What is a swing trading strategy? Swing trading strategies are usually short-term trading strategies that focus on swings of stock prices. When stocks are trending either upwards or downwards, they rarely go up or down in a straight line. Most often than not trending stock prices retrace and print pullbacks on charts, increasing the chance of a new swing towards the established trend.
Take a look at the PepsiCo stock chart. During the 2012 uptrend of PEP stock price, traders could take advantage of at least 4 swings that occurred when the price retraced to the 50-day EMA (exponential moving average) level. As long as the stock price continued advancing, swing traders needed to wait for a pullback to buy PEP shares, in order to avoid buying at high prices. Buying high and selling low isn’t exactly the best trading system! Swing trading stocks allows traders to take advantage of an established trend by entering at much more reasonable prices. Swing trading is also effective when short-selling stocks in downtrends.
The 2012 decline of RIMM stock price is a perfect example of swing trading a stock that is printing new lows almost every month!
Yet, swing trading strategies also apply to consolidating markets, or in other words when stock prices move horizontally. I recently showed how to profitably swing trade the X stock, while the price was trading inside a well-defined sideways range.
Perhaps traders would have missed the first indicated swing but not the following two.
Now, pointing out the swings when we already know what happened is easy obviously. The real question is how to pinpoint the entry points before the swing takes place. For successful swing trading stocks traders need to know the basics of support and resistance, how to manage their risk with stop loss and trailing stop orders and wait for confirmation usually by candlestick patterns.