One of the main appeals of swing trading is being able to capture significant gains in less than a week, and without having it to be a full-time job. Of course, you must still work hard to find these short-term opportunities to take advantage of. It is helpful to understand some of the swing trading strategies that successful traders use and it is important that you have a set of your own trading strategies.
First, let’s briefly go over the definition of swing trading.
What is swing trading?
Swing trading is a short term trading method used for trading a variety of investments, such as stocks, bonds, commodities, options, and currencies. Unlike day trading where positions typically last only one day, swing trading positions usually range from two to five days, but can last as long as two or three weeks. The objective of swing trading is to find the overall trend based on chart patterns. Swing traders use technical analysis to make predictions and disregard fundamental analysis. They aren’t interested in the intrinsic value of stocks, but rather they look for stocks with short-term momentum that can allow them to capture gains in just a few days.
Swing Trading Methods
Markets often go nowhere. They usually rally a few days, decline a few days, pause and then rally again. Small swings in the markets are common and it is our interest to capture profits from these small swings.
Most of the swing trading strategies involve studying chart patterns to find trade entry and exit points. These strategies differ and there isn’t any one “right” strategy. Every trader has his or her own preferred methods and strategies. Study and apply these strategies to different charts and see which ones work best for you. You can also have more than one strategy.
Trend Following Strategy
Most swing traders trade in the direction of the current trend and assume that the “Trend is your friend.” Trend following is the most popular type of swing trading strategy where you find a trending stock and trade along its trend. This strategy is used by both long-term investors and short-term traders. For the purpose of swing trading, the trend following strategy is used to spot patterns and trends that happen over a short period of time. For example, if the security is in an uptrend, the swing trader will be bullish and go long on the security by buying shares, call options, or futures contracts. The trader plans to hold the security short-term and sell when he or she sees signs of reversals. Likewise, if the overall trend is down, then the trader will be bearish and can short shares or future contracts, or buy put options.
Drawing Trend Lines
It is helpful to know how to draw trend lines on a stock chart. A trend line is a straight line that connects at least two price points and acts as a line of support or resistance. An uptrend line has a positive slope and is formed by drawing the trend line along the lowest points in the trend without letting the line cross through prices. The second low point must be higher than the first low point in order to have a positive slope. A downtrend line has a negative slope and is formed by drawing the trend line along the highest points in the trend without letting the line cross through prices. The second high point must be lower than the first high point in order to have a negative slope.
You can apply trend lines to find securities with channel patterns. Channel patterns serve as a trading range and consist of two parallel trend lines, where the lower trend line acts as support and the upper trend line acts as resistance.
Trend Following Entry and Exit Points
Swing traders normally enter the market after the trend has established itself, betting that the trend will continue. Below is an example of a trade that I executed. The first green arrow is where I entered the trade. Microsoft was one of the stocks that I was watching and I saw that the uptrend validated itself, as indicated by the third orange circle. I typically wait for at least three to four points to hit my trend line to confirm the trend’s validity before I take any action. As the price bounced up from the third circle, I bought shares. About a week later, the stock hit my target price and I got out.
How to Trade Channel Patterns
The strategy of trading channel patterns is to identify valid trends and trade in the direction of the trend. Sometimes, neither a bullish nor a bearish trend is present, but the stock is moving between parallel resistance and support levels. When the stock moves up and then pulls back, the highest price it reached before its pull back is the resistance. As the market continues up again, the lowest price the stock reached before it climbed up is the support. There are swing trading opportunities in these scenarios, with the trader going long near the support area and shorting near the resistance area.
When the price touches the support trend line, or the lower trend line, of an ascending channel, a buy trade is signaled. When the price touches the resistance trend line, or the upper trend line, a short trade is signaled. It is also important to pay attention to the volume of the stock. If the stock breaks support with high volume, it is a greater indication that the trend is broken. However, if the stock breaks support with low volume, it is okay to hold a little longer since it could be a false breakout. If you choose to hold a little longer, make sure you have a stop loss.
Trending stocks usually move in a step-like pattern, where it may go up for several days, pull back, and then go up again. If this pattern appears consistently on a chart, the stock is said to be in an uptrend. A pullback can last a few days or even a few weeks. As a bullish swing trader, you should look out for these type of stocks but you should wait until the stock has resumed its original uptrend. This means you shouldn’t buy when the stock pulls back because the stock can continue to go down further. You should buy as the stock is going back up again.
Find the lowest point of the pullback so that you can set a stop loss below it. If the stock goes below this point, you should exit the trade. This will help you limit any losses. Also, find the highest point of the recent uptrend so that you can set it as your profit target. If the stock hits this point or higher, you should consider exiting a portion of your position. This way you can lock in some gains.
Breakout Trading Strategy
Besides entering a trade in a channel pattern, you can also enter a trade when a breakout occurs from the channel. A breakout is when the price closes above or below the boundaries of the pattern.
The below chart of Amazon stock shows a breakout from the uptrend. The increase in volume also signifies that the uptrend is broken and a downtrend might be imminent. Swing traders may see this as an opportunity to short this stock.
A breakout doesn’t necessarily have to occur from an uptrend or downtrend pattern. For example, if a stock goes up and down in the $10-$15 range for a long time and then it breaks out from this range on high volume, it also signifies a breakout. Breakouts are also opportunities that I watch out for. However, you need to be careful of false breakouts. If the volume is weak, the price breakout might only be temporary and can pull back into that range.
Gap Trading Strategies
Gap trading occurs when a stock gaps up or down from the previous day close. They form because buy and sell orders are placed before the market opens and drive the price higher or lower than the previous day’s closing price. If there is an increase in volume on the day the stock gaps up or down, it is a strong indication that the price will continue to move in the same direction of the gap.
The most common gap patterns are Common, Breakaway, Continuation and Exhaustion. The trading strategy may be based on the type of gap. Take a look at Apple chart below. There was a gap up on high volume in the beginning of February. To trade this gap, I would take a look at the intraday chart and set a buy order if the price surpasses its highest point in the first hour of trading. This is because morning reversal gaps can occur within the first hour of trading.
A stock that gaps up above resistance level or a stock that gaps down below support level are reliable entry signals. You can use these gap trading strategies for intraday, end-of-day, or weekly gaps.
Japanese Candlestick Charting
The Japanese candlestick is a popular charting technique used for short-term outlooks. Candlestick charts displays the opening, close, high, and low prices for a security each day. Once traders learn how to read candlestick charts, they find them easier to look at and more useful than traditional bar charts since it reveals more about a stock’s price action. The shape and color of candlesticks help traders gauge the emotions around a stock by showing us if there is more buying (greed) than selling (fear). There are many candlestick patterns and it is important to understand what is happening in each pattern. Japanese candlesticks are a way of looking at prices and should be used with other technical indicators for them to be useful.
Bullish candlestick patterns – The below are examples of candlestick reversal patterns signaling a chance of a rally. For any of these patterns to signal a rally means that there must have been a preceding downtrend.
Bearish candlestick patterns – The below are examples of candlestick reversal patterns signaling a pullback. For any of these patterns to signal a sell means that there must have been a preceding uptrend.
These are a few of the popular swing trading strategies. It is important to use multiple indicators and not trade on any one technical concept in isolation. There is a higher chance for a profitable trade if many technical tools are signaling the same message. Regardless of the strategy and the technical indicators you use, you should always enter a trade with a clear trading plan. This means you should have a target price and a stop loss. Through analysis and experience, you can determine which swing trading strategies work best for you.
Swing Trading related articles
How to Read Stock Charts
How to Read Candlestick Charts
How to Trade the MACD Indicator
What is Technical Analysis
How to Trade Fibonacci Retracements
Fibonacci Trading Strategy
How To Trade Stocks Using Technical Analysis
Top 10 Technical Analysis Books
Check out the Trading System that combines a scanning system, charting platform, trading system and trader education all in one place.