What is Swing Trading?
The typical textbook will define swing trading in terms of trade duration, somewhere between 1 day and a couple weeks. We believe that the definition of swing trading is a time frame independent one. Swing trading strategies revolve around a trader’s ability to recognize probable turning points in the market. For this reason, swing trading and day trading are very similar and many of the strategies used for both can be interchangeable.
Traders must understand that no single swing trading strategy is appropriate for every market. Markets can either be directional or non-directional. In fact, they spend about 80% of the time in a range bound configuration. To be successful, swing traders need to have multiple strategies to take advantage of different market conditions.
Swing Trading Vs. Momentum Trading
The rules for swing trading stocks are almost the opposite of the rules used for momentum trading. Momentum trading can become very difficult as greed starts to permeate through your decision making process. There are very few that are actually successful at it.
The talking heads on CNBC and other others syndication outlets can generate a fever or depression for a stock. Many novice traders will jump on board, looking to score big profits with their newfound confidence in a stock which has just run up 10%. Do you ever wonder why the stock always goes the opposite way after you buy it? It probably means that you are chasing a move as it is coming to an end. The market moves in waves and euphoric buying is almost always met with fierce selling which shakes the weak hands out of the market.
Swing trading strategies work to take advantage of weaker traders. In range bound markets, they sell resistance and buy support. In thrusting markets, they sell important resistance levels and buy pullbacks off highs. Swing trading takes advantage imbalances between buyers and sellers.
Rules for Swing Trading Stocks
We are going to cover a few swing trading strategies, but first, let’s cover some high level rules for trading stocks. Firstly, a swing trading strategy can be applied on any timeframe chart; however, it is very important to understand that there are different traders who are trading different timeframes. A day trader may see a bullish chart pattern while a trader looking at the daily charts may see a bearish one. For this reason, it is recommended that you review different timeframes to uncover support and resistance areas that would otherwise be unknown to you.
Second, if you enter a trade using the 60 minute charts, do not adjust your timeframe mid trade. This is a recipe for disaster as your original reason for entry and money management rules will be thrown off. Most traders who do this have their trade go against them and fail to execute risk management strategies which eventually has them sitting in a large drawdown. Never go against your money management rules and always take a stop out if a trade goes against you.
Finally, never feel as if you have to trade. Overtrading will definitely cut your account size down. Good traders wait for opportune times to strike, much like a lion does when she stalks her prey.
Identify the Trend
As we mentioned above, you must have a strategy which is conducive to the market environment you are trading within. For example, a range bound strategy is not meant for a directional market and vice versa. You must first identify the trend and then identify the major support and resistance areas.
Drawing trend lines, identifying previous price areas which provided support and resistance, noting volume spikes, and applying standard moving averages will help a trader identify the overall trend and understand what type of swing trading strategy to apply. Trend lines should be drawn connecting 3 consecutive highs or 3 consecutive lows. In a bullish uptrend, you will be connecting consecutive lows and visa versa in a downtrend. Support is referred to as the demand line while resistance is the supply line. In an uptrend, the supply line is drawn by placing a line parallel to the demand line at the swing high between the first and second points on the demand line. This is your uptrend channel.
I like to apply the 20, 50, and 200 period EMA to my charts when swing trading as it allows me to analyze the short term, intermediate term, and long term price structure as it relates to that timeframe.
Swing trading is most effective when you put all the odds in your favor. When we find moving averages converging near Fibonacci levels, we can assume that this area is going to be a strong area of price support or resistance.
Be aware of huge volume expansions; this tends to end a move, up or down. High volume highs and lows also tend to create range bound markets which test these areas a couple times before breaking out of the range.
Finally, support becomes resistance and resistance becomes support when broken through. For example, if a stock was finding support at $25 a couple times and broke down through it, odds are that $25 will be resistance on the way back up. This applies on all timeframes.
Swing Trading Strategies
We have identified many trading strategies on mysmp, especially in our technical analysis and day trading centers. However, the most common swing trading strategy is to buy low and sell high when trading within a range. Typically, you will be able to draw 2 horizontal lines which contain price. The ADX should be below 20 and volume should remain light. Look for narrowing range bars to signal a reversal is at hand. However, once price starts creeping above or below this range, it is time to switch hats and get out your momentum based strategies for swing trading.
During a trending market, we want to adjust our swing trading strategies to apply Fibonacci retracement levels, Fibonacci extension levels, and moving averages, in addition to price and volume analysis. Remember, we never chase momentum; we just take advantage of the traders who do. Off an initial thrust, look for a retracement of 40% to 50% with price remaining above all 3 moving averages and buy this move if the setup looks good. We want to see high volume on the breakout and low volume on the pullback. We want to see narrow range bars near this area to signal that there is no more selling pressure. This strategy works best off the first major retracement which follows the initiation of trending move.
A quick note on automated trading; there is a value of what you can discern with your eyes. It becomes very difficult for a swing trading system to recognize trend changes and therefore, many of them will continue to fire off trades which should not be placed in light of the market condition. Be careful when you allow a robot to trade your money, it could be substantially lower