There are a ton of different swing trading strategies so we decided cover a couple of our favorites that are easy to understand and trade.

Intro

Swing trading is generally defined as a short-term trade lasting longer than one day and less than a month. While day traders usually look to capture one piece of a more significant move, swing traders try to capture an entire leg or swing upwards/downwards. 

Swing trading comes in various forms, some trade classical chart patterns like head and shoulders, others trade the short-term sentiment readings, and others take a more quantitative approach.

Pros and Cons of Swing Trading

Pros

Takes Less Time

Swing traders can achieve reasonably similar returns to day traders in less time. Because their trades take days to unfold, they aren’t required to sit at their screens, watching each tick go by.

Day traders, on the other hand, have to continually watch their trades, as well as other markets, to look for opportunities. Day traders require more labor per dollar earned, and probably deal with more mental strain.

Less Desire to Overtrade

As a result of spending less time staring at markets, swing traders are likely less tempted to overtrade. They’re not continually thinking out their trades all day the way that day traders do, and some day traders get addicted to being in a trade and will take suboptimal trades just “be in a trade.”

Fewer Fees

Swing traders also pay fewer commissions, fees, and slippage, and these fees have a smaller impact on their trades because their profits are larger per trade.

Cons

Avoid Overnight Risk

Those of you trading the markets amid this Coronavirus pandemic know how serious overnight risk is right now, on both the long and short side. A swing trader is basically powerless to mitigating the effects of overnight risk, at least in individual stocks. Day traders can swiftly flatten their position at any time.

Benefit More From Trend Days

Under normal market circumstances, there are “trend days,” or trading sessions that trade directionally, with high-conviction the entire day, per month. On these days, a swing trader’s positions, if they’re in harmony with the trend day, will typically see nice gains.

However, a day trader can take advantage of several opportunities throughout the day. 

Swing Trading Strategies

Bull Flag on Daily Chart

A bull flag is a trend pullback setup. The setup got its name because when you trace the price action, it looks like a flag:

The pattern is one of the more conservative trading patterns. Trend pullbacks, while probably being the most accessible type of pattern to trade and having the best odds of continuation, aren’t the most exciting trades. They’re typically retracements of the recent swing high.

 The most successful bull flag patterns tend to have similar characteristics, those being:

  • A sharp impulse move higher on high volume, forming the flag pole
  • The stock pulls back a bit, in a less aggressive fashion than the pole’ descent upwards.
  • The break of the flag is a signal to enter a long position.

On most days, there are hundreds of bull flag patterns to pick from in the market, so how do you choose which trade to take? Typically, the best trades are those with high volume and momentum on upswings, and lower volume and momentum on downswings. Here are a few other criteria to consider

  • Stocks coming off a strong earnings beat
  • Stocks in leading sectors that are also outperforming the rest of the sector
  • Leading stocks of the market: in recent bull markets, this has been companies like Apple or Microsoft

Trading Off Support Or Resistance

Support and resistance trades are trend continuation trades, meaning we’re looking to find a favorable point to enter in the direction of the trend.

Trading support and resistance levels within range-bound stocks seem like a losers’ game, as the price action in range-bound markets exhibits a much higher degree of randomness than that of trending markets.

There are two prerequisites here:

  • The stock has to be trending
  • The stock must have a well-defined support or resistance level

How do we define when a market is trending? Several ways, but the first thing we want to is narrow our universe of stocks to trade. The first way to do that is to elect to trade leading stocks within leading sectors.

Now, as swing traders, that can mean the leading sector of the week, it doesn’t necessarily have to indicate the strongest sector overall. Due to money flow and sector rotation strategies, sub-industries will often have very strong weeks, only to return to the middle of the pack.

From there, we simply want to look for a steady trend upwards with a series of higher highs and higher lows (on the long side).

As we see a chart heading towards its support level, we want to ensure that we’re not buying a falling knife: a support level that will break. One way to mitigate this risk is by paying attention to momentum. When a stock makes a new momentum low on its pullback, that’s an awful sign.

 As you can see below, /ES was in an uptrend, and then sold-off heavily in late July, only to find support around $2840. However, if we look at our momentum oscillator, the histogram made a new low due to the highly aggressive price action to the downside.

This high level of downside momentum can indicate that the selling isn’t over yet, so it doesn’t make sense to institute a long position yet.

If you notice, as the price breaks into a range for a few weeks, each subsequent pullback to support was met with little momentum: a good sign. One might opt to place a buy stop above the high of the trading range after a low-momentum pullback to support to enter the pullback trade.

These swing trading strategies are a great starting point as a new trader.

Bottom Line

There’s a countless number of successful swing trading strategies. Many of the basic, repeatable patterns like trend pullbacks and support/resistance holding have a positive expectancy, but the problem comes with risk management, placement of targets and stops, and trading psychology.