A Swing trading is a trading technique that is used by traders to buy and sell stocks, whose technical indicators gives suggest an upward or downward trend in upcoming days. It is a short term trading strategy. To understand the swing trading, first, we need to understand the technical analysis terms that will be used in our swing trading strategy.

1. Trend

The trend is the most important for technical analysis and swing trading. It is the direction of the market and it is very important to identify that current trend of the stock for swing trading.  Mainly there are three types of trends.

  • Uptrend: When the price of the stock is going in an upward direction, we can say that there is an uptrend. (I.e. market is going up) . Price moves in the upside direction making higher highs and higher lows.
  • Downtrend:  Price moves downwards making lower highs and lower lows, there is a downtrend in the market. So, we can say that the market is going down.
  • Sideways:  When the price bounces in between a specific high and low price. In the sideways, the price makes equal high and low and moves in a specific range.

Importance of Trend:

Market always trade in the trend. Whether it is uptrend, downtrend or sideways. More than 80% of stocks follow the market trend. So, if you trade in the direction of the trend, you will be able to make maximum profit, and if you trade against the trend there are high chances of hitting the stop-loss. So always keep in mind is that Trend is the best friend of the trader.

Trend Line: how to draw a perfect trend line?

The trend line is a trend identification tool that helps to identify the current direction of stock price. The trend line is very important for our swing trading strategy. It also helps to find demand and supply areas in the chart.

There are two types of trend lines and it is very easy to draw.

    Upward Trend line:  It identifies an uptrend in the price action.

  • To draw an upward trend line, first, join two higher lows and then extend the same.
  • An upward trend line is only confirmed, when the price comes towards the trend line and bounces back on the third time.
  • If the price closes below an upward trend line, it is considered to be a trend changing signal.  So we can say that price may enter into a downward or sideways trend.

Downward Trend line:  This trend line identifies the downtrend in the price action.

  • To draw the downward trend line, join the 1st two lower highs and extend the same.
  • When the price comes to the trend line and starts coming down on the 3rd time, we can say the downward trend line is confirmed.
  • When the price closes above down trend line it is considered to be a trend changing signal. And the price may go in the upward direction or the sideway trend.

Importance of Trend Line:

  • It takes a minimum of two highs or lows to draw a valid trend line but it takes three to confirm a trend line.
  • Like support and resistance levels, trend line becomes stronger the more times they are tested.
  • Don’t try to draw a trend line by forcing them to fit the market. If they don’t fit right it means that the trend line is not valid.

Swing Trading with Trend Line

 Trading with a trending market is always profitable. So based on the up, down or sideways trend, it is advised to trades that not to trade in the basing area and should wait for the breakout on either side.

Let’s check the entry for trade in a different trend.

Uptrend: Buy when the price is near to the demand area or surpasses the supply area.

Downtrend: Sell when the price is near a supply area or breaks the demand area,

Sideways Trend:  It suggested staying away from trading. Or if you want to trade then don’t overtrade.

2. Support and Resistance concept for Swing Trading

It is one of the most widely used concepts in technical analysis. It is nothing but the demand and supply area. Technical Analysis assumes that everything gets discounted in the price and it is controlled by the demand and supply pressure for a particular stock. I.e. If the supply for the stock (No. of sellers) is greater than its demand (No of buyers) then the price of that stock tends to go down and vice versa.

Support: It is the level at which the demand for the stock is high and buyers are more active to buy the stock.

Resistance: At this level, the supply of the stock is high and sellers are more active to sell the stock.

When there is a breakout of a support level, the support becomes resistance. And resistance becomes support when the resistance break.

3. Technical Indicators and oscillators for Swing Trading

Technical Analysis Indicators are nothing but the mathematical formulas that traders use for their trading to decide when to enter into trade. Indicators are used as a measure to gain further insight into the supply and demand of the stocks.

An indicator like volume is useful for confirm the price movement and the probability that the given move will continue. Indicators can also be useful to buy and sell signals.

This concept of technical analysis indicator explains how to use them in the analysis.

There are mainly two types of indicators:

Leading Indicator (Lead price Movements)

  • This type of indicator is designed to ‘lead the price movements’. This means that the indicator moves first and the price action follows.
  • RSI (Relative Strength Index) and the Stochastic Oscillator is the most popular leading Indicator.
  • The majority of leading indicators are oscillators. I.e. these indicators are plotted within a bounded range.
  • This type of indicator fluctuates between overbought and oversold conditions based on set levels based on the specific oscillator.
  • A leading indicator generates a signal before the new trend or reversal occurs. They are more sensitive to price fluctuations.

Lagging indicator (Lagging the price moves or follow the price)

  • As per the name, lagging indicators follow the price action and referred to as trend-following indicators.
  • It gives a signal after the new trend has started. They give signals only after the price forms the trend.
  • Moving Average and Bollinger bands are the most popular lagging indicators.

How to Use Swing Trading Indicators

There are main 3 ways for using the indicators to get the buy and sell signals. Let’s understand it in detail

  1. Crossover: It occurs when the indicator moves through an important level or a moving average of the indicator. It indicates that the trend in the indicator is shifting and this trend shift will lead to a certain movement of the stock price.
  2. Overbought / Oversold: Oscillator shows the overbought or oversold areas for the stock price. When the indicator enters into the extremely high level (as per the particular oscillator formula), it indicates that the prices are in a condition where the stock price has reached its peak level and it is now likely to turn down.

When the indicator enters into the extremely low levels, we can say that the stock price has reached a point where selling is over and prices are likely to bounce back.

  • Divergence: In simple words, divergence means the opposite direction. The divergence occurs when the price moves in a particular direction, whereas the oscillator goes in a different direction at the same time.

      There are two types of divergence:

  • Bullish Divergence (Positive Divergence): When price makes lower bottom but the oscillator makes a higher bottom. It indicates that the downward price action is losing its momentum and there can be a potential reversal signal.  
  • Bearish Divergence (Negative Divergence):  When the price makes a higher top but the oscillator makes a lower top that indicates that the upward price movement is losing its movement and there can be a potential reversal signal.

In this blog, we have seen the fundamentals of swing trading, which are very important to understand. This is the first part of the blog series “Swing Trading”. In the second part of this blog series, we will discuss ‘Swing Trading Strategies”. So, keep yourself updated with us. Happy Learning and Trading. – Trading Fuel

“Swing Trading Part 2 Coming Soon”
Author

Prashant Raut is a successful professional stock market trader. He is an expert in understanding and analyzing technical charts. With his 8 years of experience and expertise, he delivers webinars on stock market concepts. He also bags the ‘Golden Book of World Record’ for having the highest number of people attending his webinar on share trading.