Swing Trading: Main Strategies and Rules

Top 3 Best Swing Trading Strategies

Whether you’re interested in stocks, futures, or forex swing trading, you need to choose a strategy to become a successful swing trader. Not only will it help you to make the right decisions, but it'll also help you to make the best out of your swing trading.

Strategy 1: Price Action

You need a precise event (trigger) to identify the right time in order to perform a trade. In the following image, you can see different triggers taking place while the stock is in an uptrend.

Price Action Strategy

Entry Point

You need to make sure that the trade you’re interested in is worth taking before going for it. With the help of your trade trigger, you can identify your entry point. For instance, in the above image, you can understand that above the downtrend line is a good point for long. Having sufficient as well as right conditions for the entry point is important to produce a good and profitable trade.

Stop Loss

You must also manage the risk associated with your trade with the help of a stop-loss order. You can place a stop loss by using multiple ways such as ATR (Average True Range). In this method, you need to place a stop-loss order based on volatility at a specific distance from the entry price.

Profit Taking

Once you have determined that the conditions for the trade are favorable, along with the knowledge of stop loss and entry point, the next thing you need to consider is the profit potential. Keep in mind that it’s not just randomly chosen as it’s based on real-time market trends and measurements such as chart patterns, trend channels, etcetera. You'll need to establish the point where the potential profit of your trade will be based depending upon the market tendencies you're trading.

Strategy 2: Fibonacci Retracement

You can identify resistance and support levels by using the Fibonacci retracement patterns. Eventually, it also helps you to identify the reversal levels as well on the stock charts. Bear in mind that before reversing again, stocks within a trend usually retrace a specific percentage. You can explore the potential reversal levels by creating horizontal lines on a stock chart with the help of Fibonacci ratios (23.6 percent, 38.2 percent, and 61.8 percent). You can also use a 50 percent level as well (however, it's not a Fibonacci ratio) because after reaching half of the previous point, stocks also tend to reverse.

Fibonacci Retracement Strategy

Strategy 3: Trend Channel Trading

The trend channel trading strategy is highly visual and effective that occurs when the price of a certain stock bounces at least three times off a rising trendline. Moreover, once the price has hit the upper trendline, it also falls, and a buying opportunity takes place on the lower trendline's fourth touchpoint. Maybe, you also can be interested in information about types of channel trading strategies in Forex.

Trend Channel Strategy

Entry Point

The primary concept of the trend channel trading strategy is to buy the stocks you’re interested in near the trend channel’s bottom. But you need to keep in mind that you can lose a lot of money if you do it without considering the rest of the factors. One of the most important ones of those is the entry point that informs you about the right time to buy stocks. A great way to find the right entry point is to wait for the consolidation (when the price of the stock moves sideways for more than two days predominantly) slightly below or near the trend channel’s bottom.

Stop Loss

You also need to know the exit plan (Stop Loss) if your trade starts losing money in order to control risk. Selling the stock is always a good idea if the price of the stock reaches a certain point. For that matter, you can set the stop loss a few cents below the consolidation. This way, you'll know both levels even before taking the trade as the stop loss and entry points are determined on the basis of consolidation.

Profit Taking

You also need to determine whether you will exit the trade or not if it moves towards the channel’s top as planned. You can place your target at the channel’s top while placing the trade. In simple words, it means you’ll need to look at the price at which the upper trendline will intersect directly above your entry point.

How to Build Your Own Swing Trading Strategy?

Creating your own swing trading strategy sounds simple, but in reality, it's a little challenging process. That's why we have compiled a list of the most important factors that can help you to create a successful swing trading strategy. Keep in mind that the following points will serve you as a starting point, and you must not consider it a holy grail.

Signals

The primary goal of creating a swing trading strategy is to improve your chances of earning more profit. One of the most important things that you need to incorporate while creating a swing trading strategy is to understand reversal signals.

NRDs (Narrow Range Days)

NRD is a session that has exceptionally little space between closing and opening price. It usually takes place at the end of a trend, and it usually indicates a reversal. It’s known as a Doji (a Japanese word) among candlestick chartists, which literally means a mistake. In its extreme form, an NRD opens and closes at the same price, and instead of creating a rectangle, it creates a horizontal line on a candlestick chart. It’s one of the strongest reversal signals that indicate that the momentum has shifted in a downtrend from sellers to buyers or in the uptrend from buyers to sellers.

Volume Spike

Volume Spike is a session in which the volume is higher than the past days considerably, and it must not be ignored. If you find both of these signals together, then the chances of reversal are very high. It's not a wise decision to suddenly act on a solitary reversal signal, but you should always consider them and rely on both the indicator and confirmation.

Candlestick Reversal

One of the most important technical tools in swing trading is the candlestick chart that you must utilize. Tens of reversal signals that involve three, two, or even a single session can help you to identify the best timing for both entry and exit. Not only will it help you to improve your swing trading experience, but it'll also help you to increase profits and mitigate risks.

Position Sizing

If you want to become a successful swing trader, then you need to make sure your losses remain small. For example, at a given time, if you have a maximum risk of four percent and you want to minimize your portfolio risk to 0.5 percent or even less, then a 12.5 percent of the position will take you there.

0.5 percent / 4 percent = 12.5 percent.

If you’re in a market and hit the low-hanging fruit on reversals, then you’ll risk way less to ensure you keep your gains. Moreover, if you shift down your portfolio risk to 0.36 percent by keeping your trade risk at the same level, your position size will decrease to 9 percent. Of course, these numbers will vary depending upon the progression of the trade. But the main point is that you need to manage your portfolio constantly by adjusting it according to the market conditions. Moreover, position sizing serves you as one of the layers of the success equation. However, it's still one of the important ones, and you need to get it right.

Stop Loss

Not only stop loss helps you to minimize your losses, but it also allows you to determine your position size. If you're planning to go long, then the best place to put your stop-loss is just below the market price. On the other hand, if you want to go shot, then you should place the stop loss above the market price. Moreover, you should also get out of the trade if the current price of your selected stock is close to stopping loss.

For example, if you buy a stock share at 20 US dollars and its prices increase to five US dollars subsequently, you want to put your stop loss at 3 US dollars. This way, you'll lock in the profit of 1 US dollar if the price of the share decreases and reaches 3 US dollars.

Fixing profit

You can use technical analysis for fixing profit in swing trading to determine the highs and lows of the stock prices that will be taking place in the next few days. For example, you can use the ATR (Average True Range) and the resistance channel’s upper bound as a starting base.

Fixing Profit Strategy

With experience and practice, you can always augment this basic approach by using the tools at your disposal. The best way to improve the chances of your profit, it's important to trade only where the potential of your profit is three times greater than the risk. For instance, you should be making at least 30 US dollars (if the target price is reached), and the loss must not be greater than 10 US dollars (if the stop-loss price is reached).

Patterns and Indicators Working Best in Swing Trading

As mentioned, you hold on to your stocks while swing trading for several days or even weeks. It can help you to earn more profits by properly focusing on the entry and exit points. Here are some of the technical instruments/indicators that are effective for building a strategy.

Moving Averages

Observing the moving averages means looking at the past closing prices’ calculated lines. Whether you’re swing trading stocks or forex, it’s important to understand this indicator. You’ll need to calculate and compare different time periods on the chart. It will allow you to understand the average changes taking place in the market over time. We recommend you use an 4hchart with moving average settings of 30 and 50.

Relative Strength Index

For swing trading, RSI (Relative Strength Index) is one of the most powerful technical indicators. You can use this indicator to determine the ideal entry point, and it also helps you to understand short signals as well. Whether the market is flat, range-bound, oversold, or overbought, you can identify all of it using RSI.

You can determine RDI using the range from 1 to 100, where 70 might mean that the market is overbought or overvalued, and 30 could indicate that the market is oversold or undervalue.

Volume

It's one of the technical instruments that people commonly ignore, yet it's easy to use. If you're considering trends, then looking for volume is critical because market trends must be supported by volume. When a trend is going in a particular direction, you'll need to ensure that there is more significant volume taking place. If you can't see the volume, it could mean that the market is in undersold or oversold conditions.

Visual Analysis

For both experienced and new traders, it's important to look at visual patterns as well. It allows you to observe the events taking place in the market just by looking at the chart, which can help you a great deal to make an informed decision.

Swing Trading vs. Day Trading: What to Choose?

Unlike swing trading, day trading closes at the end of the day (as the name suggests). Both of the trading styles have their own strengths and weaknesses, and we recommend you choose the one that suits you the best. If you're passionate about the changing market trends and can spend more time in front of your monitor, then day trading can serve you well. On the other hand, if you don't have much spare time to spend then, swing trading could be your best choice.

Swing Trading Stocks

Trading stocks is a practice where a person tries to earn profit by buying and selling the securities like stock shares. If you do it according to the rules of swing trading, then collectively, it's called swing trading stocks.

If you want to swing trade stocks, then by accessing the stock market, you can find the list of shares of different companies. You can buy shares of any company that suits you the best to make money on the basis of swing trading rules that we have mentioned above.

Forex Swing Trading

Forex swing trading, on the other hand, takes place on the Forex market, which is far more volatile as compared to the stock market. You can make more profit by forex swing trading, but because of the high fluctuation rate, you need to have the right skills and experience.

Another important thing that you need to know about Forex swing trading is that it comes with a higher leverage level. It makes it riskier than swing trading stocks, and it can also generate adverse effects.

Best Brokers for Swing Trading

Webull - Best for Stock Swing Trading

Review Webull

Webull is one of the best online trading platforms that come with zero account minimum and zero inactivity fee. Moreover, it offers a commission-free ETF and US stocks trading environment, which makes it the best platform for stock swing trading.

Fidelity - Best for Futures and Options

Review Fidelity

If you want to swing trade futures and options, then choosing fidelity can be a great option. You can test all the functionalities that this broker has to offer by accessing its demo account for free. Other than that, the commission and fee structure of this broker is also one of the best ones in the whole industry.

Forex.com - Best for Forex Swing Trading

Review Forex.com

Forex.com, as the name suggests, is the best online brokerage for forex trading. It's one of the most successful and renowned trading platforms that offer great desktop, web, and mobile applications. Moreover, the tools and features of Forex.com also help you to take your trading experience to another level.

TD Ameritrade - Best for Professionals

Review TD Ameritrade

TD Ameritrade is one of the biggest as well as oldest US stockbrokers, which was founded back in 1975. It also offers a dedicated desktop trading platform, "Thinkorswim," which is one of the most advanced and best ones in the whole market.

Robinhood - Best for Beginners

Review Robinhood

If you're a beginner and interested in swing trading, then there is no better option for your other than Robinhood. It comes with a range of tools built on state-of-the-art technology that you can use to learn about swing trading in the best possible way.