Swing Trading Strategies for Beginners: Tips to Get Started
Are you looking to get into swing trading but don't know where to start? Don't worry; you're not alone. Swing trading strategies can be a great way to make money in the stock market, but it's not without risks. In this blog post, we will discuss swing trading strategies for beginners and give you some tips on getting started.
What is Swing Trading or Swing Trader?
Swing trading strategies are a type of short-term trading that involves taking trades in the market and holding them for a period of time, typically one to thirty days. Swing traders aim to profit from the price swings in the market.
Swing trading strategies are best for traders who are too busy to monitor the markets throughout the day. A swing trader could be busy professionals, parents, students, and more. This type of trading style allows people to utilize the markets in their busy lives.
Advantages of Swing Trading
Swing trading strategies have a lot of significant advantages that create an appeal for all kinds of traders. Below are some of the most popular reasons traders swing trading.
- Ability to take advantage of the market volatility. A Swing trader can profit from the natural ebbs and flows of the market in a short period of time. For example, while the average returns of the stock market might be 7% per year, some stocks and indexes funds can move this amount in a couple of days.
- Less time is involved for swing traders than in day trading or other forms of short-term trading.
- Less monitoring is involved because the price profit zone and stop-loss levels are far apart. As a result, even in high volatile markets, price levels may take days to be reached.
- Automated trading is possible with the use of bracket orders. OCO orders allow traders to set and forget trades, allowing the market to work for them.
- The ability to profit in both rising and falling markets: swing traders can profit from price swings in both directions. Trading the falling market is possible by shorting securities, put options, and inverse ETFs.
Disadvantages of Different Swing Trading Strategies
While swing trading may sound like an incredible opportunity, some major disadvantages need to be understood. Below are some of the biggest warnings traders need to know about swing trading.
- Entry points are critical for a swing trader. While swing trading takes long until levels are hit, this doesn't mean that a trader can enter anywhere in the trend. Many traders will get burned not waiting for safer entries, which we will discuss later.
- Being impatient can cost a trader a lot of money. The slow speed of a swing trade can cause a trader to exit early for profits without allowing the actual profit levels to be hit, especially if they are used to day trading. Taking profit too early is a common mistake for traders everywhere, but swing trading stocks can make this even tougher to avoid.
- Holding losing trades too long. The length of a swing trade can allow traders to justify holding a losing trade past their stop losses thinking the trade could work out later. However, holding losing trades can cause traders to stay unprofitable when their winning trades don't offset the losses.
One of the biggest downfalls of swing trading stocks is when a trader doesn't stick to their plan. In addition, these trades tend to take time, and if a trader cannot stay patient, their results will surely suffer. But, aside from these significant disadvantages, we believe this trading style has more good than bad.
Time Frame for Swing Trading
Swing trading is not possible for those looking too short of time frames, such as day trading. To successfully swing trade and not monitor the trade constantly, traders need to plan trades on the 4 hour, daily, weekly, or monthly time frame. The larger the time frame, the longer that trader will likely hold the trade. The shorter the time frame, the less time the trader will be holding.
Any setups found under the 4-hour time frame will likely lead the trader to get stopped out very quickly and sometimes on the same day. Getting stopped out, same-day can defeat the purpose of a swing trade and be harmful to those traders under the PDT rules. Therefore, the PDT rule limits traders to 3-day trades in a 5-day rolling window. The best setups to look for will be discussed later in this article.
Start Swing Trading Stocks with Options
Swing trading options can be a great way to increase leverage and possible returns in the financial market. However, there are some advantages and disadvantages of having a swing trading system for options that you should know before starting trading.
Some advantages of swing trading options include:
-In a swing trade, you have the potential to make large profits in a short period of time
-You can control a large number of shares with a small amount of money
-You can limit your risk by only making swing trades for options that are in the money
Some disadvantages of swing trading options include:
-The markets can be very volatile, which can lead to big losses
-Options can be difficult to understand and trade
-You need to have a good understanding of the underlying security before swinging trading options.
If you're thinking about swing trading options, understand the risks and rewards before getting started. Swing trading can be a great way to make money in stock trading, but as with day trading, it's not without its risks and requires risk management to prevent losing money rapidly.
#1 Swing Trading Strategy: Engulfing Candles
An engulfing candle is when the market produces a candle where the previous candle is inside the range of the new candle. This candle will 'engulf' the last candle's body. Think of a Pac-man or Russian nest doll scenario.
This is the inverse of an inside candle, where the market produces a candle where the body is smaller than the previous and inside the range. When we see an engulfing candle, it is typical that a trend begins and is followed by at least one other candle in the same direction, as seen by the continuation candle below.
Bullish Engulfing Candle: The candle starts below the previous candle's low and moves higher past the previous candle's high (as seen in the example below). You may see this in a raging bull market.
Bearish Engulfing Candle: The candle starts above the previous candle's high and moves lower past the previous candle's low.
Why it Works
The psychology behind the levels a candle develops is precious; for example, the tiny candle (above) has an open and close. They are significant levels for the future. For the next candle to smash those levels moving in one direction says a lot about who is in charge in the market. This is a powerful move; we see a continuation with it.
Trader Tips: You may not have to wait for the engulfing candle to close to enter the trade. For example, if the candle has already begun to 'engulf,' and there is still time left, it may be good to play the momentum of trending markets right away as these candles typically close at the lows. There is no telling when it will stop moving in that one direction, which increases your risk to reward. You don't have to figure out where entry and exit points are on the next candle. You also avoid the scenario where the stock gaps are down, and you completely miss the move.
When to Enter: There are two places a trader can go long in this scenario. As you can see, the candle completely engulfs the red candle. This momentum should bring us lower fast. The better entry point will be at the end of the engulfing candle or the start of the next candle (entry #1). The riskiest entry for losing money rapidly is going to be right when the first candle passes the lows of the previous red candle (entry #2).
Where to place a stop loss: For this place, your stop-loss is best no lower than ⅓ the candle body. This gives enough wiggle room not to get stopped out prematurely.
Where to take profit: The trailing stop loss works the best in this play. A trailing stop loss is where the stop loss rises with the price of the stock. This is a fixed percentage a trader is willing to risk. For example, if the stop loss is set to 5% and the stock rises 10%, the stop loss will be raised to +5%. If the stock reverses, the trader will lock in a positive 5% instead of a negative 5%. This allows you to ride the momentum; however, it reverses how far it goes while locking in profit.
#2 Swing Trading Strategy: Zero line Cross
A zero line cross is a favorite trading strategy for a swing trading system because of how early this allows traders to enter into new trends. Most trading oscillators will include a zero line, and when the indicator crosses this line, the trader can find a new bullish or bearish trend.
Bearish Zero Line Cross: As seen in the example below with the Market Mover indicator, the candlesticks turn from yellow to blue, indicating a bearish trend developing. The oscillator under the candles also changes the yellow to blue color as the indicator crosses the zero line. The Market Mover will also highlight this with a "bear" signal.
Bullish Zero Line Cross: As seen in the example below with the Market Mover indicator, the candlesticks turn from blue to yellow, indicating a bullish trend is developing. The oscillator under the candles also shows the blue to yellow color change as the indicator crosses the zero line. The Market Mover will also highlight this with a "bull" signal.
Why it Works
Most indicators are a visual of the stock's momentum, extreme momentum is dangerous to enter and can be seen when oscillators are at their extreme levels. Weak momentum is a very popular place to trade from and can be seen when the oscillator heads to the zero line. This weak momentum can lead to a switch in direction and a new trend or the continuation of a current trend. Most traders will only look to enter at zero lines because of this.
Trader Tips: One indicator is not enough confirmation for a trader to succeed; traders need to have 2 or 3 pieces of confirmation before entering into any trade. A personal trading strategy of mine is using the Market Mover indicator with a Ripster ema cloud. The ultimate bullish and bearish entries are described below:
Ultimate Bullish Entry Point: The ema cloud three is blue, the ema cloud two is green, and the Market Mover indicator has yellow candles. The moment this first appears is my favorite place to go long!
Ultimate Bearish Entry Point: The ema cloud three is yellow, the ema cloud two is red, and the Market Mover indicator has blue candles. The moment this first appears is my favorite place to go short!
When to Enter: As seen in the example above, once the candle changes color from blue to yellow, that is when traders will look to enter. Typically, waiting for the candle to close yellow is key because there is a chance of a false breakout and a fake-out which can leave a trader without confirmation. Another option is to play the downside when the candle changes from yellow to blue shown above as well.
Where to place a stop loss: For this risk management, your stop-loss is best taken when the candles flip colors again.
Where to take profit: The best place to exit a zero line play would be when the oscillator heads to the extreme of the range. This can be seen above when the candles turn orange or red during an uptrend or turn dark blue or green in a downtrend—the Market Mover oscillator's movement to the zero line and the top of the range below. When oscillators are extended, the stock has a high chance of retracing to the mean or pulling back. Another place to profit target for exit is when the candles flip colors back to the opposite trend.
#3 Swing Trading Strategy: Inside Candles
Inside candles are an excellent opportunity to play a reversal in a stock. The key to finding this setup is to have a trend slowly die to the point where you see very tiny candles with very tight ranges. The first candle sets the range for the rest to trade within. This is the inside range, and once the stock breaks out from the range, the new trend (reversal) begins. As shown in the stock chart below.
Why it works: Inside candles at the end of a trend signify a place of consolidation and a weakening of the trend. In the example above, the bottom of this trend allows big players to accumulate a large number of stocks from the hands of the desperate shareholders who lost money. In a bearish trend, this is a place where all hope is lost, but the smart money managers know it's an opportunity of a lifetime. So they keep the range small because they are quietly buying, doing it when nobody expects it. As a result, you can be a part of the breakout if you can recognize it.
Warnings: This doesn't necessarily mean a reversal; the trend could always continue after this. That type of pattern on a stock chart would be referred to as a flag. So always be prepared to play to break out from the range, don't be married to the direction.
Trader Tips: The more inside candles you have, the larger the breakout that occurs shortly after. In this example above, we had four inside candles, and the breakout leads to a massive bull run.
When to Enter: A trader using an inside candle trading strategies would purchase the security if it was inside the range of the previous day or wait for a break over the range. Waiting for a confirmed breakout for entry and exit can help the trader not lose money, as playing confirmation is always a better strategy. A trader will only look to enter before the breakout if the possible return is worth it. A pre-breakout entry point allows traders to have a more significant return if correct and a smaller loss if the trade does not work out.
The risky place to enter this setup is a touch of the support level of the inside candles (entry #1). The safer entry will be a confirmed breakout from the consolidation zone, and this will lead to a large move (entry #2).
Where to place a stop loss: The stop loss should be placed a the low of the inside candle in a bullish trend or the high of the inside candle in a bearish trend at your own risk.
Where to take profit: The best short-term exit is the first consolidation zone or 50% retracement of the last move. The mid-term exit will be a 100% retracement of the preceding move. Finally, the long-term exit may be a break to new highs and a continuation of the trend.
Concluding Statements on Swing Trading
Swing trading can be a great way to get into the market, but it is essential to swing trade with caution. There are many strategies that swing traders can use, but some of the most popular ones include inside candles, engulfing candles, and zero lin crosses. Traders need to understand not to risk more than they are willing to lose. Swing trading can be a great way to get into the market, but always use caution and have stop losses in place. Swing trading options can also be an excellent way to increase leverage and possible returns but should be approached with extreme caution.
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