Swing Trading Strategy: How To Master The Arts and Science of Swing Trading

If you have started to explore the various options of stocks trading, learning how to do swing trading will help you go a long way. Swing trading is one of the most popular trading styles, where traders base their trading decisions on technical analysis. In this article, we will study the common swing trading strategies practised by traders to discover winning deals in the market.

Before we start discussing the merits of different swing trading techniques, let’s quickly recap what swing trading is.

What is swing trading?

Swing traders try to make a profit from an asset price change in a short timeframe. They would base their decisions on market trend, using fundamental and technical analysis to identify patterns, trend, and potential change in trend in a short time.

Swing traders remain invested for a short duration, like days and sometimes weeks, before striking a deal. They don’t follow market trends as often like day traders, but they are prompt in identifying shifts in the trend line and exit market before the situation takes the opposite turn. This they do by using swing trading techniques.

What Is A Swing Trading Strategy?

Swing trading got its name because it tries to gain from price oscillation or swings, either upward or downward. Swing traders use an array of technical trading tools, like day traders, only for a period that is close to position trading.

Swing traders use popular trading tools like Bollinger Bands, Fibonacci Retracement, moving oscillators to form strategies. Besides, traders also keep a close watch on emerging patterns in multi-day charts like,

1. Head and shoulders pattern

2. Flag pattern

3. Cup and handle pattern

4. Triangle pattern

5. Moving Average Crossover

Let’s take a look at simple swing trading strategies.

Fibonacci Retracement: Traders involved in swing trading knows that stocks tend to retrace sometimes at different levels before reversing again. Fibonacci retracement lines help traders identify support and resistance levels. Traders draw horizontal lines at different percentage levels like 23.6 percentage, 38.2 percentage, and 61.8 percentage to identify potential reversal levels.  For instance, when the trend is downward, a trader can plan a short trade at 61.8 Fibonacci line, functioning as a resistance level, where the price retrace before bouncing off and exit when the price touches 23.6 Fibonacci line or the support level.

Support and Resistance: For traders who follow the trend, support and resistance lines are the two most important indicators. Support identifies the bottom level of a trading range, and resistance represents the ceiling. Asset price moves within the range, but when it crosses the support or the resistance level, it indicates a reversal. Price above the resistance level is identified as an overbought situation, and it may indicate the finally buying pressure will recede and selling forces will take over. Similarly, the area below the support line is where overselling occurs. A swing trader will enter a selling position when the price bounces off at the resistance, placing stop-loss level just above the line.

Bollinger Bands Method: Bollinger Bands (BB) are price bands placed on both sides of a moving average trend line. It creates a range between which asset price moves. Swing traders use Bollinger Bands to plan entry and exit points in the market.

Let’s discuss it with an example. In this case, we are considering a sell trade using Bollinger Bands. To begin, traders would look for the asset price to move near the upper line, before it retraces and breaks below the middle Bollinger Band. It is a robust bearish candle that closes near the lower BB line. A swing trader will take a position after the formation of the confirmation candle – a robust bearish candle which breaks below the middle BB line, indicating the presence of real sellers. This method allows traders to place a protective stop-loss, above the breakout candle.  The protective SL allows traders to eliminate chances of fake trend reversal signals. As the trade is now placed, the trader will wait for the price to move till the time it moves back to the middle BB line and closes near it. This is where they’ll plan an exit with profit.

Does it all sound complicated? Check out the image below to understand it better.

Channel Trading: Channel trading is a simple method involving trading assets showing a strong trend line and trading within a channel. For example, you’ll plan a sell when the trend line is downward and touches the upper limit of the channel before bouncing off down.

Traders using channel trading as the tool always trade along with the trend signals.

Using  SMA: Another popular swing trading method is using the simple moving average (SMA) line. The SMA is a continuously updating line where each data point represents the average price of an asset. 10 and 20 days SMAs smooth out the noise.

The trader will place the two SMA lines against each other on a trading chart. When the shorter SMA (10 days) crosses over the longer SMA (20 days), trades plan entry as it signals an uptrend. Conversely, when longer SMA crosses the shorter SMA, it triggers a sell signal.

MACD Crossover: The MACD consists of two average lines – the signal line and the MACD. It generates trading signals – buy or sell – when the two lines cross. In a bullish trend, the MACD will switch over the signal line, triggering off a buy signal.

The trend will reverse to bearish when the MACD line falls below the signal line, indicating selling opportunities. MACD crossover is a popular swing trading technique.

So far, we have discussed the standard swing trading methods that will give you a heads up. But there is more to it. The second thing is how to manage your trade. There are two established methods for that,

1. Passive trade management

2. Active trade management

A passive trader will wait till the market either hits stop loss or the profit target and will ignore any movement in between.

An active trader, as the name suggests, will monitor the market movement to decide their next move.

What Are The Advantages Of Using Swing Trading Strategies?

1. Swing trading can result in higher profit and loss. These strategies help traders to eliminate lots of intraday trading noise and focus on the bigger trade.

2.  Secondly, swing trading strategies are based on technical indicators, reducing risks of speculations and helping you make a clear decision.

3.  Another benefit of using trading strategies is that you won’t have to follow the market regularly.

Conclusion

Swing traders use various strategies; more experienced traders will use advanced and complex techniques. However, these simple strategies will help you lay a strong foundation.

Whether swing trading is your style or not, you can’t deny the importance of learning the various trading techniques to become more surefooted in the stock market. When it comes to stock trading, nothing can beat the power of knowledge.