Swing trading involves taking trades that you hold for more than just a single day, capturing larger price moves or “swings.” This is different than day trading where all positions are closed before the market closes each day.
Instead of the very short-term focus of day trading, swing traders look for opportunities to ride bigger trends that can play out over several days or even a few weeks. But swing trades still have a shorter-term horizon compared to traditional buy-and-hold investing.
The Technical Signals
One of the most important aspects of swing trading is analyzing charts to pinpoint high-probability trading setups based on technical signals or price patterns. Here’s a deeper look at the key signals highlighted:
Support/Resistance These levels act like a floor (support) or ceiling (resistance) that prices tend to bounce off of. When prices clearly break through one of these levels, it signals the potential start of a new trend you can trade.
Price Contraction
This refers to prices moving sideways, contracting into a tight trading range over an extended period. Just like stretching a rubber band, this price contraction builds up energy for an eventual price expansion or breakout once the trading range is broken.
Invalidation Point
This level indicates where your trade thesis is invalidated or wrong. It’s important to plan this point in advance and stick to it, preventing further losses if the trade moves against you.
Relative Strength
If a stock is outperforming the market or its sector, it indicates potential momentum building for a bigger uptrend move compared to other stocks. This relative strength makes it a better swing trading candidate.
Timeframe Alignment
Good swing traders analyze price action across multiple timeframes like the daily, hourly, and 15-minute charts. When buy or sell signals align across these different timeframes, it increases confidence in the setup.
Catalysts
Specific events or news can act as catalysts to spark bigger price moves. This could be things like earnings reports, product launches, leadership changes, etc. Swing traders look for potential catalysts that can fuel a longer price trend.
Established Trend
Analyzing moving averages helps determine the overall trend direction for a stock. Ideal swing trading setups have the potential price move aligning with that established trend trajectory.
Volume Shifts
Monitoring shifts in trading volume is important, as increasing volume can indicate institutional money flow and confirm the strength behind a price move. This adds power to swing trading opportunities.
The Three Key Strategies With those technical signals in mind, here are the three major swing trading strategies covered:
- Consolidation Breakout This strategy looks for stocks that have had prices contracting into a tight trading range over several weeks. Once the stock breaks out, either above resistance or below support, with an increase in volume, it signals a new trend in motion that you can trade.
- Mean Reversion (Short) Here you look to short sell stocks that have rallied extremely fast and high over a short timeframe, getting drastically extended above their averages. The setup is to short sell on a failed rally attempt back towards the original breakout area, capturing a countertrend reversion move back lower.
- Continuation Move With this setup, you take advantage of adding to an already established momentum move. If a stock gaps up huge on massive volume, you look to buy on a pullback to the area of the prior day’s high, looking for the momentum to then continue even higher.
Effectively managing these swing trades is also crucial utilizing stop losses and trailing stops to protect gains while letting profits run. With diligent practice, these strategies from a professional trader can supercharge a beginner’s swing trading profits.