Swing trading is a trading method that tries to achieve a stock gain over a time period of a few days to weeks, unlike day trading which occurs at a much shorter time. Even if some trades may last longer than a few weeks or months, some may still consider them as swing trading instead of trend trading. Ultimately, this style of trading seeks to seize a chunk of a possible price move, regardless of how volatile it may be.
While seemingly complicated to beginners at first, Swing trading is actually one of the methods of trading many suggest to starting traders. It isn’t as extensive nor as complicated as trend trading, but traders still have successful gains if they follow through.
An upside in swing trading is that traders do not have to worry as much as day traders do when it comes to bidding, asking, and commissioning taking up majority of your profits.
Swing trading involves fundamental and technical analysis for traders to spot price changes and to avoid unproductive hours while in the market. Below is a list of indicators that work best with swing trading.
Like day trading, Moving Averages, On Balance Volumes, and Relative Strength Index also work extremely well with this method of trading.
TECHNICAL INDICATORS FOR SWING TRADING
On-Balance Volume (OBV)
An OBV displays the correlation between the price and number of shares traded. It uses positive and negative volume flows to generate a single one-line indicator of buying and selling pressures. The ultimate significance of the OBV and where the information truly is depends on the action and trajectory of the OBV line.
Price changes are indicated if the price trend is increasing but the OBV line is stable or when the price is decreasing but OBV increases or remains flat.
Stochastic Oscillator Swing Trading
This indicator is, like RSIs, a momentum indicator. It functions to provide traders a comparison between the closing price of an asset to its wide range of prices in given time period. What distinguishes a stochastic oscillator from an RSI? The stochastic oscillator stands on the idea that the closing price of a stock should close in the direction or hover around the same direction as the current trend that is visible.
If the RSI was designed towards the speed of price change, stochastic indicators were made for steady trade ranges. Up to this day, this indicator is used to determine whether a stock is overbought or oversold. The numbers range from 0 to 100, with trigger and signal lines moving up and down. Once these two lines intersect, it is considered as a trend reversal signal. Take note that the divergence of the lines is just as important and as telling of trends as the convergence.
It’s true that stochastic oscillators are indicative of possible trend reversals, but this does not apply every single time. Some strong trends may remain overbought or oversold for an extended time frame. As an alternative, it is best to treat this indicator as a way to find clues about trends shifts when swing trading.
Best Rsi Settings For Swing Trading
An RSI evaluates magnitude of recent price changes by looking at the stock’s previous performance and its volatility. The score generated by the RSI can be used to determine the overbought or oversold of conditions of the asset.
If the RSI reading is between 70-100, it is an indication that the stock is overbought and trend reversals or corrections will likely happen. If the score is from 0-30, the stock is now considered oversold and again signal for a bullish trend reversal.
For optimal results, it is best to adjust the RSI indicator period to 10 days so that it is more responsive and dynamic. If left unchanged, the settings are more likely geared towards long term trends. That is not what you want as a swing trader.
SWING TRADING STRATEGIES
Does Swing Trading Work?
Swing trading does work! Most successful day traders have experience with swing trading, many still swing trade.
How Do You Identify Swing Trading Stocks?
The best stocks for swing trading include large-cap stocks that constantly switch between strongly defined high and low extremes. Swing traders typically look for several different chart patterns, like moving average crossovers and triangles, in a stock to predict breakouts or breakdowns.
Once traders have gotten a piece of the expected price change, they proceed to the next possible stock. Traders generally perceive their exit in a trade when this piece of price change has nearly reached the upper or lower channel line. Taking their profits with too much precision may actually cost the loss of the whole chunk they were initially trying to get.
How Much Money Do You Need To Be A Swing Trader?
If you are planning to get involved in swing trading, you might be asking yourself how much money you need to swing trade stocks. Good news for you, there’s no such thing as a capital requirement to participate in swing trading. Only day traders are required to maintain a balance in their account.
Thus, the capital you really need to get started on swing trading depends on your position size, account risk, and trade risk. Many suggest to start trading with at least $5,000 to $10,000 as your capital in order to avoid pitfalls and major losses. Some even use the formula of combining the risks to have an estimate on how much capital is required:
Capital Required = trade risk x position size x (100% / account risk percent)
Falling under these balances might cause one to risk too much on just one trade.
Choosing to start with a larger balance should not negatively affect the results of your trading in terms losses dropping you below the minimum capital.
As an additional tip, it is also best to have a goal of about 5% to 10% when it comes to profits. Keep in mind that a swing trade lasts for about 10 days on average, therefore, these small gains have the potential to add up and result in a large return rather than spending all your time on a 25% profit.
One consequence of a swing trading that relates to its time frame is that a trader never knows how the stock will open tomorrow. A lot can happen in between the time a stock closed and when it opens the following day, thus, swing traders need to be cautious.
BEST TECHNICAL INDICATORS
Which Technical Indicator Is The Most Accurate?
Moving Averages (MA)
The lines of a Moving Average fluctuate above and below zero to show momentum and trends that it is able to foresee. To determine the strength of a trend, observe how far away the current prince and trend are from the MA. The farther away it is, the weaker the trend is. This helps a swing trader identify possible reversals and look for entry and exit points.
Furthermore, If the MA lines are above zero for a steady period of time, an upwards trend is likely happening and is a signal for potential buys. Conversely, if the lines are below zero, then a downward trend is expected and hints for selling.
A MA is considered as bullish if it rises and crosses above the signal line while a bearish crossover is when the lines falls below the signal line.
WHAT ARE THE BEST TECHNICAL ANALYSIS INDICATORS?
Price Rate of Change Indictor (ROC)
An ROC indicator is a momentum indicator that tells the percent change in price between the current price and a designated price from a specified time. It is focused on the recent closing prices and much older closing prices. The relative movements of the price, used by taking the differences of their difference, can be gauged on strength in order to interpret trend direction.
The indicator is plotted against zero and if the ROC is increasing (a strong uptrend), it gives trader the pressure to buy. On the contrary, a decreasing ROC means the current closing price is below the price selected x days or periods long ago. Therefore, this downtrend implies selling of the stock.
One possible hindrance from using an ROC is the way its calculation gives equal weight of price between the current one and that of x periods long ago. Because of this, it is best to use ROC as, again, a confirmation tool on a trend rather than an actual signal.
Commodity Channel Index (CCI)
A CCI indicator gives a measurement of how much the price of a stock has deviated from its average statistical price. This indicator is often used when an investment vehicle is close to being overbought or oversold. Analysis of the CCI can help traders decide whether or not they should enter or leave a trade and other important vital decisions involving trade actions.
The CCI is commonly used to detect divergences— the indicator is unable to grow above its previous maximums, leading into divergence once the price has reached a new maximum. As expected, this will lead to price correction.
As mentioned earlier, conditions of a stock being overbought or oversold can be detected. If the CCI show values above +100, it signals overbuying; values from +100 and below indicate overselling.
How powerful are these indicators?
As you might have already heard from anyone before, always remember that indicators do not decide how a market will act. Instead, it is a tool used to confirm what is or will be happening to the market.