The 7 Best Swing Trading Strategies for Beginners in 2022
While there are many swing trading strategies available out there to swing trade, some tend to work out better over the longer term. This will be different for everyone involved as your psychology comes into play. For all of the strategies should be used with a proper money management scheme.
All of the mentioned strategies can be used to start swing trading stocks, options, forex or cryptocurrencies. You can use them for creating a swing trading system or combine different swing trading strategies into one powerful tool.
Recognize that no matter how reliable a setup is, there can be such thing as a “black swan event” or simple bad luck that turns things around against you. So before you start trading with real money, make sure to use a trading simulator for testing. With that in mind, we look at the following five swing trading strategies that successful swing traders are known to use.
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Many swing traders still want to develop their own swing trading strategy to swing trade based on their own secret strategy. Developing a swing trading system takes time, and below, you find a list of the best swing trading strategies often used by investors to trade the stock market. A swing trading strategy always consists of trading rules like the entry point, profit target, the exact set of rules and parameters for the trade entry, and money management rules on how to set a stop, place a stop, or define the position size.
1. Gap and Go Swing Trading Strategy
The gap and go strategy is typically a day trading strategy where day traders trade stocks gapping up or down significantly on high relative volume. The intraday volatility is the highest if the gap is caused by major earnings or company news. On the other hand, mergers and acquisitions news most often lead to gaps but not to volatility after the open since usually the exact price per share for the M&A deal was already announced.
But the setup also works pretty well swing trading the stock market. Major positive news often causes big up gaps, and traders tend to wait until the upgap gets filled. However, in some cases, the news is that positive that the whole company outlook changed and people just don’t stop buying.
The trading setup works because the more the stock price increases, the more swing traders feel some sort of fear of missing out. Then they start buying at a higher price. For this setup, it is important to define the trading rules, profit target and stop loss level. It is also crucial to risk the same amount of money with each trade and to calculate position size based on the risk per trade.
For example, if you risk $50 on each trade, you calculate the number of traded shares with $50 divided by the distance between the hypothetical entry price and stop loss level. An often used stop loss level for such swing trades is the low of the candle the day before the gap up happened.
2. Stock Split Power
Stock splits are almost ever a booster for stocks of successful companies. Recently Apple (AAPL) and Nvidia (NVDA) processed a stock split, and the price per share went higher and higher after that. Apple, for example, had 5 stock splits so far. In 1987 with a 2 for 1 ratio, in 2000 with a 2 for 1 ratio, in 2005 with another 2 for 1 ratio, in 2014 with a 7 for 1 ratio and in 2020 with a 4 for 1 ratio.
That means if you held 100 Apple shares in 1987, then you had 200 shares at the end of 1987, 400 shares in 2000, 800 shares in 2005, 5,600 shares in 2014 and 22,400 shares of Apple at the end of 2020. Sounds crazy, right? The back-adjusted price per share from 1987 is at about $0.25, and each of your shares would be worth over $150 today.
The trading psychology behind this type of investment strategy is swing traders see the price per share at a much lower price level, and therefore the price looks cheaper. The company valuation did not change since more number of issued shares multiplied by the price is still the same market cap. However, it appears to be cheap, and investors tend to invest in such price trends. The market sentiment is positive, and a long position can unfold meaningful gains shortly as long as the bullish trend continues.
A technical indicator is not needed for such trades. Instead, it is necessary to monitor company news and filter for news such as stock split announcements.
But be careful. There are also so-called reverse stop splits where penny stock companies try to look like a better valuated company again or stay in an index. For example, if a stock is traded at $0.25 and processes a 1:4 stock split, the price at the next open will be $1 per share. Of course, fewer shares for a higher price per share is still the same market cap, but it looks better to have a price per share of $1, and it is also the minimum amount keep listed on Nasdaq.
3. Trend Continuation Trading Strategy
While gap trading is something that you are probably familiar with, a quick refresher of this is that price simply jumps or falls at the open during the trading session, thereby showing an extreme change or continuation of sentiment.
For the swing trader, which by its very definition means that you are paying attention to the trend, continuation gaps are one of the favorite ways to play the market.
This is typically found after an earnings report that beats expectations. If you get that and you are already in a strong trend, then it makes sense that you should either be buying into the market or adding onto an existing position. Remember, this is only when we are moving with the overall long-term trend.
After an earnings report, you often see the stock gapping up or moving up sharply from the market open. This can be the context of the longer-term uptrend, and we often see the break above the recent highs during an announcement or shortly after that.
The market often pulls back slightly as a reaction and then continues to go higher. This is the type of continuation gap that longer-term traders love to take advantage of, as it writes out the overall prevailing trend.
Remember, many traders will simply place trades based upon earnings reports and nothing else. This is where the fundamental and institutional traders typically establish their positions, moving the market much more than you will. So by following the herd, you can find yourself much more profitable.
4. Fibonacci Retracement Strategy
Traders all over the world use Fibonacci retracement tools to find a level to get involved in the market. The three most common levels are the 38.2%, 50%, and the 61.8% retracements.
With that in mind, traders will typically use their favorite candlestick pattern at these levels to take advantage of a well-known ratio. Keep in mind that these ratios are not to the point. They are general areas.
It means that you are looking at an area that could be an interesting place to play a reversal candle. While there are many candlesticks that you can use, bullish candlesticks like a hammer at the 50% Fibonacci retracement level on the weekly chart of a stock is something too keep an eye on if you missed the initial move.
Being at the 50% retracement, measured from the swing low to the swing high, a bullish candlestick can move the needle. The candlestick confirms that the support held, and the swing trader will start to buy there. You can see that we often go higher afterward, although if there was a 50% pullback in the process.
You will see variations of this with engulfing candles, shooting stars, Doji candlesticks, and many other patterns. It comes down to the traders favorite setup. However, they all start with that Fibonacci retracement level.
5. Weekly Trend Line Break to Go Short
Following a trend line is very crucial and you can see several times that you could have bought a stock at support. But what is even more impressive is when you break a major trendline to the downside. This shows a significant break of support and can lead to a nice swing trade on the short side for large-cap stocks.
Major trendline breaks the go back a couple of years don’t happen every day, so when they do – you need to stand up and pay close attention to this as it can quite often make your entire year.
Your risk is very easily defined, as a break back above the previous trendline would, of course, show that selling wasn’t going to work out.
With that being the case, it’s obvious that you have a start, a stop, and your target is quite often the bottom of the trend line. However, most traders will move their stop loss is down to reflect recent swing highs on shorter time frames.
Trading like this means being very patient, but this one trade could have been a bulk of your gains for the year, eliminating many broken trades in the process.
You are on the right side of the market, and eventually, people need to start selling their stock that is now losing money, only to accelerate the market in your favor again.
6. Flat EMA Trading Strategy
This one is straightforward. You are looking for a relatively flat exponential moving average that tells you when the market is consolidating. What you are looking to do is buy support on the lower side and sell or short several times at resistance. You need to take advantage of these consolidation frames because they happen all the time.
You would give yourself something like 1% for the stop loss, above resistance and below support on the daily chart. However, there is a risk of overnight gaps for all swing trades, but if a stock breaks out from consolidation, the initiated move can be powerful, so an extra level of caution is required.
Instead of trading sideways markets, you can focus on momentum stocks and trending markets.
7. The Pyramid Scheme
Pyramiding is a reference to adding more and more positions in a particular direction. Swing traders are looking to take advantage of big moves, so it makes no sense to take your profits right away if you can avoid that.
Think of it this way: if you are in a nice trend and believe in a stock from a longer-term standpoint, there’s no reason to take a profit or to add to a position.
Jesse Livermore used to say that he doesn’t sell a stock that he owns unless there’s a reason to be short of it.
Perhaps you would start with 100 shares. After that, what you break to a fresh, new high, you would then add 25 shares. After that, you might add another 25. You can also pyramid when a stock consolidates to reduce the average costs. But be careful, only do that if you are convinced that the company financials and outlook are still strong and reasonable for such an investment. It does not make sense to invest additional money into something that doesn’t work anymore.
From a longer-term standpoint it can be profitable, but it does take a lot of patience as stocks will take quite some time to make these moves. Also, the fundamentals still have to prove that the additionally invested money is well invested.
Best Swing Trading Strategies for Beginners: Conclusion
You can experiment with such and other trading strategies and choose what makes you feel most comfortable. An advanced market scanner like Trade Ideas helps day traders to spot day trading setups like the gap and go strategy in real-time. Without a good market scanner, you may miss the optimal entry point. Furthermore, you can use a charting tool like Trendspider for technical analysis, while tools like Stock Rover provide insights into company fundamentals, which can also be helpful for analyzing a stock.
Regardless of what you do, by all means, do not risk a large amount of your account and make sure that you are not playing with the money you need to survive on.
Reading some of the best swing trading books helps you improve your knowledge about the financial markets and to discover the best trading strategies.
If it’s an investment, then you should be looking at higher time frames. If it’s a speculative investment, then things are a little bit different. Swing trading takes out the day-to-day stress of day trading and simply focuses on the longer-term movement.
Sticking with two of these types of strategies allows you to build up your portfolio and walk away from the computer. Far too many traders are stuck to their computer screens trying to make a living every day.
You allow the market to work for you by swing trading, and you only need to check them occasionally. Make your money work for you, don’t work for it and keep in mind that some of these trades won’t work out.
That’s okay, though, because they do work out as a percentage wise over the longer term, which is your job.