus, it is a swing high swing low trading.
Swing traders look for positions within an up-trending or down-trending market, where their entry and exit points are most likely to yield a profit. The exact position size and duration of the trade are determined by several factors. These are chart patterns, established support and resistance levels, and technical indicators.
There are traders who use swing trading for living and meeting the day-to-day expenses. This is because the swing trading returns can easily reach up to 8-10% in a month.
Swing Trading Strategies
Your strategy should include the timeframes for entry and exit depending on whether you are buying or selling, stop loss points and other risk management principles.
It is important to establish the criteria that will determine when you enter and exit trades to ensure consistent profits while using these strategies.
There are several strategies available for swing trading, but it is recommended that beginners start with basic technical analysis. You should learn thoroughly about popular indicators such as moving averages, RSI (Relative Strength Index), MACD (Moving Average Convergence Divergence) apart from candlestick patterns and retracements. These can help you in selecting stocks for trading.
Analyze Chart Patterns and Technical Indicators
Analyzing technical indicators and patterns is key to successful swing trading strategies. You may use free technical analysis tools like Tradingview, google finance or yahoofinance.
One of the most popular indicators used for analysis are chart patterns, which assesses the current market trend. Common chart patterns include cup-and-handle, bull & bear flags, double tops & bottoms and rounding bottom.
Other popular indicators such as RSI and MACD can help you determine potential entry and exit points as well as overall market trends.
1. Candlestick Trading Strategies
Candlestick trading strategies are based on the candlestick patterns formed on the technical charts. Each candlestick shows the psychology of the majority of the traders. Some candlestick patterns are formed of a single candlestick and others involve multiple candlesticks.
There are so many candlestick patterns which can be either bullish or bearish. Some are continuation patterns while others are reversal patterns. You can use them to trade equities for going long or short. These patterns are useful for short term market swing.
The candlesticks are more reliable when the patterns are formed at the important support or resistance levels and are supported by appropriate technical indicators like moving averages, relative strength index (RSI), stochastics oscillators or moving average convergence divergence (MACD).
A stock showing bullish candlestick pattern but RSI or MACD in sell mode or trading below important moving average does not make a good swing trade.
2. Technical Chart Patterns
They are different than the candlestick patterns. Stocks giving breakout or breakdown from these technical chart patterns make good swing trading stocks. Again, these patterns may not work sometimes, and you have to combine them with other technical indicators like we talked above.
However, these swing trading patterns are always seen by the majority of the seasoned traders. They have been reliable in the past and you should create and opportunity to trade these patterns. Triangles, flags, head and shoulders, pennants, cup and handle are the important continuation and reversal patterns.
3. Moving Averages
The advantage with them is that they are seen by majority of the traders and the institutions. Following the moving averages, you stay with the capital flow and the chances of going wrong decrease significantly.
You can simply follow any moving average, simple or exponential, of any time period like 5 day EMA, 10 day EMA, 20 day EMA, 50 day SMA or 200 day SMA. Buy stocks above the moving average keeping stop loss as the previous swing low.
You can also use moving average crossovers to be more certain on a trade. A short period moving crossing above the long period moving average is a bullish sign while the short period moving average crossing below the long period moving average is a bearish sign.
Moving averages are useful that they provide swing trading stop loss which is dynamic. That means the stop loss keeps on changing and gives you a trailing stop loss to protect your profits. This makes a good swing trading exit strategy.
Using moving averages with the technical indicators like RSI, stochastics or MACD make a very good strategy for swing trading. They give good profitable trades most of the times when they are adequately aligned with the technical indicators.
4. Fibonacci Retracements
Fibonacci retracement lines gives us the important support and resistance levels in stock trading. They make an important and reliable arsenal in your swing trading strategy.
No stock moves in a straight line. It keeps on swinging up and down on its journey to upwards or downwards. A swingtrader has to use these swings to get an entry or exit from the trade and earn the profits.
The Fibonacci retracements give us the price levels up to which a stock can retrace or pullback after a move. Fibonacci retracement levels stand at 23.6%, 31.2% and 61.8%. Being a whole number, 50% retracements is also taken into account for trading.
Out of these, 61.8% is the most important retracement level and considered as the golden retracement. A stock giving retracement after a move is expected to halt around 61.8% and resume the previous trend. Hence, it can be used as a support level and an opportunity to enter the swing trade.
Again, it is important to use the retracement along with other technical indicators we talked above and see if they support the trade.
Everyday some stock show the gap ups or gap downs when the market opens. Some of them keep moving in the direction of the gap as the trading progresses. Other start retracing back to fill the gaps.
If the gap is not filled and the stock keeps moving in the direction of the gap, it is expected to continue the trend for some more time. However, there is nothing to confirm it. The stock may or may not continue the trend over the next trading sessions.
As a swingtrader, you have to play the probability and initiate the trade while keeping the stop loss at the previous day closing price. If the trade works, you should take the profits and exit or keep a trailing stop loss. Stocks are bound to return back and fill those gaps sooner or later.
These are the important swing trading strategies that work most of the times. However, in stock trading, nothing is guaranteed. It may work or it may not work.
So, then how to make money swing trading the stocks? Well, stock trading is a process. You can not be profitable by finding a swing strategy that works all the time.
Along with a swing strategy, you also have to do the risk management carefully. Risk management ensures that your losses are small, and you do not lose your money in few trades and become bankrupt.
6. Moving Average Convergence Divergence (MACD)
Moving average convergence divergence (MACD) is a momentum indicator. It is based on the 9, 12 and 26 day exponential moving averages. Being based on moving averages, MACD is also appropriate for trend trading.
MACD has a MACD line and a signal line. When the MACD line crosses above the signal line, it is a signal for potential bullish trend in the stock. When this line crosses below the signal line, it indicates potential bearish trend in the stock.
As a swingtrader, you should consider the stock for long position when there is bullish crossover on MACD. Bearish crossover signals that you should either exit a long position or go for short selling the stock.
I again and again emphasize that you do not take trading decisions based on a single trading indicator. Same is the case with MACD. Consider the above mentioned trading strategies also when analyzing the MACD.
7. Relative Strength Index (RSI)
Relative strength index or RSI is a very popular and widely used momentum indicator. It is a leading indicator which means it gives signals much before the moves start in the stocks.
RSI oscillates between values of 0 to 100. It is useful in knowing the overbought and oversold stocks. A level of 70 and above indicates overbought levels while a value of 30 and lower indicates oversold levels.
A stock at overbought level is expected to see correction in stock prices or profit booking in long positions. Hence, traders can opt to sell their swing trades and book the profits.
An oversold stock is expected to see buying interest and an surge in stock prices in near term. Hence, these stocks can be considered for long swing trades if they are trading above important support level or making some technical chart patterns.
Stock seeing fall in prices from RSI level of 70 to 50 and above can again resume the uptrend and move higher. Similarly, an oversold stock showing up move up to RSI level of 50 and lower can resume the downtrend and again move lower.
Build An Exit Plan for Profits and Losses
Before entering into a trade, you must have an exit plan in place.
An exit plan will help you manage losses and helps to maximize long-term profits. When establishing an exit plan for profitable trades, decide the percentage increase or money target you want to achieve before taking profits off the table.
For losing trades, use a stop-loss order or mental stops when support/resistance levels are breached. This will help restrict your loss as per 1% rule of trading for your account size and prevent you from suffering bigger losses.
Now, that you have found entry level into a swing trade with the appropriate position sizing, you have to find out your exit level from the trade. Swing trading exit strategy is more important than entry plan to protect your capital and the profits.
You can either use moving averages to get an exit level from a trade. When the stock closes below the moving average you are following, the next day you exit the trade. The moving average provides you a dynamic stop loss and keeps you in the trade as long as the stock is moving in your desirable direction.
For fibonacci retracements, you can keep the next retracement level as your target and lower retracement level as your stop loss for exiting a trade.
The candlesticks and the candlestick patterns also give you the entry and exit price if you know about the candlestick patterns well.
It takes major market trends to make significant money in the stock markets. Trends span over a period of weeks or months. Traders who can not give such a big time to trades may use small market swings lasting for few days to make handsome money.
Trading these market swings profitably makes the swing trading. It is a quite rewarding trading method. Carrying positions to next day, although risky due to gap openings, but has the equal probability of working in our favor.
Using appropriate trading strategies and following the trading rules with necessary discipline, swing trading can make you a lot of money in the stock markets with free time to do other things (financial freedom).