top of page
Writer's pictureRemil Hizon

The Basics of Swing Trading



The Swing Trade is the swiss army knife of trading strategies. It can fit to almost any market condition wherein clear support and resistance levels can be plotted. Its flexibility of use can be applied on varying timeframes (from intra day to medium term). It's a straightforward and simple setup which makes it the preferred trading style of most traders across different markets.


What is a Swing Trade?


Swing trading, refers to a style of trading that is only concerned on trading a specific price range in the chart. This range is always between a swing low (support) and swing high (resistance). Little indicators are needed to execute a successful swing trade. For the most part, it is just a matter of support and resistance plotting and volume analysis. From there, a trader can isolate a profitable range that they can enter and exit repeatedly to score a quick profit.


A Swing Trade has 2 points:

  • Swing Low - A support level in the chart where the price bounces.

  • Swing High - A resistance level in the chart where the price is rejected.


Note: It is very important that a trader measures the range from the swing low point to the swing high point. You ideally want a range that is 10% or more so that the trade is worthwhile.


Here is how the swing points are plotted across a trend channel:


1. Swing trade range in a sideways channel

2. Swing trade range in an uptrend channel

3. Swing trade range in a downtrend channel

As seen in the three examples below, a swing trade can happen in a sideways, uptrend and downtrend channel. A clear trend or channel must be present first to be able to plot the swing lows and swing highs.


It is very important to remember that a swing trade is only concerned on the swing range between the support and resistance levels. This means that a swing trader is no longer concerned if the price goes up even higher after selling at the target price level. Chasing prices outside of your trade strategy will often result to losses out of panic and uncertainty.


Pros and Cons of Swing Trading


Pros

  • Clear signals. Good starting point for newbie traders since the execution is very straightforward.

  • Can be replicated on various market conditions.

  • Consistent profit when done right. When support and resistances are respected for extended periods of time, a swing trade can be repeated multiple times.


Cons

  • Prone to whipsaws (when a cutloss is triggered but price quickly jumps right back up).

  • Prone to early profit taking. Selling at the resistance level will mean that you may miss breakout trade opportunities.


How to Plan and Execute a Swing Trade


Planning

  • Filter stocks based on your initial trade criteria (volume, technical chart patterns, fundamental catalysts).

  • Scan for stocks that have a clear trend with a 10% or more swing range.

  • Plot the swing lows and swing highs based on the support and resistance levels.

  • Look for other market signals that may validate your entry and exit (RSI nearing or going below 30, Moving Average bullish crossover, MACD bullish crossover).

  • Place these stocks on your watchlist and remember the key levels (swing low and swing high points).


EXECUTION

  • Buy the stock as the price bounces from the support level.

  • Hold until it reaches or goes near the resistance level.

  • Sell as price is getting rejected near the resistance level.

  • Repeat the process as long as the support and resistance levels are being respected.


SWING TRADE EXAMPLES


Here are examples of Swing Trade setups across different trends. Note that each of these has a range of 15% or more making it a very profitable swing range.


1. On a sideways channel

A sideways channel is the simplest swing trade setup. This kind of formation will usually appear as base formations after a market downtrend. As selling pressure decreases, an equilibrium between buyers and sellers form causing the sideways move.


Execution on a sideways channel is straightforward. Buy as the price bounces from the support level and hold until it reaches the resistance level target. Once it nears the resistance level, you can gradually sell until a strong price rejection happens. Afterwhich, you can repeat the process as long as the support and resistance levels are respected.


2. On an uptrend channel

During an uptrend channel, swing trading may not be the best strategy. This is because prices tend to pullback briefly and move higher on breakouts. Selling too early when a breakout move is highly probable will deprive the trader of bigger profit. As such, a swing trade is only done in this market condition when a trader really needs to score a quick profit.


When an uptrend channel forms, a trendline support becomes the best point of entry for the swing trade. Buy as the price bounces from the trendline support and hold until it reaches the trendline resistance. Sell as the price reaches the trendline resistance.


Note: When selling during an uptrend, remember that price may potentially breakout. Since a swing trade strategy mandates you to sell at the resistance level, you will miss the breakout rally that may happen. This should be very clear to the trader when they are trying to use a swing trade strategy on strong uptrending markets. For such conditions, a momentum trade strategy is more suitable.


3. On a downtrend channel

During a downtrend channel, swing trades can be trickier to execute since support levels will have the risk of breaking down further. As such, an RSI indicator is used alongside the trendline support to accurately identify the best bounce point.


Executing a swing trade on a downtrend channel requires more caution and analysis. When a clear downtrend channel forms, plot the trendline while taking careful note of the RSI. Buy when price bounces from the trendline support while RSI bounce near or below 30 (if a stock is fundamentally strong, it rarely will go below RSI30). Hold until it reaches the trendline resistance. Sell in full as price near trendline resistance and RSI begins to go near 50.


For instances wherein the trendline support fails to hold, a cutloss must be executed with a loss range of -2% to -3%.


In a Nutshell


Swing trading, when done properly, is an effective trading strategy for ranging market conditions. As long as there are clear support and resistance levels, a swing trade can be done repeatedly to score multiple profits. This makes it a popular choice among active traders who prefer quick in and out swings on clearly defined trends.



We hope you loved our posts! To learn more about trade and investment, access the Online Learning section of our website to enjoy our free Learning Module.

268 views0 comments

Recent Posts

See All

Comments


bottom of page