Swing trading is a short-term trading strategy where traders enter and exit trades to make a profit within days or weeks. This strategy mainly uses technical analysis to identify bullish market movements. Technical analysis is mainly used to identify entry and exit points in the trade. Swing traders are anticipating the stock to move in a certain direction and look to position themselves and profit on that expected move.
Strategies for swing trading
Some of the technical strategies to help technical analysis predict price action are as follows:
The moving average convergence divergence (MACD) indicator is a popular tool used by traders to help with their entry and exit points. The MACD is a momentum-based trading indicator. This indicator can show changes in the speed of price movement and traders use to determine the direction of a trend. For more information click on the following link: How to Calculate the MACD.
Moving averages are a common tool used by technical analysts to identify the trend of a stock, price, or index. Two common examples which are used is the simple moving average and the exponential moving average. The simple moving average uses all the data points in equal weight. However, the exponential moving average focuses more weight on the recent price. Moving averages can be used for the period the investor wants to analyse. Most commonly used is the 50 or 200 day moving average. Traders though can set up the moving average to whatever period they like. For more information click on following link: What is a moving average?
Traders have used these Fibonacci numbers to come up with Fibonacci retracements. These are technical tools used by traders to determine possible support or resistance levels. Support levels means the price where the stock may not fall any further because of increased buying. A resistance level is a possible price ceiling of where prices may not go any further because of selling pressure. In technical analysis, the key Fibonacci ratios are 23.6%, 38.2%, 50%, 61.8% and 100%. For more information click on An Introduction to Fibonacci Retracements.
Relative Strength Index (RSI):
RSI is a momentum indicator that measures the speed the share prices are changing by comparing the recent gains and losses over a specified time period. This indicator can identify points where there is a change in trend. It can signify when a stock is overbought and when a stock is oversold.
This indicator shows whether the bulls or the bears are the strongest in the market, it uses the closing prices of completed trading periods to distinguish whether it is a bull or bear market. Prices that close higher are strong markets and prices that close lower are bear markets. The RSI computes this as a ratio of the number of higher closes to the lower closes during a period of 14 days.
When the RSI is above 70 it is overbought and when it is below 30 it is oversold. A movement back under 70 generates a sell signal, and back above 30 generates a buy signal.
Typically, we use a 14 day period.
Differences between swing trade and day trading
With day trading, the positions are closed by the end of the day. However, swing trading positions are held for days or weeks. Hence day traders can hold a position for only minutes or hours.
Day trading requires the trader to watch positions everyday as stocks can become a full-time job in itself. Swing traders can ride the daily volatility in a stock which may come from news announcements.
Lauren Hua is a private client adviser at Fairmont Equities.
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