Best Swing Trading Strategies

What are the best swing trading strategies?

There are different methods of employing a swing trading strategy when speculating on financial markets. These normally involve different indicators to reveal critical price points for executing trades.

So, as each individual trader is likely to find swing trading methods useful for different reasons, it can help to give yourself an overview of each type. This way, you have a better idea of which method suits you the best.

Moving averages

Moving averages are technical indicators that can be used as part of a swing trading method by tracking the average price of an asset over specific periods of time.

Using them correctly can help traders identify shifts in momentum as well as points of “support” or “resistance” – lows and highs that an asset’s price typically won’t move beyond.

There are different types of moving average indicators that can be used for tracking prices:

• Simple moving average (SMA) – tracking the average price over a specific period
• Exponential moving average (EMA) – similar to SMAs, though placing more weight on recent data
• Weighted moving average (WMA) – also weighted towards recent data but the rate of decline between one price and its preceding price is exponential, rather than consistent.

You can normally customise the length of time over which the averages are calculated to allow for more detailed analysis of the price movement. Moving averages over time units numbering 50, 100, and 200 are commonly used by traders.

Traders may be able to detect changes in the momentum of an asset’s price according to how different moving averages interact with each other. For example, if a shorter moving average (50) was to cross one measured over a longer period (200), this indicates that the average price in the last 50 units of time has increased beyond the average price of the last 200 units of time.

As such, this could indicate that a wider trend may be breaking and the price may increase.

Meanwhile, traders could look to use moving averages as areas of support and resistance. Prices often interact with them in one of these two ways, and so could inform traders of positions to target.

Example of moving average swing trading

Since moving averages are represented as single lines that track prices along a chart, traders rely on two or more moving averages reacting with each other to identify changes in short-term trends.

For example, if the EMA50 were to cross downwards through the EMA100, this would indicate that the shorter-term price has dropped below a longer-term average price, providing a potential sell signal (short position).

The opposite would be true for a potential buy signal (long position) – if a shorter moving average crosses above a longer moving average, this indicates that the near-term trend may have reversed upward into a bullish trend.

Traders may look to open positions soon after these crosses happen, since moving averages are somewhat lagging as the data used is slightly old.

Pros and cons of moving averages swing trading strategies

Pros

• They’re automatically calculated
• No need for a high level of trading knowledge to use them
• You can customise their ranges to your needs.

Cons

• Data used to calculate its values may be old, meaning it could be out of date
• Doesn’t factor short-term volatility or the effect of outside forces on prices, such as seasonality or market sentiment
• Accurate signals require precise configuration of their settings.

Support and resistance

Technical analysis can also be used by traders to identify specific points of support and resistance at different price levels.

These are levels where the price of an asset fails to break above (resistance) or fall below (support) a specific point, allowing traders to speculate on a reversal in price after interacting with either level.

These price levels can be historical, going back years, or as recently formed as the last few hours. Interestingly, it’s completely possible that current price action could respect such levels from years in the past – there is no expiry date on levels of support or resistance.

These can be useful in revealing oversold and overbought conditions, as an asset’s price will normally rebound in the opposite direction, respectively.

A common way to identify these plateaus in an asset’s price is by drawing vertical lines on a chart that should reveal the price’s constant interaction at the given level.

As such, swing traders could use levels of support and resistance to try and identify the very beginning of a potential trend reversal, which could help to capture the majority of a move.

Example of support and resistance swing trading

For example, if the price of Amazon shares had decreased from $100 to $75, before increasing again to $100, this means the $75 level could act as a support the next time it falls.

If the price constantly rebounds at $75, traders could use this as confirmation of it being a level of support. Traders may then look to open long orders around areas of support, speculating that the price will increase from there.

On the other hand, levels of resistance work in the opposite way – constant rejection of the price action at a specific value could indicate this is somewhere the price struggles to break beyond and could be a level of resistance.

Using the above example of Amazon, if the price was to rally to $100 again but fail to break above it, this is likely its point of resistance. Traders may consider opening a short position around levels of resistance, anticipating a fall in price.

Pros and cons of support and resistance swing trading

Pros

• They are relatively simple to use
• Invalidation of a trading theory using support and resistance is usually clear once the given level is broken beyond or below
• Little fundamental analysis is required as you only evaluate a few basic metrics.

Cons

• There may be little room for error if your theory is incorrect
• You rely on your own analytical ability
• Shifting market sentiment or announcements could affect prices and result in an unexpected redirection.