Swing trading strategies
Broadly, swing trading can be done by the following strategies:
- Trend trading- The aim in this strategy is to take part in a larger trend and ride it.
- Breakout trading- Breakout is a stock price moving outside of a defined support and resistance level with increased volume. Once the stock trades beyond the price barrier, volatility increases and prices usually swing in the breakout’s direction.
Breakouts are perfect setups for large price swings. Swing traders enter a long position after the stock price breaks above resistance or enter a short position once the stock price breaks down below the support price.
The techniques to trade on these two strategies are almost identical since both these strategies use the same technical analysis, chart pattern understanding and trend analysis.
So as long as a trader trades within the trend, he follows the first strategy, and if he waits for trends to break, he is trading on breakout strategy.
Support & Resistance levels- This is perhaps the easiest strategy to apply swing trading. The trader has to simply find a stock that has an established support and resistance over a long period, which will allow him to enter into trades at these levels to benefit from price action. (We will learn more about support & resistance levels & how to identify these levels using Fibonacci in our next section)
For instance, if a stock reaches its established support levels, a trader can purchase at this price as historically prices have not fallen below these levels. Thus, keeping the risk reward ratio of 1:2 or higher.
Conversely, if the price reaches an established resistance level, the trader can sell at this price with the expectation that historically share price has not breached the resistance level and will fall.
In the above chart we can clearly see that over the years a support has been firmly established at ₹250-₹260 levels. This will give the trader an opportunity to buy at such levels and benefit from an up move from the support price.
Conversely, the share has a firm resistance at ₹620 levels. Everytime, the price reaches this level, high selling takes place and stock falls down. Therefore, if the price reaches this level, the trader can short sell the stock at this level with expectation of benefiting from the fall in his favor.
Presently, the price trades at ₹538, traders wanting to enter this stock, can wait till the stock reaches its resistance of ₹620 and then sell the stock with targets of 3-5%.
Swing traders may also wait for breakouts from these levels to take advantage of further upside/downside as per their trade.
It is essential to understand that swing trading aims at consistent money-making by taking small profits out of multiple trades. Hence it is best advised that traders trade within the trend with strict stop losses to avoid huge losses.