Swing Trading Strategies

Swing trading strategies are based on short term moves in the market which come about as an over reaction to news about a particular stock. For example, a strong earnings announcement, an unexpected fed report or a tsunami in Japan can cause a stock to jump several points in either direction. As soon as traders recognise that they have over reacted or that the news is not as bad or as good as they first thought, the price can swing back again. A jump in price resulting from an over-reaction tells a swing trader that the stock will retreat in a few days, and so he would set up a short trade. As prices fall, they will usually fall to below the fair value of a stock, and this is what swing traders need in order to set up a long trade.

Swing traders look for set-up signals within the pattern of a trend. I have reviewed an important process for identifying these signals using technical analysis. Using a combination of trend analysis (using moving averages) and pivot point analysis (using candlesticks), it is not too difficult pick up pretty solid entry and exit points. It does take some practice, but it is an incredibly powerful trading technique.

Swing Trading Strategies

While I always stress that you should keep your technical analysis simple and understandable, here are a couple of extra indicators which will help firm up your decision to make a trade:

  • Trend Analysis - this is the foundational process that you HAVE to apply when getting into swing trading. You can do well by a simple eyeball of a chart; you will do better to get an objective measure of how strong the trend is running. The firmer your analysis, the safer your trade! If you haven't done so already, read up how to run a trend analysis in a few simple steps.
  • TOP TIP: You can analyse up to 10 stocks per day by INO's Trend Analysis. Enter your symbol, and they give you the trend, with a measure from 1-100 of its strength.

  • Narrow Range Day - one of the strongest setup signals for a new swing is a narrow range day (NRD), in which the opening and closing prices are very close together. On a candlestick chart, this shows up as a doji, which is translated as ”mistake” from the Japanese, and it indicates indecision in the market. The trading range during the day may be wide, but the open and close are very similar. This happens because neither buyers nor sellers were able to move the stock in any clear direction during the day. This very often signals a reverse in the swing, and is a good indicator for an entry signal, or an exit if you are already into a trade. You can read up some more on these kinds of patterns in the section on candlestick patterns.
  • Volume spikes - when there is an increase in trading volume above the average, you can see that traders are very active in the stock. This often occurs when a reversal is about to take place. When this spike takes place on the same day that a doji shows up, you know that you are on to an almost definite swing. There are three very clear examples of this in the chart below:

The combination of these three indicators is a very strong signal to use when developing your own swing trading strategies, and you can use them to take action decisions. In the chart above, you can see a solid trend along the 50 moving average, and a volume spike wherever there is a swing about to take place within the parameters of an existing trend. There are also several doji signals on the chart, and the ones that combine with a volume spike are excellent signals for action.

As you develop your own swing trading strategies, it is important to get a clear grasp of how the process works. Once you have a good feel for this, draw up a trading plan for yourself. Paper trade for a month or two, and during that time, refine your trading plan. This way, you will make decisions based on a clearly thoght out plan that you have practiced and refined, and there will be no room for guesswork or emotional trading. When you have mastered this concept, apply the technique to options trading, and watch your profits leap up by several degrees of magnitude!

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  • On this page I discuss a slightly different view of swing trading strategies that will really help you as you start to venture into options trading. Nothing drastically new, but certainly a different viewpoint. Remember, though: Keep It Simple!


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