Swing trading isn’t as simple as it is often defined. In this article, we’ll take a look at the key insights you need to know if you want to use this strategy.
The Right Stocks for Swing Trading
One of the most important key for swing trading is picking the right stocks. The best candidates are large-cap stocks, which are among the most actively traded stocks on the major exchanges.
In an active market, the stocks will swing between broadly defined high and low extremes, and the swing trader will ride the wave in one direction for a couple of days or weeks only to switch to the opposite side of the trade when the stock reverses direction.
The Right Market
In either of the two market extremes, the bear market environment or raging bull market, swing trading proves to be a rather different challenge from the market between these two extremes.
In these extremes, even the most active stocks will not show the same up and down oscillations as when indexes are relatively stable for a few weeks or months.
In a bear market or bull market, momentum will in general carry stocks for a longer period of time in one direction only. It therefore confirms that the best strategy is to trade on the basis of the longer-term directional trend.
The swing trader, therefore, is best positioned when markets are going nowhere: when indexes rise for a couple of days, then slip for the next few days, only to repeat the same general pattern again and again. A couple of months might pass with major stocks and indexes roughly at the same place as their initial levels.
However, the swing trader has had many chances of catching the short term movements up and down (sometimes within a channel).
The problem with both swing trading and long-term trading is that success is based on correctly recognizing what type of market is currently being experienced. Trend trading would have been the ideal strategy for the bull market of the last half of 1990s. Meanwhile, swing trading probably would have been best in 2000 and 2001.
Exponential Moving Average
Simple moving averages (SMAs) offer support and resistance levels, as well as bullish and bearish patterns. Support and resistance levels can signal whether to buy a stock. Bullish or bearish crossover patterns indicate price points where you should enter and exit stocks.
The exponential moving average (EMA) is a variation of the SMA that places more emphasis on the latest data points. The EMA gives traders clear trend signals and entry and exits points faster than a simple moving average. The EMA crossover can be used in swing trading to time entry and exit points.
A basic EMA crossover system can be used by focusing on the nine-, 13-, and 50-period EMA. A bullish crossover takes place when the price crosses above these moving averages after being below. This signifies that a reversal may be in the horizon and that an uptrend may be starting.
When the nine-period EMA crosses above the 13-period EMA, it signals a long entry. On the other hand, the 13-period EMA has to be higher than the 50-period EMA or cross above it.
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