Swing trading is often referred to as the "Swiss Army knife" of trading strategies due to its simplicity and versatility across various market conditions. Whether in trending or ranging markets, this strategy excels in scenarios where clear support and resistance levels can be identified. Its flexibility spans multiple timeframes, from intraday setups to medium-term positions, making it a practical choice for both long term investors and short term traders across diverse markets.
What is a Swing Trade?
Swing trading is a trading style focused on capturing price movements within a defined range on a chart. This range is typically bounded by a swing low (support) and a swing high (resistance).
Swing Low - A support level in the chart where the price bounces.
Swing High - A resistance level in the chart where the price is rejected.
Note: It is very important that a trader measures the range from the swing low point to the swing high point. You ideally want a range that is 10% or more so that the trade is worthwhile.
Here is how the swing points are plotted across a trend channel:
1. Swing trade range in a sideways channel
2. Swing trade range in an uptrend channel
3. Swing trade range in a downtrend channel
As seen in the three examples below, a swing trade can happen in a sideways, uptrend and downtrend channel. A clear trend or channel must be present first to be able to plot the swing lows and swing highs.
It is very important to remember that a swing trade is only concerned on the swing range between the support and resistance levels. This means that a swing trader is no longer concerned if the price goes up even higher after selling at the target price level. Chasing prices outside of your trade strategy will often result to losses out of panic and uncertainty.
Pros and Cons of Swing Trading
Pros
Clear signals. Swing trading provides straightforward entry and exit signals, making it an excellent starting point for beginner traders.
Adaptable to various market conditions
Consistent returns. When support and resistance levels hold for extended periods, swing trades can be executed repeatedly, yielding consistent returns.
Cons
Prone to whipsaws (when a cutloss is triggered but price quickly jumps right back up).
Prone to early profit taking. Selling at resistance levels may limit your gains, as it can prevent you from capitalizing on breakout opportunities that extend beyond the range.
How to Plan and Execute a Swing Trade
Planning
Filter stocks based on your initial trade criteria (volume, technical chart patterns, fundamental catalysts).
Scan for stocks that have a clear trend with a 10% or more swing range.
Plot the swing lows and swing highs based on the support and resistance levels.
Look for other market signals that may validate your entry and exit (RSI nearing or going below 30, Moving Average bullish crossover, MACD bullish crossover).
Place these stocks on your watchlist and remember the key levels (swing low and swing high points).
EXECUTION
Buy the stock as the price bounces from the support level.
Hold until it reaches or goes near the resistance level.
Sell on strength near or at the resistance level.
Repeat the process as long as the support and resistance levels are respected.
SWING TRADE EXAMPLES
Here are examples of Swing Trade setups across different trends. Note that each of these has a range of 15% or more making it a very profitable swing range.
1. On a sideways channel
A sideways channel with a strong support is the ideal swing trade setup. This kind of formation will usually appear as base formations after a market downtrend. As selling pressure decreases, an equilibrium between buyers and sellers form causing a stable consolidation.
Execution on a sideways channel is straightforward. Buy as the price bounces from the support level and hold until it reaches the resistance level target. Once it nears the resistance level, you can gradually sell until a strong price rejection happens. Afterwhich, you can repeat the process as long as the support and resistance levels are respected.
2. On an uptrend channel
During an uptrend channel, swing trading may not be the best strategy. This is because prices tend to pullback briefly and move higher on breakouts. Selling too early when a breakout move is highly probable will deprive the trader of a bigger profit. As such, a swing trade is only done in this market condition when a trader really needs to score a quick profit.
When an uptrend channel forms, a trendline support becomes the best point of entry for the swing trade. Buy as the price bounces from the trendline support and hold until it reaches the trendline resistance. Sell as the price reaches the trendline resistance.
3. On a downtrend channel
During a downtrend channel, swing trades can be trickier to execute since support levels will have the risk of breaking down further. As such, an RSI indicator is used alongside the trendline support to accurately identify the best bounce point.
Executing a swing trade on a downtrend channel requires more caution and analysis. When a clear downtrend channel forms, plot the trendline while taking careful note of the RSI. Buy when price bounces from the trendline support while RSI bounce near or below 30 (if a stock is fundamentally strong, it rarely will go below RSI30). Hold until it reaches the trendline resistance. Sell in full as price near trendline resistance and RSI begins to go near 50.
For instances wherein the trendline support fails to hold, a cutloss must be executed with a loss range of -2% to -3%.
In a Nutshell
When executed correctly, swing trading is a highly effective strategy for navigating ranging market conditions. As long as there are clear support and resistance levels, a trader can repeatedly enter and exit positions to generate consistent returns. By isolating these clearly defined ranges, swing trading offers a repeatable and efficient approach to navigate the markets with precision and confidence.
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