Swing trading strategies

In this article, you will learn the basics of swing trading strategies and gain valuable insights into five of the most popular swing trading techniques and strategies commonly utilised by traders. This guide covers an example that illustrates how to swing trade stocks using a Fibonacci retracement and guides you into identifying your swing trading entry and exit points. 

What is swing trading?

Swing trading is a trading strategy that focuses on profiting off changing trends in price action over relatively short timeframes. Swing traders will try to capture upswings and downswings in stock prices. Positions are typically held for one to six days, although some may last as long as a few weeks if the trade remains profitable. Traders who swing trade stocks find trading opportunities using a variety of technical indicators to identify patterns, trend direction and potential short-term changes in trend. To cover the basics on swing trading, visit what is swing trading? 

Swing trading example

There are numerous strategies you can use to swing-trade stocks. In this example we've shown a swing trade based on trading signals produced using a Fibonacci retracement. The three most important points on the chart used in this example include the trade entry point (A), exit level (C) and stop loss (B). Any swing trading system should include these three key elements. 

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Guide to diagram:

A – Trade entry point
B – Stop loss
C – Price forecast (exit level)
D – Fibonacci technical analysis

The stop loss level and exit point don't have to remain at a set price level as they will be triggered when a certain technical set-up occurs, and this will depend on the type of swing trading strategy you are using. The estimated timeframe for this stock swing trade is approximately one week. It's important to be aware of the typical timeframe that swing trades unfold over so that you can effectively monitor your trades and maximise the potential for your trades to be profitable.

Five swing trading strategies for stocks

We've summarised five swing trade strategies below that you can use to identify trading opportunities and manage your trades from start to finish. Apply these swing trading techniques to the stocks you're most interested in to look for possible trade entry points. You can also use tools such as CMC Markets' pattern recognition scanner to help you identify stocks that are showing potential technical trading signals. Read more about our trading tools.

1 – Fibonacci retracement

The Fibonacci retracement pattern can be used to help traders identify support and resistance levels, and therefore possible reversal levels on stock charts. Stocks often tend to retrace a certain percentage within a trend before reversing again, and plotting horizontal lines at the classic Fibonacci ratios of 23.6%, 38.2% and 61.8% on a stock chart can reveal potential reversal levels. Traders often look at the 50% level as well, even though it does not fit the Fibonacci pattern, because stocks tend to reverse after retracing half of the previous move. 

A stock swing trader could enter a short-term sell position if price in a downtrend retraces to and bounces off the 61.8% retracement level (acting as a resistance level), with the aim to exit the sell position for a profit when price drops down to and bounces off the 23.6% Fibonacci line (acting as a support level).

2 – Support and resistance triggers

Support and resistance lines represent the cornerstone of technical analysis and you can build a successful stock swing trading strategy around them. 

A support level indicates a price level or area on the chart below the current market price where buying is strong enough to overcome selling pressure. As a result, a decline in price is halted and price turns back up again. A stock swing trader would look to enter a buy trade on the bounce off the support line, placing a stop loss below the support line.

Resistance is the opposite of support. It represents a price level or area above the current market price where selling pressure may overcome buying pressure, causing the price to turn back down against an uptrend. In this case a swing trader could enter a sell position on the bounce off the resistance level, placing a stop loss above the resistance line. A key thing to remember when it comes to incorporating support and resistance into your swing trading system is that when price breaches a support or resistance level, they switch roles – what was once a support becomes a resistance, and vice versa. 

3 – Channel trading 

This swing trading strategy requires that you identify a stock that's displaying a strong trend and is trading within a channel. If you have plotted a channel around a bearish trend on a stock chart, you would consider opening a sell position when the price bounces down off the top line of the channel. When using channels to swing-trade stocks it's important to trade with the trend, so in this example where the price is in a downtrend, you would only look for sell positions – unless price breaks out of the channel, moving higher and indicating a reversal and the beginning of an uptrend.    

4 – 10- and 20-day SMA 

Another of the most popular swing trading strategies involves the use of simple moving averages (SMAs). SMAs smooth out price data by calculating a constantly updating average price which can be taken over a range of specific time periods, or lengths. For example, a 10-day SMA adds up the daily closing prices for the last 10 days and divides by 10 to calculate a new average each day. Each average is connected to the next to create a smooth line which helps to cut out the 'noise' on a stock chart. The length used (10 in this case) can be applied to any chart interval, from one minute to weekly. SMAs with short lengths react more quickly to price changes than those with longer timeframes.

With the 10- and 20-day SMA swing trading system you apply two SMAs of these lengths to your stock chart. When the shorter SMA (10) crosses above the longer SMA (20) a buy signal is generated as this indicates that an upswing is in progress. When the shorter SMA crosses below the longer-term SMA, a sell signal is generated as this type of SMA crossover indicates a downwards swing.  

5 – MACD crossover 

The MACD crossover swing trading system provides a simple way to identify opportunities to swing-trade stocks. It's one of the most popular swing trading indicators used to determine trend direction and reversals. The MACD consists of two moving averages – the MACD line and signal line – and buy and sell signals are generated when these two lines cross. If the MACD line crosses above the signal line a bullish trend is indicated and you would consider entering a buy trade. If the MACD line crosses below the signal line a bearish trend is likely, suggesting a sell trade. A stock swing trader would then wait for the two lines to cross again, creating a signal for a trade in the opposite direction, before they exit the trade. 

The MACD oscillates around a zero line and trade signals are also generated when the MACD crosses above the zero line (buy signal) or below it (sell signal).

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How to swing trade stocks

Now we have reviewed the most popular swing trading strategies, follow the below steps to open an account with us, so you can get started to swing trade stocks.

  1. Open a live trading account. Open a live trading account to start swing trading stocks. You can also open a demo account if you would like to practice the above swing trading strategies in a risk-free environment..
  2. Research markets using technical analysis.  Utilising tools such as our pattern recognition scanner, you can spot trend reversals and other price signals to help inform your swing trading efforts.
  3. Choose an asset to swing trade. Once you have undertaken your research, decide which asset and time frame you wish to swing trade. Also, determine your entry and exit strategy based off your swing trading signal. For example, to buy AAPL when the price hits the support level.
  4. Use risk management conditions. Include a stop loss and take profit order to mitigate any risks. These risk management tools help keep your trades consistent and relevant to your trading strategy.
  5. Monitor your position. Keep an eye on your trade whilst it is open. Be aware of gapping and slippage, and changes within the market’s sentiment.
  6. Exit trade. If the trade has not been exited by your stop loss, close the trade as per your swing trading strategy. See our guide to creating a trading strategy template if you need help creating a plan.

Finding stocks to swing trade

When swing trading stocks it is essential to choose the right assets to trade, as bad market selection could be a major weakness in your trading strategy. Make use of these tips to enhance your market selection efforts

  • Make use of chart patterns. Use our pattern recognition scanner that can help you identify reversal patterns like a double top or triple top chart pattern. Visit our article on stock chart patterns to discover the most important chart patterns and their meanings.
  • Monitor the economic calendar. Keep an eye on the economic calendar, which can help you determine the health of a nation’s economy, and potential trading opportunities or risks in the future.
  • Factor in earning calendars. Earning calendars will help you factor in sudden price movements to your swing trading strategies.
  • Be careful when trading penny stocks. Penny stocks are highly speculative investments, so take care when trading them. Although the volatility of the penny stock markets presents high-growth trading opportunities, it also presents larger risks.

Summary

All of these strategies can be applied to your future trades to help you identify swing trading opportunities in the markets you're most interested in. The advanced charts on our Next Generation trading platform are equipped with all five of the indicators and drawing tools required to put the above strategies into practice, plus many other technical indicators and studies so you can start to craft your own strategies for specific markets.

Want to learn more about swing trading? Visit our ‘What is swing trading’ article to learn more about the theories that drives swing trading to be one of the most popular trading strategies.

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