3 popular swing trading strategies for stock
trading
Swing trading is not
particularly unique in comparison to other trading styles, and the swing trading strategies we discuss
here are not exclusive to stock trading. However, the trading approaches usually applied for swing
trading stocks can be categorized into three major swing trading strategies: trend-following, momentum
or breakout, and mean-reversion swing trades.
Now, let’s dive deeper into each
of these swing trading strategies for a more comprehensive understanding.
Swing trading strategy no.1:
trend-following
Trends in the markets usually
move in waves — impulses and corrections. The average impulse phase lasts for 3-10 days, including days
of a big range and days of small ranges.
A reversal – or a potential
swing low – is when a correction phase turns back into an impulse phase.
Swing traders aim to get into
the trade early and exit near the potential swing high.
An example of a
trend-following swing trading opportunity. The price tests a dynamic support area, showing a
responsive activity, and continues to move in the direction of the trend again. Source:
Tradingview.com
Identifying reversal points for
swing trading
As a swing trader, the key
element of trend-following is correctly identifying the swing low (or for a downtrend, swing high). To
do that you need to determine support areas to make sure that a price reversal is not temporary but has
the potential to transition to a more meaningful move.
For a moving trend, support and
resistance levels are usually dynamic. This means they move with the price. Static support and
resistance levels, on the other hand, are linked to specific prices only.
Dynamic levels exist in the form
of trendlines, channel borders, and moving average indicators as seen in the three examples below.
Three patterns for
trend-following swing trades: The square signifies a potential entry point. The first pattern
indicates an entry near the trendline. The second pattern shows two potential entry points near a
lower channel border which acts as a support. The third pattern shows an entry point around the
moving average. Source: AthenaAvo
Once the price enters a support
area, you will need to keep an eye out for some kind of a reversal pattern, for example, a confirmed low
or a ‘ring’ low. Usually, it is visible when there’s a new daily candlestick with a lower low and a
lower high, after which the price breaks it to the upside. As seen in the chart below, if the displayed
situation happens, it might be an indication of a possible reversal and a point where one can take a
directional risk.
In this swing trading
bullish pattern for Mastercard stock in 2023, we can see the reversal of the moving average and an
opportunity for building a bullish swing trade. Source: Tradingview.com
Exiting a trade is a different
story. You may need to apply different strategies, such as a trailing stop, or even a fixed profit-loss
ratio. A position management swing trading strategy depends on the market you are trading. For example,
stock markets tend to create elongated price swings, which last for 5-10 days, while currency markets
(forex) usually make shorter price moves ( of between three and five days).
Swing trading strategy no.2:
momentum trading
Momentum techniques for stock
markets are similar across different time frames and asset classes and assume buying something that is
already priced high to sell it even higher (for selling, it’s vice versa). One type of momentum approach
includes a breakout trading technique, when a trader hits the market aggressively as it tries to cross
some level or a border of a range.
As applied to swing trading,
momentum trading usually means still moving with a stronger-than-usual trend, and entering positions
when price is away from the support or resistance zones.
It works as follows: if the
price moves substantially higher than the dynamic support area, it is unlikely that it will reverse
anytime soon. This usually means price discovery and a continuation of a current trend.
In this case, you would not wait
until the price pulls back to the support (since it would be extremely unlikely). Instead, you need to
monitor your trade for a continuation chart pattern and spot the moment of a breakout of its trendline.
The chart pattern may be in any shape: a triangle, flag, pennant diamond, so understanding the various
chart patterns is key here.
Here we have an example of
a momentum swing trading entry. The price emerges from a short-term trading range and continues
moving in the direction of a trend above the border of the trading range. This is known as a
‘breakout’. Source: AthenaAvo
As strong trends usually move
fast, it doesn’t take much time to complete a consolidation (the area that establishes a chart pattern
of continuation). You will need to act relatively quickly and operate with quite small time frames (such
as M30/H1).
The rule of thumb is that the
location of the price should be far from the dynamic support area and positioned at 2.3 - 3 levels of
average daily volatility. The example on the chart below shows a quick strong trend for NVDA stock in
2023, which pushed the price $80 above the support area (the area between moving averages below). The
average daily volatility for this stock at the time was around $8. Therefore, the location of the price
was 8 times higher from the support than the average volatility. It would be an extremely unlikely
scenario for the price to reverse, so the continuation of a trend is a dominant scenario, given the
strong guidance for the next quarter, mentioned during the earnings call.
This D1 candlestick chart
shows the price gap for NVDA stock after the earnings call in 2023, when the price jumped eight
times higher than the average daily volatility. Source: Tradingview.com
How to swing trade breakouts
There are two potential ways
that you can trade the momentum as a swing trader: the first is a breakout of a triangle, and the second
is the pullback to the line of a breakout. In both cases, the position is held overnight and, if held
for 5-10 days, represents an asymmetrical trading opportunity.
This chart offers a closer
look at the same situation as the previous chart. You can see two entry points for momentum swing
trading for NVDA stock on this H1 time frame. Source: Tradingview.com
Swing trading strategy no.3:
mean-reversion
Another strategy for swing
trading stocks is mean-reversion trading. This approach aims to pursue relatively short-term price moves
when the price returns to the range.
In this case, you would need to
monitor the price in case of a false breakout occuring at a strong support or resistance area. Moving
averages with parameters of 20, 50, and 200 may help you to identify such an incident.
You can see an example in the
chart below where there was a potential breakout in two instances, but then it reversed almost
instantly, causing a false breakout – sometimes referred to as a fakeout.
In this chart we see two
trading opportunities for bearish swing trading entries for PYPL stock in 2023. Source:
Tradingview.com
In this example PYPL was trying
to push above the 200-day moving average, and every time, it resulted in a pullback lower. That happened
during the first half of 2023. As a swing trader you could potentially capitalize on such trading
opportunities by finding entry points on lower time frames, with the help of candlestick patterns.
The H4 chart below shows an
example of a candlestick engulfing pattern. The red arrow indicates a possible entry point for a short
position.
In this image we see an
example of an engulfing pattern for H4 chart for NVDA stock. Source: Tradingview.com