In comparison to day trading, swing trading is the practice of buying trending or in range stocks for a number of days in order to profit from the move up or down. Swing traders usually hold stocks for a period of a couple of days to even a couple of months so long as the trend is still strong or a certain trading range is still intact. In this article we are going to cover some of the tricks that swing traders use on a daily basis in order to be profitable.
When to get into a trade
Swing traders usually get into a trade at the very beginning of a new trend and typically get out based on the exhaustion of the trend, after a certain number of days, or after a certain profit goal has been met. In order to be a swing trader you need to be very disciplined about your entry and exit points and must have a risk management strategy in place before you ever get into a trade. For example, if you identify that IBM stock might be getting into a new trend then you must have an exit point where you recognize your trade has gone wrong before you even get into the trade.
One way that traders identify if a stock is starting a new trend up or down is by the use of moving averages. Moving averages are the average price of a stock over the defined period. Some of the default values that traders usually look to when trading stocks are the 20, 50, and 200 day moving averages. Typically traders overlay these moving averages on top of each one to get buy or sell signals into a stock. For swing traders typically the 4 and 9 day moving averages of price work well as buy and sell signals when overlaid one on top of the other. Given that this method can produce many buy and sell signals if a security is trading within a range then it is also important to establish if a security is in fact trending or not. In the section below about technical indicators we will cover one such indicator that will let you know right away if a security is trending or not. The other way to determine if a security is trending is by looking at its price and seeing if its making higher highs and higher lows (bullish trend) or lower highs and lower lows (bearish trend).
Here is an example of how moving averages would be used when trading a security:
Notice how this signal gets you into Google’s stock very near the lows of every move higher. It is important to first establish if the security is trending or rangebound first before using this method however as using this method on a rangebound stock could give you late buy or sell signals.
The MACD indicator is an indicator that measures the bullish or bearish momentum of a trend. It is most accurate when used when a security is trending. There are a couple of ways in which it generates buy or sell signals:
- Divergence (Price goes up but the MACD histogram shows momentum going lower)
- Crossovers (When the MACD crosses above the signal line or below it)
- When the MACD crosses above the 0 line
Here is a chart showing the usefulness of this method:
As you can see the MACD crosses above the signal line whenever the price is about to move up and below it when the price will move down. If you take a look at around December you will see that the momentum of the MACD starts heading lower right before price started doing so (this is how you can use divergence as a buy or sell signal).
RSI & ADX Indicators
The RSI indicator is typically used in rangebound securities or to know when a security that is trending is near the peak of its price channel or near the bottom of its price channel. It works best however when used in rangebound stocks.
First in order to determine if a stock is rangebound or trending you can either visually determine if its trending or use the ADX indicator to determine if a stock is trending or not. A reading below 20 on the ADX indicator should tell you right away that a stock is trading between a range. A reading above 20 should tell you that a stock is trending. If a stock is rangebound oscillator indicators such as the RSI should help you identify peaks and troughs in a security and get you in at the bottom of the range and out near the top. Notice how the RSI indicator gave us a sell signal on AT&T a little before a selloff. If a security is trending then oscillator indicators such as the RSI should not be used and instead the MACD and moving averages method should be used instead to determine buy or sell signals.