Swing Trading Strategy or How to Profit From Stocks’ Trading Cycle

In swing trading, the time span is longer compared to day trading. In this trading strategy, stocks are watched for weeks or even months, before making an investment decision. It is essential to follow the market momentum carefully in order to decide on opening a position: shares should be bought in upside swings and sold when the movement is about to top.

Both fundamental and technical analysis is essential for this strategy. Financial reports as well as industrial forecasts on the companies in the focus should be taken into consideration. Swing trading does not necessitate hours spent daily on monitoring, so it is a suitable choice for market players who are not into full-time trading.

The concept of swing trading is based on the 4-stage cycle that stocks go through. In the first one, shares consolidate, which shows that equilibrium is reached between bulls and bears. Then, a breakout to the upside signals the start of stage two: the uptrend. At some point, however, the rally loses steam and the stock peaks. Here you most often get a candlestick formation signaling a reversal such as: a double top, a doji, head and shoulders, evening star, bearish engulfment, etc. In the last stage, sellers take over and the stock begins trending down.

The above 4-stage cycle is repeated for each stock, in all time frames. When a pullback ceases its downward progress, the cycle repetition starts from stage one. Swing trading is a strategy aiming at taking advantage of both directions, up and down, so the right identification of each of the four stages is key to success.

Trade volume is something that you want to watch very closely when a share closes above a previous high. If that happens on a high volume, it means the trend is confirmed, so there is high probability of the stock continuing its way up. A fresh high on low volume is not deemed a sure confirmation of trend continuation.

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Swing trading advantages

  • Higher expected returns compared to buy and hold trading. However, as this trading strategy is susceptible to market volatility, it should be done with extreme caution. It is wise to withdraw profits in strong periods and store them for tough moments.
  • With correct identification of the stock cycle stages and with discipline, the risks are fewer compared to long-term trading. Swing trading offers a lot more flexibility in that it gives opportunity to take advantage of both uptrends and downtrends.
  • There is no need to closely watch market fluctuations throughout the whole day as far as you are familiar with the broader picture.
  • By following this strategy you avoid a number of disadvantages, such as: the need to study financial statements in detail; losing money in trying to pick market tops and bottoms; the risk of losses owing to overnight gaps, etc.
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March 12, 2020