Swing Trading Strategies That Work
Swing trading is a method of technical analysis that helps traders spot short-term directional moves that last a few days/weeks, generally no more than 20 days.
In swing trading, we buy at one level and sell at another level. The focus is on the direction of the price and NOT the price itself.
One of the safest ways to trade is going with the direction of the trend. An objective in motion tends to stay in motion.
This is likened to a car moving forward. It is easier for it to continue in the same direction than to stop and reverse. This work similarly with stock prices.
In essence, we find a safe place to jump on board the trend.
Trend and momentum go hand in hand, and by placing momentum on our side, it increases our odds of riding on a trend.
In this article, we’ll learn to appreciate a few concepts to help us devise swing trading strategies that work.
Defining Stock Price Cycles
The market is always in an endless cycle. A cycle is loosely defined as price movements of a market from a trough to peak and back again.
The trough and peak are known as the trading range (refer to Figure 1 below). The advance and decline between trading ranges are trends.
Swing trading is slowly gaining popularity because it involves making quick moves right after a decline in the stock’s price to reap maximum gains of the advance phase.
Figure 1: Market Cycle
Defining A Stock’s Price “Swing” & Anticipating Price Action Signals
Market trends almost never move in straight lines but if you notice, they experience a series of highs and lows.
These highs and lows, which are the “corners” where price moves away, are the swing points (refer to Figure 2 below).
The swing points are critical points on a price chart where we can anticipate a price action signal.
Figure 2 – Swing Points
Characteristics of Swing Trading
Swing trading involves the reading of price charts to anticipate the next price swing in the market.
In effect, buying during a pullback and selling short during a throwback.
We identify a specific price entry where the stock has almost immediate potential to perform in our desired direction.
However, do not be fooled by the ease of identifying an entry point by looking at a historical price chart.
Trading with hindsight does not work well with most stock markets, and especially so in Singapore.
Traders would have to develop the gumption and confidence in taking action at the right edge of the chart.
Also, swing trading might not apply for every stock.
Characteristics of a swing stock include
- short-term momentum
- reasonably price
- price persistency (stock price tends to follow through, ie. not erratic)
Mid-price stocks generally are preferred because of its price leverage.
Ultra-penny (price less than $0.20) and defensive stocks are generally not suitable candidates for swing trading, as their moves tends to be sluggish with price bars generally overlapping (refer to Figure 3 below).
Figure 3 – price persistency and non-price persistency
However, the change in bid size for ultra-penny stocks in recent year has rendered the chart more amiable to swing trading (refer to Figure 4 below).
Figure 4: Non-price persistency (note: prices are adjusted after shares consolidation)
There are some good lessons in Singapore arising from the change in bid size. These ultra-penny stocks provides some of the most attractive gains (refer to Figure 5).
Figure 5: Change in bid size allows stocks less than $0.20 to be trade-able
Figure 6: Change in bid size allows stocks less than $0.20 to be tradable
Stocks with high liquidity are the most suitable for swing trading.
Stocks with low liquidity tend to create spotty charts, which are difficult to manage (refer to Figure 7).
Figure 7: Stock with spotty chart characteristic
Types of swing trading strategies
Markets have a tendency to pull back after a run-up, exhibiting an action/reaction behaviour, with breakout price moves between the pullbacks.
It is important to capture as much of these breakout price swings as possible.
Identify an entry after the end of the pullback is crucial to ensure that the entry is not premature, otherwise, any further correction move would put the trade in jeopardy.
It is important to note that the action/reaction phenomena arise due the natural process of establishing a balance between the bulls and the bears.
We only trade in the direction of the dominant force.
It works on the premise that over the short-run, trending price movements of certain vigour are likely to continue in their present direction (Refer to Figure 8 & 9).
Figure 8: Reaction Swings
Figure 9: Reaction Swings
Often traders find it extremely difficult to find an entry point into a stock that has experienced significant gains in the short-term.
This concern is misplaced and generally arises due to the lack of understanding and the erroneous belief that high price is high risk.
In fact, a strong run-up often provides the momentum to propel the stock further.
High price is great opportunity!
In momentum swing, we identify a safe entry after a strong run up to take advantage of the momentum that had built up in its prior move.
We have to be mindful that while the gain can be impressive, we have no intention to overstay our welcome.
Fast move is also prone to sharp retracement.
Thus, understanding the price action is crucial in managing the trades (Refer to Figure 10 & 11).
Figure 10: Momentum Swing
Figure 11: Momentum Swing
Flexibility and adaptability
The success of a swing trade hinges a lot on the quality of the pullback. This is determined by its nature, depth and width.
The pullback patterns are the foundation of profitable swing trades and these patterns occur over and over in every market – be it stocks, futures or forex market.
Our Swing Trading strategies allow traders to take advantage of the opportunity in these markets.
If swing trading is not your cup of tea, you can adapt it for position trading using weekly chart.
Position Trading enables you to safely ride the trend to a profitable end, capturing at outsized gain (Refer to Figure 12 & 13).
Figure 12: Swing trading adapted for Position Trading
Figure 13: Swing trading adapted for Position Trading
Swing trading course in Singapore
A good stock trading programme should not only cover the essential elements in the trading methodology but offers a myriad of supporting elements that help participants to trade better, regardless of their level of proficiency.
For people who want to learn more about profitable swing trading, Asia Charts offers the Super Rally (SR) Trading programme, which is conducted over 2½ days.
It gives participants a complete understanding of how market structure and price action control all market movements and how to effectively take advantage of the opportunities that market offers.
Our programme provides you with a comprehensive framework that enables you to evaluate opportunities in a disciplined, consistent manner with precise entry and exit points.
While most traders put all their emphasis on the timing of the entry, SR Trading puts as much emphasis on the selection of right stocks that give better profit potential.
The expert advisor provided in our charting software also offers timely entry signals.
The automatic screener identifies setups at the end of each trading day so that you can adequately prepare your trades for the next day.
Apart from the trading system, equal importance is also placed on risk management and trader’s mindset, without which even an infallible system will not help traders to be profitable.
Many past participants have commented that these 2 topics alone, is well worth the investment in our programme.
Our suite of support includes weekly debrief video, monthly coaching, members’ forum and free re-sit (admin fee applies).
New traders find the free re-sit invaluable. Members’ forum allows like-minded traders to share ideas, lessons learned and insights.
The value of this ongoing interaction and learning is likely to be as valuable as our programme itself.
If you’re interested to find out more, you may sign up for our SR Trading preview workshop’s waiting list. We’ll inform you via email when there’s an upcoming class.