Swing Trading is all about minimum risk, maximum profit, and that too, in short time. Sounds exciting, right? In this blog post, we will learn what exactly is Swing trading, the three key elements of Swing trading setup, and the popular Swing trading strategies.
Swing is the movement in price in a particular direction. Swing trading is the trade taken by following this short-term price trend. In other words, Swing trading is the trading strategy which pertains to holding a positional trade for more than a day, may be for a few days or few weeks.
Swing trading uses price movement and trend to technically analyze the stock. Having said this, fundamental analysis too, can come into play while selecting just the right stocks out of the ones ruling your thoughts lately.
If you play the stock market, you might have heard about the richest Swing Trader, Dan Zangler. They say he made $18 million out of a $10,775 investment in just under two years using same strategy. That’s how powerful Swing Trading is. It helps in catching the Swing just before the stock price is about to go high, riding the Swing for a short-term and then jumping out of the trade just before it’s about to dive down again.
Swing trading is based on (a) technical analysis and (b) trend analysis.
(a) Swing trading based on Technical analysis:
Swing trading is data-driven, based on technical analysis of short-term price movements. Such trades are taken more frequently and for a shorter duration, and trying to be more accurate with position-timing.
(b) Swing trading based on Trend-following, Trend-analysis:
This involves studying the trend-direction and trend-strength of the stock, based on broader economic news in order to decide whether the trade will offer advantage of short-term price movements.
Before looking into the Swing trading strategies, it’s important to know the three key elements of a Swing trading setup:
Entry level – The level at which trade is entered into.
Exit level – The level at which the trade should be closed.
Stop loss – The pre-determined level at which the trader plans to exit the trade in case if the stock moves adversely resulting into a loss.
Popular Five Swing Trading Strategies:
1) Price Action Strategy
Price Action strategy is where the trader tries to make profit from an opportunity that arises when the price of the stock breaks in a particular direction. Price action means observing how the price of the stock reacts at certain levels of support and resistance.
The support and resistance levels are calculated using various strategies which in turn take help from a number of technical indicators.
2) MACD Trend-following Strategy
MACD (Moving Average Convergence Divergence) Trend-following strategy is one of the best trend-following and momentum indicators; as it tells us about the overall direction in which the stock price is likely to move.
Under this strategy, the trader determines buy and sell levels at intersection of MACD line and the signal line.
For example, when the MACD line crosses above the signal line, it is said to be a bullish crossover. A bearish crossover is when the MACD line crosses below the signal line.
After the Swing trader enters a trade, he waits for crossing-over of these two lines again such that it indicates an opposite trend. At this point, the Swing trader exits the trade, resulting in booking profit.
3) Simple Moving Averages Indicators Strategy
As the name suggests, this is the simplest swing trading strategy which works around (SMAs) Simple Moving Averages. Last 10-day average of closing stock price gives us 10-day SMA. When the 10-day SMA crosses over 20-day SMA, it indicates an impending bullishness.
Conversely, when the 10-day SMA crosses below the 20-day SMA, it means a likely slump in the stock price.
4) Fibonacci Retracement Strategy
Fibonacci retracement of stock price determine probable support levels and resistance levels using horizontal line. These levels are where the price trend is likely to halt, and retrace or reverse from its current trend.
This strategy is used along with other strategy to confirm the predicted possible trend. Hence, one must pre-decide a stop loss before entering the trade.
5) Bollinger Bands Indicator Strategy
This Swing trading strategy makes use of Bollinger Bands, one of the popular technical indicators. Bollinger Band consists of three bands. The middle band is SMA for a particular number of days, while the lower and upper bands encompass two standard deviations from the middle band. That’s how this indicator shows the extent to which the stock is overbought or oversold.
A swing trader needs to decide on which stocks to trade and when to enter and when to exit. This is precisely where scanning tools like Investar’s Custom Screener can be a great help. The Investar Custom Screener can help scan stocks in intraday based on Price Action, MACD Crossovers, Moving Averages and Bollinger Bands and many other Technical and Fundamental Strategies.
Thus, Swing trading strategies require lot of discipline, practice and substantial amount of professional experience in using technical indicators. Thus, at times the Swing trading strategies can be quite complicated to follow and implement. The trader has to carefully select the right strategy or a combination thereto, which more importantly, should be simple and easy for his own understanding and practical applications.
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