Swing Trading Strategies 

What Is Swing Trading?  

Swing trading is a way of trading that aims to generate profits from stocks (or other financial assets) over a period of a few days to weeks. 

Rather than holding investments for a long period, swing traders attempt to exploit price swings—short-term ups and downs. They look for points where the price is likely to stop falling (support) or stop rising (resistance). They then buy when the price bounces off support or sell when it reaches resistance. 

Unlike day traders, who make many quick trades within a single day, swing traders aim for larger price movements and hold their trades for longer periods. To help them determine when to buy and sell, they use various tools to analyze price charts and patterns. 

Swing Trading Example  

Let’s analyze the Apple Swing trading scenario in a slightly different way, based on the price chart shown: 

Imagine a seasoned swing trader closely monitoring Apple (AAPL) stock. They will notice that the price has stabilized in a range between $185 and $195 during June and July. What catches their eye is the appearance of a bullish “cup and handle” pattern on the chart. This pattern often indicates that the price is poised to move upward, and the trader waits for the stock to break above its recent high in late July to buy. 

Before actually buying, the trader conducts some research and checks a few other things on the chart: 

• They notice that the overall picture, since May, shows that the stock has been in an uptrend, rising from below $165 to its current level. 

• The sideways movement (the rectangle pullback) after this initial rise appears to be a period of “accumulation,” with neither buyers nor sellers making a real profit. 

• Trading volume appears largely consistent. 

• The stock price remains above its important long-term price averages. 

Then, in mid-July, the trader noticed what he’d been waiting for: Apple’s stock price clearly pushes above $195, with more trading activity than usual. This confirmed what he’d observed earlier, and he decided to buy (go long) at $196. To protect himself, he placed a stop-loss order around $185, just below the low point of the handle pattern. After the purchase, the stock took off, rising more than 15% before pausing. 

The trader had an initial target of selling between $205 and $210 to take profits. However, as Apple’s stock continued its strong climb over the summer, reaching $230 by early September, he decided to hold onto the position and potentially profit further. He adjusted his stop-loss order upward, using the 20-day moving average as a trailing stop. 

By mid-September, the stock began to look a bit weak, retreating from its high. This was the first significant decline since the breakout, but it found support around $216 (you can see this as the horizontal blue line on the chart). As the stock rallied again toward $230 in early October, traders began to see some warning signs: 

• The price hasn’t risen much from its September peak. 

• Technical indicators, such as the Relative Strength Index (RSI), are showing “negative divergence,” which could indicate fading upward momentum. 

• Trading volume during this recent rise is lower than during the initial significant climb. 

Finally, when Apple’s stock price fell below the $216 support level in mid-October, the trader decided to exit his position. He sold his shares at $215, realizing a profit of $19 per share, equivalent to a 9.7% gain on his initial investment. 

Five Swing Trading Strategies for Stocks  

Here are five swing trading strategies you can use to spot trading opportunities and manage your trades from start to finish. Try applying these techniques to the stocks you follow to see if you can identify potential entry points. You may also find tools like CMC Markets’ Pattern Recognition Scanner useful for identifying stocks showing potential technical trading signals. 

Fibonacci Retracement 

The Fibonacci retracement pattern helps you identify potential price reversal points on stock charts by identifying support and resistance levels. Often, after a price move, stocks retrace by a certain percentage before reversing. By drawing horizontal lines on a stock chart at key Fibonacci ratios (23.6%, 38.2%, and 61.8%), you can identify potential levels where a reversal may occur. Many traders also pay attention to the 50% level, even though it is not a Fibonacci ratio, because stocks often retrace after retracing half of the previous move. 

For example, if a stock is in a downtrend and its price moves back up to the 61.8% retracement level (which would then represent a resistance level), a swing trader might consider entering a short-term sell trade. The goal is to exit this sell position for a profit when the price declines to the 23.6% Fibonacci level (which represents a support level) and then rebounds. 

Support and Resistance Triggers 

Support and resistance lines are fundamental to technical analysis, and you can build a successful swing trading strategy based on them. 

A support level is a price point or area on a chart below the current market price where buying pressure is strong enough to overcome selling pressure. This causes the price to stop falling and rise again. A swing trader will seek to buy when the price bounces off the support line, typically placing a stop-loss order just below the support line. 

Resistance is the opposite of support. It is a price level or area above the current market price where selling pressure may outweigh buying pressure, leading to a reversal of the upward price trend. In this case, a swing trader may enter a sell trade when the price bounces off the resistance level, placing a stop-loss order above the resistance line. It is important to remember that when the price breaks through a support or resistance level, their roles reverse—the previous support level becomes resistance, and vice versa. 

Channel Trading 

This swing trading strategy involves finding a stock that exhibits a clear trend and trading within a defined channel. If you draw a channel around a stock price in a downtrend, you may want to open a sell position when the price bounces off the upper line of the channel. When swing trading stocks using channels, it’s important to trade in the direction of the trend. Therefore, in our downtrend example, you would only look for selling opportunities unless the price breaks out the channel upwards, which could signal a reversal and the start of an uptrend. 

10- and 20-day SMA  

Imagine you’re monitoring a stock’s price movements on a chart. To understand daily ups and downs, traders often use simple moving averages (SMAs). Think of a simple moving average as a line that smooths price data over a set number of days. For a 10-day simple moving average, you take the stock’s closing price over the past 10 days, add them together, and then divide the result by 10. You do this daily, and connecting these average prices creates a smooth line. A 20-day simple moving average does the same thing, but monitors the closing prices over the past 20 days. 

Now, here’s a swing trading idea: 

• Buy signal: When the faster-moving 10-day simple moving average crosses above the slower-moving 20-day simple moving average, this is often seen as a sign that the stock price has begun an upward trend. This crossover indicates that it may be a good time to buy. 

• Sell ​​Signal: Conversely, when the 10-day simple moving average crosses below the 20-day simple moving average, it may indicate the beginning of a downtrend. This crossover may signal a selling opportunity. 

Remember that these simple moving averages (SMAs) can be applied to different time frames on the chart, whether you’re looking at minute-by-minute or weekly data. Short-term simple moving averages (such as the 10-day) react to price changes more quickly than longer-term simple moving averages (such as the 20-day). 

MACD Crossover 

MACD is another popular tool for swing traders, helping to identify trend direction and the potential for reversals. MACD uses two moving average lines: the MACD line and the signal line. 

Here’s how the crossover system works: 

• Buy signal: When the MACD line crosses above the signal line, it indicates that the stock’s momentum is shifting upward, and it may be a good time to buy. 

• Sell signal: When the MACD line crosses below the signal line, it indicates a potential downward trend, signaling a potential selling opportunity. 

Swing traders using this strategy often wait for these crossovers to occur and then take a position. They then hold the trade until the two lines cross again in the opposite direction, signaling the time to exit the trade. 

MACD also has a zero line. If the MACD line crosses above this zero line, it can also be considered a buy signal. Conversely, if it crosses below the zero line, it can be interpreted as a sell signal. 

Advantages and Disadvantages of Swing Trading  

• Advantages 

• You won’t face the intense and constant pressure of day trading, as you make moves throughout the day. 

• Swing trading aims to capitalize on a significant portion of price changes (swings) in the market, which can lead to good gains in the short term. 

• You can often make trading decisions simply by looking at charts and indicators (technical analysis), which makes things easier. 

• Unlike day traders, you typically don’t face the restrictions of making a large number of trades in a short period of time. 

• Disadvantages 

• Because you hold your positions overnight and over weekends, you’re vulnerable to any unexpected news or market shifts that occur when you’re not actively trading. 

• If the market suddenly reverses, you could face significant losses on your open trading. 

• By focusing on short-term swings, you could miss longer, more impactful trends that persist over weeks or months. 

• While less time-consuming than day trading, swing trading requires more attention and effort than buying and holding investments for the long term. 

Forex Swing Trading: When the Trends Turn Against You  

What can happens if a swing trade isn’t closed in time? 

Imagine you’re in a swing trade. Perhaps you buy GBP/USD because your trading strategy gave you a “buy” signal. Everything looks promising for a while. 

However, the market can produce unexpected surprises. Imagine a major, unexpected event—such as the UK’s Brexit referendum results being announced in the middle of the night. Suddenly, the value of the pound sterling plummets, and the GBP/USD pair drops sharply in a very short time. 

If you had kept the buy trade open without any protection, you would have been in a losing position. This sharp and sudden price drop could have resulted in huge losses, possibly resulting in the loss of a significant portion, or even all, of my trading money. 

This example demonstrates the importance of having good risk management rules in swing trading. If you don’t clearly define your goals through “take profit” orders (to automatically close the trade when you reach your desired profit) and “stop loss” orders (to automatically close the trade if it moves against you beyond a certain point), you are exposed to risk. An unexpected market move can occur at any time, and without these safeguards, you could face significant financial losses. 

Swing Trading vs. Day Trading  

First, there are day traders. These traders are fast-moving, entering and exiting trades within the same day. They don’t like to hold any positions overnight, so they aren’t affected by any important news that may break while they’re asleep. 

Then, there are swing traders. They operate a little differently. Their trades last longer, typically from a few days to a couple of weeks. They try to exploit large price fluctuations, those “swings” that occur over several days, rather than just minor ups and downs within a single day. They look for chart patterns that repeat over several days to make their moves. 

Many people find swing trading attractive because it’s a nice middle ground in terms of trading frequency and time commitment. 

You’re not making trades at the pace of day trading, so it doesn’t require as much of your constant attention. At the same time, you’re aiming for larger gains than you’d typically see in a single trading day. 

Swing Trading vs. Long-Term Position Trading  

It is very important to understand the difference between swing trading and position trading in the world of CFDs because each has its own set of features and benefits. 

Consider position trading as a long-term perspective. Instead of focusing on daily price movements, traders who use this approach hold their trades open for longer periods. They rely heavily on fundamental analysis—which looks at the underlying value and long-term potential of an asset—to find opportunities. Technical analysis, using tools such as the 200-day moving average, helps them identify the right times to enter and exit these long-term trades. While it may be considered less risky than quicker trading styles, position trading typically requires significant capital and a deep understanding of the market. 

In contrast, swing trading aims to profit from price swings that occur within major trends. Traders typically hold their positions for a few days or a few weeks. Unlike position trading, swing trading relies more heavily on technical analysis. Swing CFD traders attempt to capitalize on these market swings by trading things like breakouts (when the price strongly exceeds a key level), bounces off support levels, and reversals at resistance levels. 

Which One to Choose? 

The choice between position trading and swing trading depends on what you’re looking for and the current market situation. If you’re a long-term investor looking for more stable growth, position trading may be the best option. While, If you prefer active trading over shorter time frames, swing trading may be more appealing. 

No matter which strategy you choose, remember that doing your research and properly managing your risk are essential steps to successful trading. 

Technical Indicators for Swing Trading  

Swing traders rely heavily on technical analysis to feel confident in their trades. This involves studying past price patterns and current price action to identify good entry and exit spots. 

Here are three common tools they use: 

1. Relative Strength Index (RSI) 

Think of the Relative Strength Index (RSI) as a measure that shows the strength of a current trend. It can also determine whether a stock has risen significantly, making it potentially overbought (i.e., it may be overpriced and poised to decline). Conversely, it can also determine whether a stock has fallen significantly, making it potentially oversold (i.e., it may be undervalued and poised to rise). 

The Relative Strength Index (RSI) is assigned a score between 0 and 100. If the score exceeds 70, the stock is often considered overbought. If it drops below 30, it is often considered oversold. 

2. Moving Averages (MA) 

A moving average is used to determine the average price of a stock over a specific period of time. This could be the average price over the past 30 days, 50 days, or even an entire year. A moving average draws a line on a chart that smooths out the daily price movement, helping you see the overall trend. 

It’s important to note that a moving average shows what’s happened, so it’s used to confirm an existing trend rather than predict a new one. Therefore, so it will always lag slightly behind the real-time market price. 

A common swing trading technique using moving averages is to look for crossovers between two different moving averages—one that reacts quickly to price changes (such as the 50-day moving average) and one that responds more slowly (such as the 100-day moving average). When these two lines cross, it could signal a trend change. 

If the faster 50-day moving average crosses the slower 100-day moving average and continues to rise, it could signal the beginning of an uptrend (a bullish trend). If the faster 50-day moving average crosses the slower 100-day moving average and continues to decline, this may indicate the beginning of a downtrend (a bearish trend). 

3. Stochastic Oscillator 

The stochastic oscillator is another tool that helps measure momentum, and is similar to the Relative Strength Index (RSI). It typically analyzes a stock’s price over the past 14 trading days, comparing the most recent closing price to the price range over the two-week period. 

This indicator clearly shows when price momentum may be slowing, which can sometimes occur before actual trading volume reaches its peak. This makes it a useful indicator for swing traders. 

The stochastic oscillator also has two lines: a solid black line (the indicator) and a red dotted line (the signal line). Like the RSI, its scale ranges from 0 to 100. If these lines exceed 80, the stock is generally considered overbought. If they fall below 20, it is considered oversold. 

FAQ’S 

How Can I Start Swing Trading?  

To get started with swing trading, you’ll need upfront capital to enter into a position. You’ll also find it very helpful to have charting software and a system for analyzing price patterns and indicators. Furthermore, it’s generally recommended to understand simple moving averages and trading channels to help you plan your initial trades effectively. 

How Much Money Can I Make Swing Trading?  

While swing trading can be highly profitable if used correctly, there are a few things to keep in mind. Because you typically hold trades for several days or even weeks, hoping the price will move in your favor, other trading methods that aim to generate faster profits may generally yield better returns. 

Swing trading also relies heavily on understanding and using technical analysis—that is, looking at charts and indicators to predict price movements. If you’re newer to investing and don’t have a solid understanding of these techniques, you may find yourself making more losing trades than winning ones. 

Finally, the overall market condition plays a significant role. If the market doesn’t move much or doesn’t have much price swings (low volatility), your chances of making money through swing trading will be limited. 

Is Swing Trading Risky?  

Compared to other short-term trading methods, swing trading involves less risk. Because it relies on technical analysis and is limited to holding trades for only a short period, there’s a smaller chance of being left with a position you can’t easily sell. 

But, swing traders still need to be accurate when determining the right times to buy and sell. If these entry and exit points are miscalculated, there is still the potential for losing money. 

In conclusion, success in swing trading depends on a combination of knowledge, strategy, and careful risk management. Whether you’re drawn to the elegance of Fibonacci levels, the simplicity of support and resistance, or the predictive power of moving averages and oscillators, a deep understanding of these tools and a disciplined trading approach are crucial. 

Before immersing yourself in the world of swing trading, it’s advisable to arm yourself with information, practice on a demo account, and always prioritize protecting your capital. By understanding the dynamics of price swings and applying sound trading principles, you can navigate the market with greater confidence. Join naqdi to receive market insights, analysis, and tools that will help you trade with confidence.