Swing Trading Strategies – List of widely used Swing Trading Tools & TechniquesLast Updated Date: Aug 30, 2023
In this article we will look at know everything about Swing Trading Strategies or Techniques.
We’ll understand what it means as well as the swing trading techniques and tools commonly used by swing traders.
Stock trading involves buying and selling various securities through the stock market. Earning profits for the trader is the primary objective.
Traders adopt several different trading strategies to maximize their profits.
About Swing Trading Strategies or Tools
Swing trading is a strategy that looks to profit from opportunities arising out of price trends over a short period. The period typically ranges from 2 to 10 days.
This may also increase to few weeks, depending on how the pricing opportunity plays out.
Swing trading looks to book smaller return percentages over short periods. This can eventually accumulate high returns over a long duration.
Swing trading predominantly relies on the use of various technical analysis techniques.
These techniques chart out a stock’s price pattern or trend so as to identify profitability opportunities.
The key aspect in successful swing trading is ‘timing’. Timely buying and timely selling of stocks can generate good profits in swing trading.
Swing traders use various technical analysis to generate buy and sell signals for the selected stocks. Any swing trading technique applied, primarily identifies three price points on the chart.
- The entry price at which to enter trade.
- The forecasted exit price so as to maximise profit.
- The stop loss price to exit trade so as to minimise losses.
Swing Trading Techniques include
- Fibonacci Retracement
- Support and Resistance Levels
- Simple Moving Average (SMA)
- Bollinger Bands
- Channel Trading
- MACD Crossover
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Fibonacci Retracement – Best Swing Trading Strategy
This technique is based on Fibonacci ratios of 23.8%, 38.2% and 61.8%.
In a bullish market, prices have a tendency to rise, and then reverse back down to a certain level before rising again. The converse is true in a bearish market.
Markers are placed at the Fibonacci ratio levels in the price chart to attempt to predict movement.
This technique thus involves forecasting the level at which the price will reverse, so as to take profitable buy or sell decisions.
E.g.: Let us say a stock is experiencing a downward trend. At a certain level, a reversal may take place and the price may begin to rise.
This is likely to rise up to a certain level before retracing and beginning a downward trajectory again. These retracements are likely to occur at the Fibonacci ratio levels.
A swing trader having bought stock during the downward trend begins to make a profit when the prices retrace upwards.
This trader can book his profit before the price breaches the next Fibonacci retracement level wherein a downward trajectory is likely.
Swing traders can thus use Fibonacci ratios plotted along a stock’s price chart, to take swing trading decisions.
Fibonacci is one of most commonly used Swing Trading Strategies.
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Support and Resistance Levels – Top Swing Trading Strategy
This technique works on the premise that prices swing within a specific range.
Resistance level represents the upper price level of the stock. At this level the selling demand outweighs the buying demand. This leads to a downward movement in stock price.
Similarly support level is the lower price level of the stock wherein the buying demand exceeds the selling demand.
This causes an upward swing in the price movement. Resistance level will be above market price.
Conversely support level will lie below the market price. Support and resistance levels for any stock are identified based on the historic analysis of price trends.
This is typically done over a 12-18-month period. Swing traders rely on these levels to take buy and sell decisions.
This is a widely used Swing Trading Tools in India.
Simple Moving Average (SMA) – Best Swing Trading Technique
This technique involves the use of simple moving average of prices over specific short periods. Swing traders use SMAs ranging anywhere from 5 days to 200 days.
Let’s look at an example that applies 10 and 20 days SMAs. We calculate the average price (average of closing prices) of the stock for the 10 day and 20-day period.
Each average price determined is plotted and a line is drawn across all these prices. These SMA lines are then plotted on the price movement chart of the stock to generate buy and sell signals.
Typically, the price at which the lower SMA crosses over the higher SMA, generates a buy signal and vice versa.
This is because the lower SMA crossing the higher SMA generally forecasts an upward movement in the price of the stock and vice versa.
Simple moving average is a well known Swing Trading Techniques used by traders.
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Bollinger Bands – Top Swing Trading Technique
This technique involves placing two bands, upper and lower price band within which prices are expected to move. The tool places these bands above and below the moving average line of the stock.
A formula based on the standard deviation of price of the specific stock, derived by John Bollinger determines the placement of the bands.
Generally swing traders opt to buy when the price touches the lower band on the assumption that the prices will then begin rising.
Swing traders could opt to sell when the price reaches the upper band. This is assuming that the price movement would reverse and move downwards thereafter.
Bollinger Bands is a well known Swing Trading Strategy used in Indian Traders.
Channel Trading – Best Swing Trading Tools
A channel is the range of prices within which stocks tend to move in a given time period.
Let us consider a time period of a month. Within this month, prices may move upwards or downwards within a particular range. They are unlikely to breach either of these levels within that period.
The upper price here, is known as ‘ceiling’ price and the lower price is known as ‘floor’ price. These can become the resistance and support levels for the stock.
The premise of channel trading is investor sentiment that attaches importance to the ceiling price and floor price of the stock.
The breaching of price levels within the channel can be used as the basis for generating buy and sell orders by the swing trader.
This is widely used Swing Trading Techniques.
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MACD Crossover – Top Swing Trading Tools
MACD stands for Moving Average Convergence Divergence. Swing traders use this tool to identify price trends so as to seek out profit making trade opportunities.
This technique uses two lines – the MACD line and the signal line, plotted on the price chart. When the MACD line breaches the signal line in the upward direction, it is indicative of a bullish trend.
Swing traders use this point to take a buy decision. Conversely when the MACD line breaches the signal line in the downward direction, it indicates a bearish trend.
This signals a sell decision for the swing trader. Swing traders may use any of the above technical analysis techniques. In fact they often use a combination of these so as to make trade decisions.
Owing to their complexity, a detailed study of these techniques and their utility is warranted before engaging in swing trading.
MACD Crossover is one of the most famous Swing Trading Tools available to swing traders.
Conclusion – Swing Trading Strategies
Swing trading offers several benefits to traders. As it does not require continuous monitoring it is less tedious.
Specifically, it is less tedious than day trading which requires minute to minute monitoring.
Swing trading uses detailed technical analysis to generate buy and sell signals which makes it a less speculative trading form.
On the flipside though, swing trading relying primarily on price ‘trends’ which lack certainty are susceptible to losses.
They also incur higher tax and brokerage costs than long-term trading strategies.
All in all, successful swing trading requires an in-depth knowledge of the various technical analysis tools.
A swing trader relies on a few tools that he has mastered so as to generate consistent, good profits for him.
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