Swing trading is a popular investment strategy that aims to follow shorter-term trends, with positions staying open anywhere from a few days to a couple of months.
In this guide, I reveal some of the best swing trading strategies that can be deployed when buying and selling stocks.
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Best Swing Trading Strategies Key Takeaways
- Understanding Market Trends: You should have a good understanding of market trends and be able to identify the direction and strength of the trend.
- Timing is Key: You must be able to identify entry and exit points at the right time to maximize profits.
- Technical Analysis: Use technical analysis to identify patterns and trends in the market. You can use various technical indicators and chart patterns to make informed trading decisions.
- Risk Management: You must have a solid risk management plan in place to limit your losses.
- Patience and Discipline: This kind of trading requires patience and discipline as trades can last several days or weeks. You must stick to your trading plan and not let emotions interfere with your decisions.
- Flexibility: You should be flexible and adjust your strategies based on market conditions.
- Diversification: You should look to diversify your portfolio to reduce the risk of losing all of your investments in one trade.
What is a swing trading strategy?
Swing trading is one of many strategies that focuses on short-term market cycles. In its most basic form, traders will initially look to identify a trend on a particular financial instrument, such as stocks or forex.
The swing trader will then enter an appropriate buy or sell order, depending on whether they believe the trend is moving to the upside or downside. Unlike day trading and scalping, swing trading offers a lot more flexibility in terms of the trade duration.
This is because swing trading positions can remain in place for a few days or even weeks. Although there is no rule set in stone in terms of the maximum position term, swing traders rarely remain in the market for more than a couple of months.
Crucially, I found that the most successful swing trading strategies will aim to keep positions in place for as long as the trend remains active.
And, if at any point the trader believes the market is about the reverse, they will comfortably close the position to secure their gains.
Example of a stock swing trade
Before I delve into some of the best swing trading strategies for active traders, I will run through a quick example of how this system generally works.
- Let’s suppose that you are analyzing the price action of Apple stock on NASDAQ and have identified that a key resistance level of $140 has firmly been broken.
- As a result, you elect to enter a buy position at a stake of $100, with the view that the upward trend could remain in place for several days.
- Apple stock has once again broken through another identified resistance level and is now trading at $170.
- A few more days have passed and it appears that Apple stock is now struggling to break through its prior all-time high price of $180, so you decide to exit the trade at $178.
As per the above example, you risked $100 on an Apple buy order at a share price of $140, and exited the position at $178. This represents gains of 27% and the swing trade remained open for just over a week.
The key takeaway here is that in this example, the trader had the flexibility to keep the position open for as long as the identified trend remained in place.
This allows traders to maximize potential gains rather than being forced to close a position.
I should also note that swing traders are not restricted to long positions. On the contrary, if the trader believes that the stock is due to enter a prolonged trend to the downside, they have the flexibility to go short.
Five strategies for swing trading stocks
In this section, I discuss some of the most popular swing trading strategies that can be used when buying and selling stocks.
Momentum swing trading strategies
Some of the most widely swing trading strategies are centered on momentum. In a nutshell, you will be tasked with assessing how quickly an identified trend is moving in any one particular direction and update your trading strategies accordingly depending on your trading style.
To achieve this, you will need to take into account volatility and volume levels, and compare this to daily averages for the respective stock being traded. One of the best indicators in this regard is the Moving Average Convergence Divergence (MACD).
Most online brokers support this indicator – either through their own native trading platform or a third-party integration with providers like TradingView or MetaTrader.
- For example, let’s suppose that IBM stock is witnessing abnormal buying pressure during the first few hours of trading.
- Although this indicator alone would likely be sufficient for scalpers and day traders to enter a position, this won’t be the case when swing trading.
- After all, swing trading will aim to maximize identified trends by staying in the market for as long as possible.
- Therefore, you would need to identify why IBM stock is experiencing a rapid amount of interest from the broader markets before making a decision on how to proceed.
This could be anything from a relevant new story – such as a much better-than-expected quarterly earnings report.
Either way, seasoned swing trading professionals will only enter a suitable position once the reason behind the momentum shift has been verified. This can be achieved by technical analysis and/or fundamental research – depending on the situation at hand.
Support and resistance levels
Many swing traders rely solely on support and residence levels – meaning that they are proficient in using technical indicators to interpret key charting zones.
- A support line is a pricing point that has historically prevented the price of an asset from declining any further.
- There are many reasons why an asset might have a specific support line, such as the pricing point representing its 52-week low.
- Either way, support lines act as a great defense against prolonged downward trends.
However, if a key support line is broken, this represents one of the best swing trading strategies for short sellers.
The reason for this is that once the price of the asset moves below a historical support line, there is every chance that the decline will be prolonged. After all, there might be a lot more downward action before the next support line comes to the asset’s defense.
In this scenario, the trader would deploy a short-selling order on the asset and watch closely how the price reacts to the next historical support line. If the next support line is broken again, the trader will likely keep the position in place.
If not, and a triggering of the next support line results in the reversal of the asset’s price, the trader will exit the position and secure their gains.
Resistance lines work much the same, albeit, in reverse. That is to say, when an asset is moving to the upside, it will often find resistance at specific pricing points.
If, however, the asset convincingly breaks through a historical resistance level, this is where a trader will enter a long position.
To reiterate, once the long position is entered, the trader will be on the lookout for other historical resistance levels to assess how long the position should remain in place.
Finding support and resistance levels for swing trading
It goes without saying that you will need to be well-versed in finding historical support and resistance levels for this swing trading strategy to work effectively.
One of the most commonly used technical indicators in this regard is the Fibonacci retracement.
Once deployed, Fibonacci levels will highlight the most likely support and resistance levels based on historical and current pricing action. Each level will be represented by a percentage.
Key Fibonacci retracement percentages to focus on when swing trading are the 23.6%, 38.2%, 61.8%, and 78.6% levels. In order to generate sufficient data that can be interpreted, you will need to draw the Fibonacci retracement indicator between two pricing levels.
Although most swing traders will utilize technical indicators when formulating potential trades, fundamental analysis can also prove very useful.
In fact, this is perhaps the best swing trading strategy for complete beginners that have little to no grasp of technical analysis.
- In its most basic form, fundamental analysis seeks to make swing trading decisions based on real-world news.
- An overly positive news development can result in an asset witnessing a prolonged trend to the upside, which represents highly conducive conditions for swing trading.
- Similarly, if the news story is overly negative, the opposite can happen.
Either way, swing trading strategies that focus on fundamental analysis are arguably a lot easier for newbies to deploy.
Some examples of fundamental news that can positively impact the value of a stock and ultimately transition into a prolonged upward trend for swing trading include the following:
- A significantly better-than-expected quarterly earnings report, especially concerning revenues and operating income
- Regulatory approval from the government for the release of a specific product, such as a pharmaceutical drug
- An announcement from the board of an increased dividend payment or a proposed share buyback program
If any of the above events come to fruition, this can spark abnormal buying pressure, which a seasoned swing trader will look to take advantage of for as long as practically possible.
On the flip side, if the news is negative, then the swing trading strategy might look to enter a short-selling position to capitalize on a prolonged downward movement.
Buy the rumor, sell the news
I should also make reference to the age-old saying in the stock markets – “Buy the rumor, sell the news”.
This investment thesis can act as a drawback when it comes to swing trading on the back of an announcement.
- For instance, let’s suppose that there are solid rumors in the market that Tesla is about to initiate a stock split.
- This can result in enhanced buying pressure, meaning that Tesla stock enjoys momentum to the upside.
- But once the Tesla stock split is officially announced, many swing traders will look to lock in the gains that have already been generated.
- This can then result in a fast reversal, where the stock quickly moves to the downside.
This is something to bear in mind when deploying a fundamental swing trading strategy.
Using mean reversion strategies in swing trading
Another popular swing trading strategy is to deploy positions based on the mean reversion.
For those unaware, the mean reversion is a theory that the value of an asset will eventually move back to its average pricing point after experiencing a rapid movement to the upside or downside.
In other words, this swing trading strategy makes the assumption that a particular trend above or below the historical average is temporary in nature. This enables swing traders to enter a buy or sell position accordingly.
There are many different ways to execute the mean reversion when swing trading, but one of the most common is to rely on the simple moving average (SMA).
This indicator offers insight into the average price of an asset over a specific timeframe. Due to the shorter-term nature of swing trading, the 20-day and 50-day SMAs are likely the most appropriate.
- For example, let’s suppose that you are trading Alphabet stock.
- You deploy the SMA indicator and identify that Alphabet stock is trading 15% above the 20-day SMA.
- This could indicate that Alphabet stock is heavily overbought and thus, a return to the mean reversion could be on the cards in the very near future
- In this scenario, the swing trader could look to deploy a short-selling order with an approximate target of 15%
I should make it clear that the mean reversion strategy in swing trading is considered higher risk, as much of the focus is on overbought or oversold conditions.
In simple terms, wider stop-loss orders will need to be entered to ensure that this swing trading strategy is deployed correctly.
This suggests that the mean reversion strategy often results in higher position margins – both to the upside and downside.
Using the RSI to swing trade
The relative strength index (RSI) is also commonly used when deploying a swing trading strategy.
I would argue that this is one of the most beginner-friendly technical indicators and as such, a great starting point for newbies.
- Put simply, the RSI seeks to determine whether an asset is overbought or oversold.
- Once executed on your charting screen, the RSI will provide a reading from 0 to 100.
- Any readings between 30 and 70 will not yield sufficient results for the purpose of entering a swing trade.
- A reading of below 30 means that the asset could be oversold.
- A reading of above 70 means that the asset could be overbought.
If the RSI suggests that the asset is oversold, then this could mean that a reversal of the current downward trend is about to occur.
Swing traders would then enter a buy order accordingly, in the hope of purchasing the asset before it witnesses a prolonged move to the upside.
If the RSI suggests that the asset is overbought, then the upward trend could be about to reverse to the downside. This would motivate the swing trader to execute a sell order.
Advantages of swing trading
Still not sure whether a swing trading strategy is right for you?
Below, I highlight some of the key advantages of utilizing this short-term trading system:
First and foremost, one of the key advantages of swing trading is that it offers you a lot more flexibility when compared to other strategies.
For example, day traders are required to close an open position before the end of the trading session. This is the case even if the day trader believes further gains could be in the making.
Swing trading, on the other hand, enables positions to remain open for a few days or even weeks.
Less time-intensive than scalping and day trading
Although swing trading is still considered a short-term trading strategy, it is a lot less time-intensive when compared to a scalping or day trading strategy.
For instance, scalpers are required to analyze patterns and trends based on the 1-minute charting setup. This means that scalpers need to be glued to the screen for long periods of time.
In comparison, swing traders will generally focus on the daily and weekly timeframes.
Furthermore, the 1-hour timeframe will also be considered, but this is typically for the purpose of finding the most effective entry and/or exit point.
More suitable for beginners
Some trading strategies are not suitable for beginners.
Although most swing traders are well-versed in technical analysis, fundamental research is also possible.
Fundamental research is a lot more user-friendly, as the swing trader can make decisions based on real-world news developments that are somewhat easier to interpret.
Wider profit targets
Both day traders and scalpers will typically target very small profit margins, considering that trades will rarely remain in place for more than a few minutes or hours.
In the case of swing trading, the trader can keep the position open for several weeks if an ongoing trend remains in place.
This opens up the possibility of targeting much higher margins.
Disadvantages of swing trading
Like all strategies, swing trading also comes with several disadvantages, such as:
Day traders have full control over their positions, as they can watch pricing action in real-time and react accordingly.
However, swing trading positions will usually be kept open past market hours – either overnight or across the weekend.
This in itself presents a major risk, as by the time the respective market reopens, a major pricing swing might have occurred.
At this stage, it could be too late for the swing trader to react.
Although swing traders have the potential to make wider profit margins, equally, losses on a swing trade can be considerably higher when compared to much shorter-term strategies.
This is because stop-loss orders will need to be entered much further away from the entry price. After all, it can take several days for a swing trading theory to be validated by the markets.
Day trading strategies, on the other hand, will always have sensible stop-losses in place that may represent just a few dozen basis points.
Finding stocks to swing trade
Like any strategy, swing trading requires you to be able to identify suitable opportunities.
Although many asset classes are suitable for swing trading, stocks are likely the best option for newbies.
Below, I discuss some tips on finding stocks to swing trade as a beginner.
Focus on large-cap stocks
When finding your feet as a swing trader, you will likely want to focus your efforts on large-cap stocks.
This is because, generally speaking, large-cap stocks experience less volatility – especially on the daily charts.
As such, you will give yourself the best chance possible of avoiding larger losses.
As you begin to get more comfortable with how swing trading works, only then should you consider exploring smaller-cap stocks.
Stick with stocks that generate high trading volumes
Another swing trading tip is to target stocks that typically witness larger daily volumes. In turn, this will ensure that you are swing trading stocks with sufficient levels of liquidity.
In doing so, you shouldn’t have any issues entering or exiting a position at your preferred pricing point. Similarly, you will reduce the threat of slippage.
Look for sector trends
It is also a good idea to focus on sectors that continue to outperform (or underperform) the broader stock market.
For example, throughout most of 2021 and the first six months of 2022, oil prices went through a prolonged upward trajectory. This was largely due to global economies reopening after COVID lockdowns, supply chain issues, and the Russian invasion of Ukraine.
In turn, this made oil-related stocks ideal for a swing trading strategy, considering that the sector as a whole largely witnessed prolonged growth to the upside.
The daily routine of a swing trader
Although swing trading can be less time-consuming when compared to other strategies, you will need to dedicate a certain number of hours each day to give yourself the best chance possible of finding suitable opportunities.
Some of the most common daily tasks of a swing trader are summarized below:
All successful swing traders will begin the day before the financial markets are open for trading.
This will enable you to get a 360-degree overview of the previous day of trading and whether any post-market activity needs to be looked into further.
Fundamental data analysis
Next – also before the markets open, you should spend some time assessing the financial news.
In particular, look for any relevant developments that could impact an outstanding position, or provide insight into a new trading opportunity.
Assessment of open positions
Before the markets open, swing trading professionals will run an analysis of open positions.
This is to assess real-time profits and/or losses, and whether or not the original investment thesis is still relevant.
Begin technical analysis
Seasoned swing traders will then begin exploring potential trades for the respective day.
Unlike day traders, a good trading day could be to do nothing and just allow existing positions to play out.
Create a watchlist
As a swing trader, you should be constantly on the lookout for potential trading opportunities.
This can be achieved by adding suitable stocks to a real-time watchlist and keeping tabs on both the technicals and fundamentals.
This will enable you to hone in on a small selection of stocks, rather than attempting to watch over the entire market.
In summary, I have discussed some of the most popular swing trading strategies utilized by seasoned investors and discussed how to use the different swing trading strategies available.
While most swing trading strategies require at least a basic understanding of technical analysis, fundamental data can also be of great assistance.
Just remember that swing trading comes with wider take-profit and stop-loss margins when compared to other strategies, so it might be best to start off with a demo account before risking any funds.
Swing Trading FAQs
Is a 1-hour timeframe good for swing trading?
No – although the 1-hour timeframe can be useful for swing trades, this is generally only the case for finding suitable entry and exit points to execute a position. In terms of finding swing trading opportunities, you will likely find that the weekly and daily timeframes, alongside the 4-hourly, are more suitable.
Is swing trading better than day trading?
f you are a complete beginner, then swing trading may be more suitable for your skill set when compared to day trading. This is because you will have more flexibility when it comes to keeping positions open, and there is slightly less emphasis on technical indicators.
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