Stock market trading involves buying stocks at low prices and selling them later at higher price to earn profits. Trades may last for a single day or more than one trading day.
Stock trading lasting for a single day is called as day trading. Trading lasting for more than a single trading day is called as swing trading (few days) or positional trading (few weeks to months).
To make big money in the stock market, it is important to give the markets some time to move in our desirable direction and catch short term trends in stock prices. It is no secret that trending markets make the big money.
Swing trading is such a type of stock trading which gives us both these advantages of being short term and capturing the short term moves. It is an ideal way of making money in the stock market. Swing trading for beginners is, especially, a very good method to start with keeping in view their nil or minimum exposure to the stock markets.
There are trades who use swing trading for living and meeting the day to day expenses. This is because the swing trading returns can easily reach up to 8-10% in a month.
You can swing trade stocks by delivery trading or margin trading where you buy and hold stocks. In futures and options segment, traders can swing trade options with limited risk. Swing trading futures involves higher risk and higher returns in contrast to swing trading options.
In this simple swing trading guide, you will learn swing trading strategies to swing trade stocks successfully and the various swing trading basics. It will make you clear how does swing trading work and how to make money swing trading stocks, futures or options.
Table of Contents
- What is Swing Trading
- Swing Trading Strategies
- Technical Indicators For Swing Trading
- How To Do Swing Trading
- Swing Trading Stocks
- Swing Trading vs Day Trading
- Rules To Swing Trading
What is Swing Trading
We can define swing trading as a type of stock trading done with an aim to earn profits from short term stock market swings. Swing trade can last from a few days to a few weeks. The swingtraders attempt to buy shares at low price and sell at high price or vice versa. Thus, it is a swing high swing low trading.
The other different ways to trade stocks like day trading, positional trading and trend trading but swing trading is has its own advantages.
Daytraders hold their positions for a few minutes or hours and don’t carry forward to next trading day. They book their profits or losses before the market close. Hence, they are protected from adverse stock related news or announcements released after market close which may lead to losses.
Swing Trading Strategies
You need a strategy to trade equities successfully. A strategy is your trading plan which guides you how and when to execute the trade. It involves the chart reading through technical analysis to find the entry and exit from the trade and the risk management.
We shall talk about the risk management in the later part of the article, first we take on the various strategies for swing trading. You must understand that no strategy is guarantee to profitable trading. Being profitable in stock trading is more of a mathematics than a strategy.
1. Candlestick Trading Strategies
Candlestick trading strategies are based on the candlestick patterns formed on the technical charts. Each candlestick shows the psychology of the majority of the traders. Some candlestick patterns are formed of a single candlestick and others involve multiple candlesticks.
There are so many candlestick patterns which can be either bullish or bearish. Some are continuation patterns while others are reversal patterns. You can use them to trade equities for going long or short. These patterns are useful for short term market swing.
The candlesticks are more reliable when the patterns are formed at the important support or resistance levels and are supported by appropriate technical indicators like moving averages, relative strength index (RSI), stochastics oscillators or moving average convergence divergence (MACD).
A stock showing bullish candlestick pattern but RSI or MACD in sell mode or trading below important moving average does not make a good swing trade.
2. Technical Chart Patterns
They are different than the candlestick patterns. Stocks giving breakout or breakdown from these technical chart patterns make good swing trading stocks. Again, these patterns may not work sometimes and you have to combine them with other technical indicators like we talked above.
However, these swing trading patterns are always seen by the majority of the seasoned traders. They have been reliable in the past and you should create and opportunity to trade these patterns. Triangles, flags, head and shoulders, pennants, cup and handle are the important continuation and reversal patterns.
3. Moving Averages
Moving averages can be incorporated into the trading plan to make a simple swing trading strategy. Moving averages are the most simple and reliable technical indicators.
The advantage with them is that they are seen by majority of the traders and the institutions. Following the moving averages, you stay with the capital flow and the chances of going wrong decrease significantly.
You can simply follow any moving average, simple or exponential, of any time period like 5 day EMA, 10 day EMA, 20 day EMA, 50 day SMA or 200 day SMA. Go long in a stock above the moving average keeping stop loss as the previous swing low or short below a moving average with stop loss previous swing high.
5 day EMA, 10 day EMA and 20 day EMA make the best moving averages for swing trading for short term swings. You can also use moving average crossovers to be more certain on a trade.
A short period moving crossing above the long period moving average is a bullish sign while the short period moving average crossing below the long period moving average is a bearish sign.
Best moving average crossover for swing trading is the one which suits you best. Most successful swing traders use the 5 day EMA and 20 day EMA or 10 day EMA and 50 day EMA crossovers.
Moving averages are useful that they provide swing trading stop loss which is dynamic. That means the stop loss keeps on changing and gives you a trailing stop loss to protect your profits. This makes a good swing trading exit strategy.
Using moving averages with the technical indicators like RSI, stochastics or MACD make a very good strategy for swing trading. They give good profitable trades most of the times when they are adequately aligned with the technical indicators.
4. Fibonacci Retracements
Fibonacci retracement lines also make an important and reliable arsenal in your swing trading strategy. Fibonacci retracements gives us the important support and resistance levels in stock trading.
No stock moves in a straight line. It keeps on swinging up and down on its journey to upwards or downwards. A swingtrader has to use these swings to get an entry or exit from the trade and earn the profits.
The Fibonacci retracements give us the price levels up to which a stock can retrace or pullback after a move. Fibonacci retracement levels stand at 23.6%, 31.2% and 61.8%. Being a whole number, 50% retracements is also taken into account for trading.
Out of these, 61.8% is the most important retracement level and considered as the golden retracement. A stock giving retracement after a move is expected to halt around 61.8% and resume the previous trend. Hence, it can be used as a support level and an opportunity to enter the swing trade.
Again, it is important to use the retracement along with other technical indicators we talked above and see if they support the trade.
Everyday some stock show the gap ups or gap downs when the market opens. Some of them keep moving in the direction of the gap as the trading progresses. Other start retracing back to fill the gaps.
If the gap is not filled and the stock keeps moving in the direction of the gap, it is expected to continue the trend for some more time. However, there is nothing to confirm it. The stock may or may not continue the trend over the next trading sessions.
As a swingtrader, you have to play the probability and initiate the trade while keeping the stop loss at the previous day closing price. If the trade works, you should take the profits and exit or keep a trailing stop loss. Stocks are bound to return back and fill those gaps sooner or later.
These are the important swing trading strategies that work most of the times. However, in stock trading, nothing is guaranteed. It may work or it may not work.
So, then how to make money swing trading the stocks? Well, stock trading is a process. You can not be profitable by finding a swing strategy that works all the time.
Along with a swing strategy, you also have to do the risk management carefully. Risk management insures that your losses are small and you do no lose your money in few trades and become bankrupt.
Technical Indicators For Swing Trading
We saw above that we need technical indicators to get more reliability about the swing trades. The indicators act as complimentary to the chart patterns or the moving averages.
The best technical indicators for swing trading are the ones which give you rather consistently profitable trades. Of course, no indicator is very good or very bad and they are best when used in combination and they indicates the same direction for a trading signal.
Talking about myself, the best indicators for swing trading for me has been the moving average convergence divergence (MACD), the relative strength index (RSI) and the stochastics. other two indicators I use usually to strengthen my view are the Parabolic SAR and the Directional movement index (ADX).
Let us know how to use these indicators for trading!
Moving Average Convergence Divergence (MACD)
MACD is a momentum indicator. It is based on the 9, 12 and 26 day exponential moving averages. Being based on moving averages, MACD is also appropriate for trend trading.
We shall not be going into details of MACD here and if you wish, you can read it here.
MACD has a MACD line and a signal line. When the MACD line crosses above the signal line, it is a signal for potential bullish trend in the stock. When this line crosses below the signal line, it indicates potential bearish trend in the stock.
As a swingtrader, you should consider the stock for long position when there is bullish crossover on MACD. Bearish crossover signals that you should either exit a long position or go for short selling the stock.
I again and again emphasize that you do not take trading decisions based on a single trading indicator. Same is the case with MACD. Consider the above mentioned trading strategies also when analyzing the MACD.
Relative Strength Index (RSI)
Relative strength index or RSI is a very popular and widely used momentum indicator. It is a leading indicator which means it gives signals much before the moves start in the stocks.
RSI oscillates between values of 0 to 100. It is useful in knowing the overbought and oversold stocks. A level of 70 and above indicates overbought levels while a value of 30 and lower indicates oversold levels.
A stock at overbought level is expected to see correction in stock prices or profit booking in long positions. Hence, traders can opt to sell their swing trades and book the profits.
An oversold stock is expected to see buying interest and an surge in stock prices in near term. Hence, these stocks can be considered for long swing trades if they are trading above important support level or making some technical chart patterns.
Stock seeing fall in prices from RSI level of 70 to 50 and above can again resume the uptrend and move higher. Similarly, an oversold stock showing up move up to RSI level of 50 and lower can resume the downtrend and again move lower.
How To Do Swing Trading
As we have learnt about the strategies and technical indicators to be used in a swing trade, let us know how to swing trade stocks like a professional!
For getting into stocks for a swing trade, you need a trading setup or a system and a plan.
The swing trade setups consist of trading systems which give us trading signal for getting into stocks. This setup includes technical charts which should be preferable candlestick charts or OHLC charts. You include moving averages and the technical indicators we talked above in this setup.
When the swing trading strategies we discussed above, along with the swing trading indicators are aligned in one direction and give us a trading signal, for example, to buy stocks, we make a plan for the swing trade.
The swing trading plan tells us how many stocks to buy and and the entry and exit price levels based on the swing trade setups.
Regarding entry price level, you can decide that by using candlestick patterns, moving averages, fibonacci lines and gaps.
You can consider entry when the stock breaks above the moving average and sustains there on closing basis. Previous swing low becomes your stop loss for the trade.
Using fibonacci retracements, you can consider going long when stock retraces back and takes support at 38.2% or 61.8% retracement keeping stop loss at the lower retracement line.
You have to keep in mind that the technical indicators should be in the buy mode at this time.
To decide the quantity of stocks to buy, we should follow the 1% rule of trading. This rule ensures proper position sizing while keeping your risk on each trade fixed.
Now, that you have found entry level into a swing trade with the appropriate position sizing, you have to find out your exit level from the trade. Swing trading exit strategy is more important than entry plan to protect your capital and the profits.
You can either use moving averages to get an exit level from a trade. When the stock closes below the moving average you are following, the next day you exit the trade. The moving average provides you a dynamic stop loss and keeps you in the trade as long as the stock is moving in your desirable direction.
For fibonacci retracements, you can keep the next retracement level as your target and lower retracement level as your stop loss for exiting a trade.
The candlesticks and the candlestick patterns also give you the entry and exit price if you know about the candlestick patterns well.
Swing Trading Stocks
To find stocks for swing trading, you should regularly study the stock charts at the end of the day. However, it is difficult to study hundreds of stocks on daily basis to find the trading signals.
You can create a watchlist of few large cap, midcap and small cap stocks or your favorite stocks where the trading volumes remain high on daily basis. High volumes make it easy to enter or exit a trade easily and quickly.
You build a swing trading system to study the charts. We have talked about it above under the swing trade setups. Study all the watchlist stocks using this system and find the trading signals.
Select stocks using your swing trade stock screener carefully which fulfill all your criteria. Do not anticipate anything. Follow only what is shown on your trading system charts. This will also help in taking unnecessary trades and avoid overtrading.
Select only those stocks which are near the support levels. Ideally, the stock you select for swing trading should offer a risk to reward ratio of 1:3 or minimum of 1:2. The more the stock near the support level and stop loss price level, better the risk reward ratio and better the position sizing.
Swing Trading vs Day Trading
Day trading and swing trading has their own pros and cons and the advocates and critics. Every individual is different, so everyone has his/her own method or style.
Day trading is very short term trading where the traders do not carry forward their position to next trading day. They are of the opinion that carrying position to next day carries the risk of gap opening prices due to news flow after market close.
Day trading offers trading on much higher margin, thus providing cash leverage. Margin trading allows trading in big positions with very low brokerage rates.
On the other hand, swing traders carry forward their trading positions to next day and can hold the stocks for few days till they achieve their target price or market makes them exit the position.
They are of the opinion that although their is risk in carrying positions to next trading day however, they can also get gaps in their favorable direction. More money is made in gaps and by giving some time to the market by holding the trading positions.
From my personal experience, if you ask me, do swing traders make money, I would say definitely without any hesitation.
I was a day trader for quite some time but soon I realized that day trading is not for me. It gave me lot of stress, distraction from my regular job and inconsistent results.
Now I have shifted to swing trading and I am quite happy, relaxed, confident and consistent. I do not need to screen stock on daily basis to find stocks for day trading.
Swing trades usually last for 4-5 days and I just track those stocks only on my trading system at the end of the day to decide on whether to carry on the position or exit the trade.
The final word is whether it is day trading or swing trading, only important thing is trading successfully. You have to find the method suitable to you to trade equities successfully.
Rules To Swing Trading
Basics of trading successfully remains the same whether you are a day trader or a swing trader. Best swing traders are the swing traders who stick to their trading strategies strictly with discipline, research and confidence.
They back test their swing trading system and after finding it successful, follow it minimum for one year. They do not change their system if it gives them some losing trades on the trot. They know that losses are a part of trading and they just keep them short.
Rules To Swing Trading :-
- Follow the trend. Swing trade stocks in the direction of major market trend only. If you get sell signals in a stock when the markets are on the bull run, avoid that stock and prefer the stock with buy signals.
- Select swing trade stocks where trading volumes are high. Stocks with thin volumes make entry and exit difficult and have wide spread between bid and ask price.
- Choose position sizing appropriately. You must know that trading is more of a mathematics than charts and indicators to be profitable in the long run.
- Follow the stop losses strictly. Follow the written swing trading plan to keep emotions out of trading.
- Build a trading journal to keep track of your trades. Reduce the number and size of trades when facing losses successfully and be aggressive when the trades seem working well.
These are the basic swing trading tips you must adhere to for trading successfully,
It takes major market trends to make significant money in the stock markets. Trends span over a period of weeks or months. Traders who can not give such a big time to trades may use small market swings lasting for few days to make handsome money.
Trading these market swings profitably makes the swing trading. It is a quite rewarding trading method. Carrying positions to next day, although risky due to gap openings, but has the equal probability of working in our favor.
Using appropriate trading strategies and following the trading rules with necessary discipline, swing trading can make you a lot of money in the stock markets with free time to do other things (financial freedom).