Table of Contents Show
Learn everything you need about swing trading in this article.
Swing trading: What is it?
Swing traders seek to benefit from market fluctuations over a period of a few days or weeks. Typically, they focus on stocks and use technical analysis, but the same strategy may also be applied to currency, commodities, and digital assets.
What are the best indicators for swing trading?
Trend lines
A trend line is a straight line plotted on a chart that connects a sequence of successive highs or lows. This line helps to illustrate the prevailing trend in a security’s price, as well as identify key support and resistance levels. Popular chart patterns, including trend channels, wedges, and triangles, are made up of two trend lines.
Moving averages
Averaging prices over a period of time can smooth out movements, suggesting trends and providing support and resistance. When two moving averages cross, it could be an indication that a trend alteration is imminent. Swing traders often pay particular attention to 20-period, 50-period, and 200-period moving averages.
Oscillators
Oscillators are frequently employed to measure momentum, which is the rate of fluctuation in price over a definite time period.
They are regularly used as indicators to determine when a security has become excessively bought or sold. If momentum is diminishing, it may signify an upcoming change in trend. Preferred oscillators include the stochastic, relative strength index (RSI), and moving average convergence divergence (MACD).
The stochastic moves on a range from 0 to 100. When the stochastic lines move above 80, this implies that the market could be overbought. On the other hand, when the stochastic lines dip below 20, it implies that the market might be oversold.
Fibonacci
Fibonacci retracements are based on a numerical pattern identified by the 13th-century mathematician Leonardo Pisano, known as Fibonacci.
These levels of retracement are usually considered significant levels of support and resistance. The 38.2% and 61.8% levels are particularly important, as is the 50% level, although this is not based on a Fibonacci ratio. Fibonacci extension levels can be used as possible support and resistance points, as well as profit targets.
Volume
Volume is an influential but usually unappreciated indicator that can help decide the intensity and legitimacy of price movements. For example, if you are observing a significant support level and the price breaks through that boundary with a great amount of volume, it is more probable that the trend will continue in the same direction.
On the other hand, if the price breaks through the level with feeble volume, it is a minor shift, and it is unlikely that the value will persist in the same course. This same concept can be applied to all chart patterns. The high volume serves as a form of confirmation of the correctness of the price movement.
Strategies of swing trading
Swing traders commonly use traditional chart formations as the basis of their approach. A few forms, known as reversal patterns, point to the possibility that the cost movement may reverse.
The Head and Shoulders and Double Top are two examples of inversion patterns and signify that the ongoing upswing in cost could reverse.
Continuation patterns, such as the Bullish Pennant, suggest that the current trend will carry on, and traders will be looking for a potential upward breakout from the formation.
Japanese candlestick chart patterns are also popular among swing traders. Investors can seek out candlestick patterns such as the Shooting Star, which is a bearish reversal pattern, or the Marubozu, a trend continuation pattern.
Chart patterns are a great indicator for traders, however, they can get an even clearer indication of the market direction when multiple patterns or indicators point to the same conclusion. For instance, if a Head and Shoulder formation is observed alongside a bearish signal from a momentum oscillator such as Stochastics or RSI, it provides a strong indication of the trend.
Additionally, traders can pay attention to important support and resistance levels to look for potential reversals or breakouts. These levels can be identified by utilizing trendlines, moving averages, and Fibonacci levels, and if the price manages to break through, it is expected to continue in that direction.
Swing trading: Best stocks
Swing trading is often best done with highly liquid, large-cap stocks.
Screeners can be utilized to select stocks that meet certain criteria, such as a minimum volume, price, and market capitalization. Screeners can also be used to spot stocks that are trending up, using simple moving averages such as 20- and 50-period. When the price is above one or more of these averages, it’s usually a sign of an upward trend. Additionally, traders may opt to go with stocks that are outperforming those in the same sector.
