Swing trading, one of the most popular trading styles, can be very profitable if done correctly. Swing traders try to capitalize on short-term price movements and trends.
They don’t try to make a huge profit in a single trade, but they can accumulate wealth in the long run, as the small profits they make per trade add up over time.
Unfortunately, without a solid strategy, swing trading can be highly risky. Don’t worry; we are here to help you.
In this article, we will discuss the best strategies for swing traders. We will also share some valuable tips traders should follow to reduce risk and improve their chances of making a profit.
So, without any delay, let’s talk about the strategy of swing trading you can follow.
Best Strategies Swing Traders Can Follow
Support and resistance trading
If you know how to identify the support and resistance levels for a stock, this strategy can be an excellent option. Support is a level on the price chart where the buying pressure overcomes the selling pressure. Generally, when a stock price hits the support level, it bounces back (under normal circumstances) and starts rising.
On the other hand, a resistance is a level on the price chart where the selling pressure overcomes the buying pressure. As a result, the stock price usually declines when it hits the resistance level.
Swing traders usually look for an entry point when the price bounces off the support level, and they set the stop-loss just below the support level. They enter a sell position when the price bounces off the resistance level before a temporary downtrend starts.
This strategy is easy to follow, but you will need to read the chart to find the right entry and exit points. Also, it’s important to know that these levels usually switch roles when the price breaches them. The resistance becomes the new support level when the price breaks through it.
Pullback trading
As the name suggests, pullback trading involves pullbacks. You should know that pullbacks and reversals are two different things, and reversals usually last longer than pullbacks.
A pullback is a temporary decline (small downward price movement) in a stock’s uptrend or a temporary rise (small upward price movement) in a stock’s downtrend.
When there is a small downward price movement, you can find an entry point and ride the trend until a reversal. With the pullback trading strategy swing trading can be very profitable, and beginners can also try it.
Chanel trading
The channel trading strategy is effective and easy to execute, but you will need to find stocks that are trading within a channel. You must be good at identifying channels to execute this strategy correctly. The chart can have an upward, downward, or sideways channel.
The idea is to trade with the trend with defined entry and exit points. You should look for entry points in an uptrend and sell positions in a downtrend.
Generally, when the price breaks out of a trading channel to the upside, it could indicate a breakout. But a bigger dip could be on the way if the selling pressure is high and the price breaks below the channel’s bottom.
10-day and 20-day SMA
As the name suggests, this strategy involves applying two simple moving averages (SMAs)– 10-day and 20-day to the chart.
When the 10-day SMA crosses above the 20-day SMA, it indicates an upswing, and a buy signal is generated. When the shorter SMA crosses below the longer SMA, a sell signal is generated, as it indicates a downswing.
This strategy makes it easy to find entry and exit points, and beginners can follow it too. The chances of making an error are also low in this case.
Breakout swing trading
A breakout presents an entry point to all traders, and swing traders can also capitalize on them. Breakouts generally occur when a stock’s price breaks through the resistance level. Swing traders try to find an entry point at the beginning of an uptrend and ride it until a reversal, or a new resistance level is formed.
It shouldn't be your primary strategy if you aren’t good at predicting breakouts or reading charts. But if you have experience in this area, this strategy can help you make a good profit.
So, these are the best strategies swing traders can use. Some of these are easy to execute, and some need more effort to execute correctly, so you should choose an option based on your preferences. With the right strategy swing trading can be easy for beginners too.
Like other forms of trading, the risk is also involved in swing trading. However, it can be minimized with proper risk management. In the following section, we will discuss the best ways to minimize the risk while trading.
Risk Management for Swing Traders
Stop-loss
Since swing traders hold their positions for two days to weeks, they are exposed to overnight risks.
As a swing trader, you should understand the importance of stop-loss, as trading without it can blow up your account. It can help you limit your loss if you are clear about how much money you are willing to lose. Generally, you should set your stop-loss order below your entry price.
Trading smaller positions
If you are a beginner and don’t know anything about swing trading, you should start with trading smaller positions.
There is no point in risking a considerable amount of money in the learning phase, as a small error can wipe out your funds. You can gradually increase your risk threshold as you understand the basics and gain more confidence.
Diversifying portfolio
Swing traders are exposed to both market risks and position risks, as they don’t close their positions on the same trading day. Since swing trading isn’t as demanding as day trading, you can easily diversify your portfolio.
Having a diversified portfolio is better than buying only one or two individual stocks in terms of risk management. If you follow this approach, your profit or loss won’t depend only on a single stock’s performance.
These steps should be a part of your risk management plan. You should also define your risk tolerance before opening a new position. In the following section, we will share some important tips every swing trader should follow.
Important Tips for Swing Traders
Liquidity is key
You should know that liquidity is one of the most important factors for swing traders. A swing trader should be able to enter into and exit from a trade quickly. If it doesn’t happen, they may be unable to open a position at the beginning of a new trend or exit from a trade before a reversal.
Consider multiple time frames
To understand market sentiments correctly when reading charts, you should use multiple time frames– hourly, daily, weekly, etc. This approach will help you identify short-term trends for swing trading.
Some beginners make decisions based on five-minute, 30-minute, or even one-minute candlestick charts, which isn’t the right option. These time frames are more suitable for day traders.
Understand the importance of volume
Volume is another important factor to consider for swing traders, as it shows the number of shares traded (bought and sold) in a particular time frame. A trend accompanied by high volume is likely to continue, so traders should always check the volume before buying a stock.
Always have a target price
For swing traders, opening a position with no target price in mind is like driving on a road that never ends. You should always have a target price in mind when you buy a stock and execute the sell order when it hits the target price.
If you get carried away and don’t sell your holdings, your profit may become a loss, as the price won’t always move in the same direction. Finding an exit point can be difficult in such a situation, and your money will get stuck in an asset if that happens. Also, you should set realistic expectations and choose a reasonable target price.
A stock trading at $200 is unlikely to cross the $1,000 mark in a week or month under ideal conditions. But its price can reach $210 or $220 in a short period in good market conditions. Depending on your lot size, you can make a decent profit even with a 1% to 10% growth in the stock price.
Manage your funds
Not every trade will go your way, and in the worst situation, you can lose a significant amount of money. Since you aren’t guaranteed to make a profit, you shouldn’t risk the money you can’t afford to lose.
You should have a dedicated trading fund, and you can add more money to it every month. Initially, it shouldn’t exceed 5% of your monthly income. This way, you won’t have to wait for the market to move in the right direction to pay your electricity bill.
You should also properly manage your trading account and use only a fixed percentage per trade. If you have $5,000 in your trading account, you shouldn’t risk $3,000 or $4,000 in a single trade.
You should use only 2%-5% of it per trade, as it will allow you to make a comeback if you lose a few trades in a row.
Don’t panic
Many traders lose money, as market conditions aren’t always favorable. Sudden price drops often leave beginners worried, but experienced traders know that fluctuations are a part of the stock market.
As a swing trader, you should stay calm and stick to your plan in every situation. If you have done proper risk management, you are unlikely to get in trouble.
You can improve your chances of making a profit by following these tips. As you gain experience, you will understand what works best for you, and the journey ahead will likely be good.
Is Swing Trading Profitable?
Yes, swing trading can be extremely profitable. But as a swing trader, you shouldn’t chase huge profits, as a single trade won’t make you a millionaire. A swing trader’s profit per trade can be bigger than a day trader’s profits. However, the target profit isn’t even close to a long-term investor’s profit.
Swing traders can make a significant profit in the long run, as the small profits they make per trade add up over time. Patience is important for traders, and they also have to be consistent.
They have to conduct research and read charts regularly to find opportunities (entry points). They also have to monitor their positions, as overnight and weekend risks are involved; however, it isn’t a demanding profession, and you can combine it with a 9-to-5 job or other trading styles.
Swing traders can also lose money, as risk is involved in every form of trading. But with the right planning and risk management, one can minimize it while improving the chances of making a profit.
What Is the Most Profitable Strategy: Swing Trading?
All the swing trading strategies we have discussed in this article can help you make a profit, and they all are worth trying.
Nonetheless, when it comes to choosing one over the other, personal preferences, skills, experience, market conditions, and several other factors come into play. Depending on these factors, one strategy may be better than the other under certain circumstances. But in general, no swing trading strategy is better than the other.
The best approach is to try all the strategies and see what works best for you. Swing trading isn’t the easiest trading style to master, but the right strategy and approach can make it easy.
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Conclusion
We hope you found this article helpful and liked our shared strategies. Swing trading can help you achieve your short-term and long-term financial goals if you plan your every move carefully. However, even if you choose the best strategy swing trading isn’t guaranteed to be profitable.
Price swings can present many new entry points, but they can also decrease your profits. So, it’s important to do proper risk management, and you should also follow the tips we shared.
Traders don’t walk on a straight road; their journey is full of ups and downs. You will likely make mistakes, but if you keep learning from them, you can succeed and accumulate wealth in the long run.