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Swing Trading Strategies

This is a step by step guide for beginners to learn about how to swing trade stocks and make money from trading online. Through the guide, you will learn the four types of swing trading strategies that still work for 2020. Before we go any further, let's first define what swing trading is.

What is Swing Trading

Swing trading is a short term trading method to trade the stock or the options market. The typical trading period is anywhere from 2 days to 2 weeks. This is different than day trading where the holding time is anywhere from a few seconds to 1 day.

Swing trading focuses on short term price movement and make a bet based the chart patterns and technical indicators. Swing trading is different than investing because swing trading does not take into account how a company is doing in the long term whereas investing in a company means you buy and hold a stock for a much longer period, usually over a year.

There are both pros and cons of trading compared to investing in stocks. The main advantages and disadvantages are listed below.

Pros of Trading

  1. Traders don't have to wait for a long time to make a sizable profit. They get and see results quickly, from a few minutes to a few weeks.
  2. During a stock market crash, traders might be able to get out faster than investors. This is because market usually crashes in a short period of time before the changes are reflected on a company's income statement or balance sheet fast enough. A disciplined technical trader might be able to cut losses and exit the market after hitting a preset stop loss for his or her portfolio.
  3. There is no need to read or understand a company's income statement, balance sheet or other type of financial statements to make a profit. No comprehensive research about a company is needed.

Cons of Trading

  1. Although it is easy to make a profit on a single trade, it is also easy to lose money. In fact, most people lose money trading. It takes a lot of work and effort to learn how to make  consistent profit from trading stocks online.
  2. Trading requires much more discipline than investing. The game is tough to beat if you don't have right mental attitude towards trading. Traders who are looking to get rich quick will be in for a big surprise.
  3. Instead of reading financial statements, a trader spends his time studying technical analysis and stock chart patterns.
  4. High Tax Rate - traders have to pay a much higher tax rate on profits, which is based on the individual's income bracket. The tax rate for long term capital gains are much lower, so investors pay much less in tax on their profits when they hold their stocks for over a year.

How to Swing Trade Stocks

To start trading stocks online, you will first need to have an account with a stock broker. If you don't have one yet, check out the top 5 online stock brokers and choose one that meets your need. Since late 2019, major stock brokers are offering $0 commission for trading stocks, options and ETFs. This is really good news because traders can now save hundreds if not thousands of dollars in commissions each year.

While opening a stock broker account and executing a trade is easy, make money from swing trading is not. Let's move on to talk about swing trading strategies that traders use, mainly the trend following strategy, buy low sell high strategy, breakout strategy and candlestick trading strategy.

Trend Following Strategy

Trend following is one of the oldest and most popular type of trading strategies. Most swing trading strategies involved using technical analysis and stock chart patterns to find trade entries and exits, the trend following strategy is no different.

When we use the trend following strategy, we only trade with the trend. When the stock is in an uptrend, we can only go long. If a stock is in a downtrend, we can only go short on the trade.

For example, the stock AMZN (Amazon Predictions) is in an uptrend and it is now trading at the upper trend line.

  1. One way to trade the stock is to just buy it and hopefully the stock will continue to go up.
  2. Another way is to wait for a pull back, so that we can get on the trade near the trend line.
  3. However, sometimes a stock is so strong that it never retrace to the trend line. In that case, we would buy the stock when a new trend line is established.
  4. If at any time, the stock drops below the lower trend line with strong volume, we will get out of the trade because the trend line is now broken. If the volume is low during the drop, it could be a false signal. Sometimes, a stock would dip below the trend line only to go back up later.

Multiple Time Frames

To increase the odds of a winning trend following trade, we will use both the weekly and daily stock charts. We first use the weekly chart to determine the overall trend of a stock, and then use the daily chart to find an optimal entry.

For example, the weekly stock chart for COUP is in an uptrend, so we can only go long on this stock.

  1. The optimal price to buy this stock is when the stock price is near it's trend line. Notice the stock is now trading way above the trend line, so we will pass on this stock.
  2. However, we will add it to our watchlist and buy it if the stock drops to the trend line or when the stock breaks out and a new trend line is formed.
  3. Some traders would still buy this stock because it can still go higher, but it is not the best price. We want to buy stocks near the trend line (higher low) where it offers the best risk-reward ratio and only trade those stocks.

Below is a daily stock chart of COUP. This is the chart that you would pin point an entry based on your favorite technical indicators or chart patterns.

Some traders even use an additional intraday chart, but that is optional for most swing traders.

You can use the following stock screeners to find the type of stocks to utilize the trend following strategy.

Trending Stocks Screener - find trending stocks of the day.

Momentum Stocks - find stocks with momentum in the recent past.

52 Week High Stocks - find stocks that made new highs of 52 weeks.

Buy Low Sell High Strategy

The buy low sell high strategy for swing trading involved buying stock at support and sell at resistance. For example, the stock GDX (GDX Predictions) is trading in the range of $13-$17 in the past few months, it is safe to say that $13 is the support and $17 is the resistance. Each time the stock gets closer or drops below the $13 price level, it bounces back.

  1. One way to trade it is to buy the stock when it approaches $13, and sell it when the stock hit your profit target or near the resistance.
  2. You also need to set a stop loss in case the stock drop below $13 and doesn't bounce back. The stop loss level would be a little below the $13, if the stock breaks lower, then sell it to prevent further losses.
  3. To learn more about support and resistance, read Support and Resistance.

Let's take a look at another example, BDC

Here's one way we could have traded this stock using the buy low and sell high strategy.

  1. The support level for the stock is $27.94 based on the closing price of March 18.
  2. The stock then trades in the range of $27.94 to $39.30 between March and May and forming a triple bottom pattern.
  3. The triple bottom pattern is one of the strongest stock patterns for technical traders, you can learn more about it on the top 10 stock chart patterns article.
  4. The stock then gaped up from the support on May 18 which triggers a buy signal.
  5. Place a stop loss below the support line.
  6. One strategy is to exit the position when the stock is approaching the resistance. Another exit strategy would be to sell half of the position, and let the other half ride with the trend.

The ARCO daily chart had a very similar pattern for utilizing the buy at support and sell at resistance strategy.

Just like the previous stock, ARCO shared some of the common patterns with BDC.

  1. A triple bottom has formed during mid March through mid May.
  2. The stock then bounced from support on May 18, which is the perfect time to go long.
  3. Set a stop loss below the support. In case the pattern doesn't work out, we can get out at a small loss. Stop loss is necessary for every trade that we enter.
  4. The volume keeps rising as the stock rallies to new highs in the following days. Rising on strong volume is a very positive indicator for swing traders.
  5. The volume gets even stronger as it approaches resistance. For this reason, we may consider selling only half of our positions at the resistance, because there is a good chance that this stock would become a breakout stock. We will discuss breakout stocks and the breakout strategy later in the article.

To find stocks for the buy low and sell high strategy, use the follow stock screeners.

Oversold Stocks Screener - find a list of stocks that are oversold based on the RSI indicator where RSI is below 30.

Macd Crossover Screener - find stocks where the MACD indicator is making a bullish crossover.

Support and Resistance Screener - find stocks that are trading at support.

Breakout Trading Strategy

Breakout strategy is a strategy to trade breakout stocks. A breakout happens when a stock is trading in a range for a period of time and then rises above the resistance with strong volume.

For example, if a stock ABC is trading in the $5-$10 range for the past couple of months, and then it rallies above 10, it triggers a buy signal if the volume is higher than usual.

False breakout often happens when the volume is low during the day of the breakout. This happens when a stock breaks higher temporarily only to pull back later to the level below the previous resistance. In the above example, it would mean the stock rises above $10 with weak volume and then drops below $10 afterwards.

Strong volume on the breakout day reduces the chances of a false breakout, trade breakout stocks only when the volume is higher than the norm.

Let's look at a real daily stock chart of ATRO

  1. The stock is trading in the range of $6.99 and $9.57 since late March until early June.
  2. The stock then gaped up and rises above $9.57 on 6/3 with strong volume.
  3. This is a bullish signal to go long, with a stop loss right below the resistance.
  4. The stock then closed above $11.41 on 6/3 which is 19.23% gain from the previous day's closing price.
  5. The previous resistance has now become the new support, which means $9.57 has become the new support. If price ever drop to this level again, it could go a lot lower.
  6. Set a price target to take profit or sell some of the profit and let the rest run with the trend.

Please note it is much easier to see now on the chart. However, when we are on a trade with our money on the line, it becomes much more difficult. That is why mental attitude is very important in stock trading which we will discuss later.

Following are some stock screeners to help you find breakout stocks.

Breakout Stocks Screener - find stocks that are breaking out of a previous resistance.

Gap Up Stock Screener - list of stocks that gap up today.

Stocks Up 5 Days In a Row - list of trending stocks that are up 5 days in a row.

Candlestick Trading Strategy

Candlestick patterns is a powerful charting technique with a set of patterns that offer bullish and bearish signals for stock trading. They are similar but more useful than the traditional bar charts because candlestick patterns are easier to see and apply.

Candlestick patterns were originated from Japan and therefore also known as Japanese Candlesticks, and they are getting popular in the western countries.

If you are new trader or have never seen candlestick patterns, please refer to the following articles.

How To Read Candlestick Charts - introducing candlestick patterns and how to read them on a stock chart.

We will be looking at three types of candlestick patterns, the Bullish Engulfing, Bearish Engulfing and the Doji pattern.

  1. Bullish Engulfing pattern is a bullish pattern when it occurs on a down trend. The pattern signals a reversal trend is coming. If the volume is higher than usual on the day where a bullish engulfing pattern occur, that strengthens the signal.
  2. Bearish Engulfing pattern is a bearish pattern when it occurs on a uptrend. The pattern signals a reversal trend. When the volume is high, the pattern is more accurate.
  3. The doji pattern is a reversal trend that happens for both the uptrend and down trend. When the doji pattern occurs on an uptrend, it is a bearish signal. When the doji pattern occurs on a down trend, it is a bullish signal. Also, the signal is stronger when the volume is higher than the average trading volume.

Let's look at real chart example of a bullish engulfing pattern.

The weekly stock chart of NVDA shows a bullish engulfing pattern in August of 2019 and another in March of 2020. Each time the pattern occurs, it was followed by a massive gain in the stock price.

On the daily chart of NVST, a bullish engulfing pattern occurred on 5/19.

Not only the volume is higher than usual when the Bullish Engulfing pattern occurred, but the pattern itself engulfs multiple previous days which makes the signal even stronger. The stock has been risen since the pattern occur.

In summary, here's what makes a Bullish Engulfing pattern a strong signal

  1. The volume is higher than normal
  2. The Engulfing pattern engulfs multiple days
  3. When other technical indicators are showing positive or bullish signs.

The Bearish Engulfing pattern is similar to the Bullish Engulfing pattern except that it is a reversal signal that occurs on an uptrend. When this pattern occurs, it is time to be cautious on long positions. To learn more about Bearish Engulfing, Doji, or other candlestick patterns, please read the following two articles.

Top 10 Candlestick Patterns - Learn the top 10 candlestick patterns for trading.

Doji Pattern - Learn how the Doji Pattern works and how to trade them.

Candlestick Stock Screener - Screen and find stocks with bullish candlestick patterns.

Trading Discipline

Two traders following the exact same trading strategy may get completely different results. One could be making a killing while the other went broke. Why is that? A trading strategy alone will not make a trader successful, the ingredient that most losing traders missing is trading discipline.

On the surface, it may seem that a winning trading strategy is all you need to make money from stocks. But that's far from the truth. Mental attitude and discipline is what differentiates a successful trader from a losing trader.

In the short term, any trader can put on a trade and get lucky. However, to make money consistently, it requires strong mental discipline from the trader.

As defined in Trading in the Zone, any technical indicator or chart pattern gives you an edge in a trade, and it is merely an edge. Having an edge may make you some profits on one stock, but it may lose money on another. To have the discipline in trading is to know when to take profit, and when to cut losses.

Common Trading Mistakes

Here are a few common scenarios how traders make mistakes

  1. Many beginners allows their profits to turn into losses because of greed. They want bigger and bigger profits until the stock started to drop. Then they wait hoping the stock would go back to the previous high so that they can sell at the peak. When this doesn't happened, they just hang on to the trade until they started to lose money on the trade.
  2. Some trader allow their small losses to turn into big losses because they have a big ego of being right on every trade. They put on a trade and set a mental stop loss of 5%. When the stock hit their stop loss, they don't sell. They hope the stock would go back to the original price so that they can exit breaking even. Some traders even double down on their losing positions which makes the problem even worse. Most of these traders watch their small 5% loss to turn into a 20%, 30% or even a 50% loss on a single trade and it cruses his or her portfolio. 
  3. Then there are others who are so afraid to put on a trade even though their trading system or method is telling them that they should. These traders watch their winners run away, out of desperation they finally buy the stock when it was already too late. Usually, these traders buy when the price is far above their original price, or even worse buy at the peak when they should have been started selling.

Traders with this kind of mental attitude will never succeed in trading the stock market no matter what type of winning trading strategies they are using. Fortunately, trading discipline is a skill that can be learned and acquired by practice. To learn more, read the Trading in the Zone.

Final Words

Swing trading is not an easy game. Traders should approach trading as a business, not as a hobby. In a real business, there are certain things that we do in order to gain a competitive advantage over our competitors. Likewise, we should do the same thing with swing trading. Here a few ways to gain a competitive advantage in trading.

  1. Keep a Journal - have a journal that records all your trades with details on entry, exit, profit, loss and mistakes.
  2. Keep Learning - business owners learn from other successful people. In trading, we must also keep learning from our mistakes and the general market.
  3. Protect your capital first, then focus on profit.
  4. Always follow your own rules, and have stop loss for your all trades.
  5. Focus on becoming a better trader instead of making more money. Never let your ego get in the way.

By doing the above, you already beat 80% of the people, because most participants in the stock market never done any study.

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