Everything You Need to Know About Swing Trading Strategies

Are you ready to try something new?  If you’ve been trading stocks for a while, and you are looking to try something new, perhaps swing trading is for you.  Because let’s face it, sometimes the buy and hold strategy can be less than exciting.  It’s kind of like waiting for the paint to dry or the grass to grow.    

Swing trading, on the other hand, can be a little more gratifying since you are looking to profit on short term moves in a stock.  Swing trading is a broad term used to describe a number of short term trading strategies.  These strategies can also be used to trade other investment vehicles like bonds, commodities, forex, and yes, even cryptocurrencies.  For simplicity though, we will focus our trading strategy discussion on stocks, although the principles are the same.  

Swing Trading vs. Day Trading

If you’re a swing trader, your outlook will generally be longer than a day trader, but shorter than a long term investor.  A swing trader will typically hold their position for more than a day, but no more than a few weeks.  As a short term trader with this time frame, you can perhaps expect to get returns of between 5-20%.  This is different from a long-term, buy and hold strategy where an investor will hold on to his position for months or even years, with the expectation of much higher gains.

The idea with a swing trade is to hold onto a stock to profit from short term price changes or swings.  As the stock oscillates between optimism and pessimism, a swing trader will try to profit from those swings. Swing traders find opportunities by using technical indicators to identify patterns, trend direction, and potential short-term changes in trend.  A swing trade will typically include three elements:  the entry point, exit level, and a stop loss.  The stop loss and exit level may not necessarily remain at a fixed price as they will depend on the technical trigger used in your strategy.

For reference, we liked this chart on Broker Review.

Picking the Right Stocks

Obviously, a good candidate for swing trades is one that trades actively and tends to swing between broadly defined highs and lows.  Large-cap stocks would fit well into this category.  Since you are not investing for the long term, the sector you are investing in and the stock’s fundamentals matter little.  It is not necessary to look at a company’s debt levels or its price to earnings ratios.  We are not interested in the company’s long term prospects.  We are only concerned with where the stock will be in a couple of days or weeks, not years.  So we rely primarily on technical analysis as opposed to fundamental analysis.

Looking at chart patterns is one of the most common forms of technical analysis used by traders.  When a chart is showing an upward trend, most traders will go long and buy shares in the hopes of selling later at a higher price.  When a stock is on the downtrend, most traders will short a stock.  Shorting a stock means selling shares that have been loaned from a broker with the intent of buying them back at a lower price. 

When there is neither a bullish or bearish trend, opportunities exist to swing trade as well.  In such a case, the stock trades within a range.  This presents an opportunity to take a long position near the support area and a short position near the resistance.  

Pros of Swing Trading

  1. Swing traders take advantage of short-term price movements to maximize short-term profits.  The market is continuously changing, and the swing trader can trade in and out, making profits all along the way.
  2. It is relatively easy to find stocks worth investing in.
  3. Swing trading is versatile and flexible.  Swing trading strategies work with all markets including stocks, commodities, forex currencies, and more. These strategies can apply to ETFs, single stocks, and even cryptocurrencies.  
  4. Availability of tools.  There are many tools, platforms, and apps available that can help you. 
  5. Swing trading offers a great risk to reward trading opportunities.  You risk a smaller amount of your capital for a potentially much bigger profit compared to your risk.
  6. Swing trading eliminates a lot of intraday noise, compared to day trading. 
  7. Using technical indicators reduces the risk of speculative trading and helps you to make clear decisions.
  8. Unlike day trading, you’re not constantly glued to the screen.
  9. Swing trading is suitable for those with a full-time job.
  10. Swing trading is less stressful than day trading.

Cons of Swing Trading

  1. Needs constant monitoring of market conditions and analysis to be profitable.
  2. It can be very risky because it is more susceptible to market volatility.  There is a higher risk of losses beyond your initial investment.
  3. You may miss out on long term opportunities since the focus is only on the short term.
  4. You must be exceptionally good at technical analysis and master the art of interpreting charts, graphs, and technical analysis tools.
  5. Because swing trades play out over several days or weeks, you are exposed to the risks of “gaps” in trading overnight or over the weekend
  6. You are open to the risk of sudden reversals which can catch you off guard because you are not watching the screen all day.  To decrease this risk, it would be wise to use stop orders with every position.  Stop orders will lock in gains and limit losses.

Finding a Suitable Candidate

When searching for a suitable candidate for a swing trade, here’s what we can look for: 

  1. Catalyst:   We can begin by looking for a catalyst that will result in a powerful move in the stock.  A catalyst might be an earnings miss or beat, some significant news such as a pharmaceutical company beginning a clinical trial, etc.
  2. Volume:  Big moves in a short time frame are usually accompanied by large volumes.  So try to find stocks that are trading with more volume than usual.
  3. Volatility:  With great volume comes great volatility which is exactly what you are looking for if you are a swing trader.  A stock trading within a tight range won’t produce as many opportunities as one with bigger moves. 

Three Simple Swing Trading Strategies

What are some strategies?  According to one source, these are some short term trading strategies that work:

Stuck in a box.  In this scenario, a stock is stuck trading within a certain range.  The idea with this one is to capture just one swing in the cycle.  To do this, you would need to pick out the key support and resistance levels.  If the price breaks below the support level, wait for a strong price rejection (i.e. close above support) to enter your trade.  Go long and set your stop loss at some buffer (eg. 1 ATR) below the support level, and take profits before the resistance level.  You will have the highest probability of success if you exit before resistance is encountered and selling pressure steps in. 

This looks something like Trading with Rayner‘s chart.

Catch the wave. The idea with this strategy is just to capture “one move” in a market that is in an uptrend.  If a market is in a healthy uptrend, the price will tend to bounce off the 50 day MA.  In this strategy, we will be looking to capture one swing that is in line with the uptrend.  The ideal time to enter the trade would be after a pullback has ended in order to capture the next uptrend. 

How To Execute the Catch the Wave Strategy

1.  identify a stock that respects the 50 day MA.

2.  Wait for the price to come to an area of value which would be the 50 MA price before entering your trade.    

3.  Set your stop loss at some buffer (1 ATR) below the low and take profits just before the next swing high. 

Trading with Rayner, shows us it looks something like this.

Fade the Move.  For all you contrarian traders out there, this might be the strategy for you.  This strategy is more aggressive because it is a countertrend move which means that you are trading against momentum.  But if executed correctly, it will still offer a favorable risk to reward ratio.  

When the market has been trending higher and has traveled quite a distance towards the swing high (towards resistance), there may be an opportunity to take a counter-trend trade.   This means that you would trade on the next downswing.   This trade requires care because the market can quickly turn against you.  

Steps to Execute Fade the Move

1.  Identify a strong momentum move into resistance that takes out the previous high.  2.  Look for strong price rejection at the resistance level.  

3.  Go short on the next candle and set your stop loss at some buffer above the highs.  

4.  Take profits before the nearest swing low.  Remember not to stay too long in the trade as you are trading against the prevailing trend.

This is illustrated by Trade Rayner‘s chart.

Manage Your Trades

As with all trades, it is necessary to manage the risk in order to limit your losses and capture your profits.  We can never fully predict how the market will trade.  Therefore, we need to have some idea of what we will do if the trade we have entered into doesn’t hit our stop loss or reach our target profit.  

There are two ways to manage our trades.  We can do it passively or actively.  In passive trade management, we allow the market to either hit our stop loss or our target profit.  If it does neither, then we do nothing but wait. There are pros and cons to this method.  The pro is that decision making is automated for us.  The cons, however, are that you miss exiting your trade even though the market is about to reverse. And you risk having your profitable trade become a loss.

We can also use a more active approach to manage our trades.   With this approach, we will monitor how the market is trading and then make our decision on when to exit.  It is important in this case to monitor your trade on your entry time frame (or higher).  Your entry time frame is the time period on which you are basing your trend on, whether it be hourly, daily, weekly, etc.  Using a lower time frame can scare you out of a trade on every pullback that occurs.

The pros of active management are that you can minimize your losses. However, it is more stressful and you run the risk of exiting your trade too soon before you have given it enough room to run.

Trend Indicators Are Your Friend

Trend indicators are useful in helping us determine our trading strategy.  However, when deciding which indicators to use, it is important to choose a combination instead of relying on just one, as we will have a more complete picture.  An important point to keep in mind though is to avoid being redundant in choosing your indicators.  Many traders make the mistake of using indicators that show the same type of information.

There are basically three types of indicators:

  1. Trend indicators that allow you to see if an asset is currently overbought or oversold.  Trend indicators try to create a clear “channel” which will tell you whether prices are close to breaking out or returning to normal.  An example of this is Bollinger Bands.
  2. Momentum indicators help you determine the direction and strength of a current price trend.  Examples of this are the Relative Strength Index and Moving Averages.
  3. Volume indicators help identify the relationship between price and volume.  However, since these do not always occur at the same time, the volume can be used for advanced forecasting.  Two examples of these are the On Balance Volume (OBV) and Money Flow.

Popular Trend Indicators

So now let’s talk about some of the most popular technical indicators used by swing traders:

1. Bollinger Bands

Bollinger Bands consists of three lines.  The middle line represents a simple moving average (generally a 20 day moving average) of the stock’s price, and an upper and lower band plotted two standard deviations away. The closer the price moves to the upper band, the more overbought the market.  Whereas the closer the price moves to the lower band, the more oversold the market.   

Because standard deviation is a measure of volatility, the upper and lower bands coming together is called a squeeze and is a sign of low volatility.  It is considered by traders to be a good time to enter the market as it signals future volatility to come and a possible trading opportunity.  

Conversely, the wider apart the bands, the more likely it is that there will be a decrease in volatility and a possibility of exiting the trade.  Bollinger bands however do not indicate when a change may take place or the direction of a price move.  As such, they should be used in conjunction with other non-correlated indicators such as moving average divergence/convergence (MACD), on-balance volume, and relative strength index (RSI).  

For reference you can check out this site.

2. Moving Averages

Moving Averages calculates the average of a market’s price movements over a given period, smoothing out any erratic short term spikes. It is a lagging indicator since it is calculated based on past price action.  As such, it confirms trends rather than predicts them.  

There are two types of moving averages used by traders, Simple Moving Average (SMA) and the Exponential Moving Average (EMA).  The SMA takes a straight average over a set period of time and gives equal weight to all data points.  The EMA, however, gives more weight to the most recent data points and treats them as more relevant and important.  By giving more weight to recent data, it can give clear trend signals faster than the SMA.  However, it can also increase the possibility of a false signal.  Hence, most traders will use a combination of both.  

Moving averages are classified as short (5- to 50- period), medium (50- to 100- period), and long term (100- to 200- period).  They are used to determine crossover points.  A short term (faster)  MA crossing a longer-term (slower) MA, indicates a change in momentum.  A faster MA crossing a slower  MA from below indicates an impending bull move.  On the other hand, a faster MA crossing a slower one from above could be a bearish sign.

IG uses this chart as a reference.


A favored tool with swing traders is the MACD (Moving Average Convergence Divergence) momentum indicator.  It uses moving averages to identify trend direction and reversals.  It usually consists of three elements:  a MACD line, a signal line, and a histogram displaying the difference between the two. 

The MACD line is calculated by taking the difference of two moving averages, typically a short term moving average, in this case, a 12 day period, and a longer-term moving average, 26 day period, i.e. 12-day EMA – 26-day EMA.  The signal line is the 9-day EMA of MACD line.   The  MACD histogram is calculated as MACD line – signal line.   

Buy and sell signals are generated when the MACD and signal lines cross.  If the MACD line crosses above the signal line, this could signal a bullish trend and a time to buy.  If the MACD line crosses below the signal line, this could be a bearish sign, suggesting a sell trade.  A swing trader could wait for the lines to cross again before exiting the trade, as this would signal trade in the opposite direction. 

The MACD also oscillates around a zero line with trade signals generated by crossing this line. Crossing above the zero lines would be a buy signal, whereas crossing below would be a sell signal.  There is one drawback to MACD however.  It is a lagging indicator because it is based on moving averages, which are an average of historical prices. 

Source: https://www.babypips.com/learn/forex/macd

4. Relative Strength Index

Relative Strength Index measures the speed and change of price movements.  It is basically calculated by comparing the current price strength relative to past strength.  For example, a 14 period RSI will compare today’s price to the last 13 closes.  A high reading indicates that today’s price is strong relative to the previous 13 closes, and vice versa.  It is calculated using the formula:

RSI = 100 – ((100/(1+(Average of Upward Price Change/Average of Downward Price Change)). 

RSI oscillates between 0 and 100.  A stock is considered to be overbought when RSI is over 70 and oversold when below 30, but these traditional levels can be adjusted to better fit the security.  During strong trends, RSI may remain in overbought or oversold territory for extended periods.  RSI often forms chart patterns not seen on price charts such as double tops and bottoms and trend lines.  

We can also look for support or resistance to RSI.  In an uptrend, RSI remains in the 40 to 90 range, with 40-50 acting as the support.  In a downtrend, RSI tends to stay in the 10 to 60 range with 50-60 as resistance.  These ranges will vary depending on RSI settings and the strength of security’s underlying trend.  Underlying prices making a new high or low not confirmed by RSI can signal a price reversal.

Although intended as a momentum oscillator to measure how strong the momentum in the market is, most traders use it as an overbought/oversold indicator.  Overbought stocks are due for a pullback, and while oversold stocks are due for a rally.  

  Source:  https://www.fidelity.com/learning-center/trading-investing/technical-analysis/technical-indicator-guide/RSI

5. Stochastics

Stochastics is favored by swing traders because it is easy to understand and has a high degree of accuracy.  It is used to show when a stock has moved into an overbought or oversold position.  It is especially beneficial when used in conjunction with an oscillator like RSI.  

Stochastics measures the relationship between a closing price and the price range over a period of time.  Stochastics is measured by two lines, the K line and the D line.  We won’t go into the mathematical formulas used in the calculation of these two lines since the charting software will do the calculations for us.  

Suffice it to say that the slower D line is the one that we want to follow closely.  It is the one that signals major changes in the chart. When used with an oscillator like RSI, it can help us to know when to buy or sell.  For instance, if it moves above the 80 levels, it is in overbought territory, and one should consider selling.  Conversely, if it moves below the 20 levels, it is oversold, and one should consider buying.  

6. On Balance Volume

On Balance Volume (OBV) is an easy-to-use tool based on the idea that both volume and price activity are equally important.  This information is crucial for determining the strength of trends, as trends need to be supported by volume.  Trends with higher volume will be stronger than ones with weak volume. Rising volume means that there is money supporting the trend.  A lack of volume, on the other hand, can indicate an overbought or oversold condition.  

This tool is particularly useful for identifying when a breakout will occur.  Breakouts tend to follow a period of consolidation.  This period is characterized by low volume.  You would ideally want to enter a trade during this period.  As the breakout takes hold, you should see the volume spike.  A good sign is a substantial volume occurring when a trend is going in a particular direction.

Some Final Words of Caution

We have just covered some of the most popular technical indicators used by swing traders today.  If anything, we hope that it has impressed upon you the need to become an “expert” in the art of technical analysis.  Swing trading is something that requires a lot of practice and experience in order to make profitable trades.  

That said, it is something that we should consider trying once we’ve understood the risks and rewards of this trading strategy.  When just starting out, we might think about trading only with money that we are willing to lose.  And we should have clearly in mind at what point we will exit our trade so as to limit our losses.

Don’t Forget the Risk

Swing trading can be a highly risky venture.  As an individual investor, trying to outperform the market in the short term is not an easy task.  Especially when you consider that you are competing against professional traders with instant access to the latest information, technical analysis tools, and unlimited computing power.   

Even if you have done your homework and completed a thorough technical analysis, there are multiple of unpredictable factors that can affect the stock price in the short term.  Such factors include economic variables, market sentiment, and market speculation.  These factors can cause unexpected breakouts in the stock price that cannot be predicted by price charts.  In addition, you must also consider the higher commissions and taxes associated with frequent trading which may limit your profits.

Is Swing Trading for You?

Perhaps after reading all this, you are thinking that swing trading may not be for a novice trader such as yourself.  If this is the case, you might want to consider starting out on a platform such as HedgeTrade. On this platform, you can access the expertise of experienced traders to formulate your own trades. This is just one of the many low-risk trading options that are available to you.    


As always, the information in this article is for educational purposes only and does not constitute investment advice.  Always consult with your advisor before proceeding with any investment strategy. 

Learn more in our article, “How to Trail with ATR Indicator“.