Please read this blog to learn about swing trading and its strategies. We will talk about five swing trading techniques commonly used by stock traders to identify a stock’s entry and exit points.
What is Swing Trading
Swing trading is the trading strategy that one can use while trading assets. The idea is to hold positions for one or more days and profit from the “swings” or the price fluctuations. Unlike the day trading strategies, the stocks are held for more than one day but shorter than buy and hold strategies that may last for several years.
In swing trading, the trader relies on market volatility and liquidity and tries to capture the short and medium-term gains. Swing traders make their profits from the anticipated price movements of their trade. This trading strategy generally uses technical analysis. One can also rely on financial analysts, who study an asset’s momentum signals (highs and lows) for 52 weeks and give their buying and selling recommendations.
Here are some key points that one must understand before swing trading:
- It involves opening fewer positions, which have a higher potential of either gain or loss, as the prices can fluctuate substantially. One needs to analyze the patterns and price trends of the asset before investing.
- The swing trading generally works on risk/reward ratios based on target profit and stop loss. Based on price fluctuations and technical indicators, one can either make a profit or a loss.
- Typically, a swing trader holds the position for more than one trading session but not longer than a few months. Swing trading is generally a low-time commitment. During a volatile market condition, the trade may occur during a single trading session. But this is a rare situation; generally, the trade lasts for several weeks or months.
Let us now talk about some commonly used Swing Trading Strategies:
- Fibonacci retracements:
Fibonacci numbers are nothing but a sequence of numbers wherein the sum of the previous two numbers is the third successive number. When we use swing trading, we usually draw Fibonacci retracements by simply drawing the trend line between two extreme points. Hence, the horizontal lines are drawn to show where the support and the resistance are likely to take place. A series of at least six such horizontal lines at the Fibonacci level is drawn, which intersect the trend line. Each level depicts a percentage. The most used Fibonacci retracements levels are 61.8 percent and 38.2 percentage. Other levels are usually 23.6 percent, 38.2 percent, 50 percent, 61.8 percent and 100 percent.
Support and resistance triggers:Support and resistance are nothing but a price level which helps the traders take a call on whether to sell or buy the particular stock!
Support is usually defined as a point(price level) where the stock is expected to pause its downtrend movement as there is a demand for that stock. Resistance, on the contrary, is a point(price level) where the stock is expected to pause its current upward movement. The price level is where the stock might start falling due to selling interest.
Traders usually track the support and resistance triggers as an entry or an exit point from the particular stock.
Channel trading:Channel trading is a strategy wherein you draw parallel lines following the resistance and support levels. These parallel lines are also called channels. Traders often buy or sell the stocks taking the help of these channels. They usually sell the stocks at the upper resistance level and hold the lines when the stock moves between the parallel trend lines. In case the price goes out of a trading channel towards the upside, it means that the stock will continue its upward journey. The stocks usually move upwards, downwards, or sideways on the chart. Generally, the traders buy the stocks at the lower support lines.
The technique allows traders to easily compare short, medium, and long-term trends during large periods.
Simple moving average (SMA) It is one of the strategies that traders use to ignore daily price fluctuations. A simple moving average is generally calculated using the average of different ranges of prices by the number of periods during that stage. The common simple moving average levels are 50-bar, 100-bar and 200-bar. The short-term level helps determine the short-term trends, the 100-bar helps to use the intermediate trend, and the 200-bar helps determine the long-term trend. In short, the simple moving average technique will tell you whether the stock price will continue to grow or go downwards. - MACD Crossover
MACD, which stands for Moving Average Convergence Divergence, is an important swing trading strategy to identify the bullish and bearish trends in the market. Analysts use the MACD indicator to show the relationship between two moving averages, which is between slow-moving and fast-moving averages. Let’s look at the formula for calculating MACD. Analysts substrate the 26-bar levels from the 12-bar levels. The difference between the two levels is then depicted as a MACD line on a histogram.
Let us now discuss some advantages and disadvantages of Swing Trading Strategies:
- Compared to day trading, swing trading can see lesser but more significant profits as the position is open for a longer duration.
- Since the trader stays longer in the market, price fluctuations can be pretty drastic. This means greater chances of loss and gain. If the market moves in the predicted direction, the trader makes a profit, or they’ll make a loss.
- A swing trader can have a diverse portfolio of stocks, commodities, bonds, futures, currencies, and cryptocurrencies.
Conclusion:
Like any other trading strategy, swing trading strategies have associated risk factors, and one must carefully analyze the technical indicators before investing. One must set the parameters for market entry and exit. However, these swing trading strategies are relatively easier to understand and implement.
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