The Best Swing Trading Strategies Currently That Works | TradingFuel (2024)

In this part, we will learn the Swing Trading Strategies. To learn this strategy, first we need to understand two important indicators that we are going to apply.

1. Leading Indicator: RSI (Relative Strength Index)

RSI is one of the most used ad popular momentum indicators. It givessignals on overbought and oversold conditions of stocks and it is plotted in arange between 0 and 100.

Generally, readings below 30 indicate oversold and readings below 70indicate overbought level. It helps the trader to identify whether a stock’sprice has been unreasonably pushed to current levels and whether a reversal maybe on the way.

For swing trading, we can use it to pick potential tops and bottomsdepending on whether the market is overbought or oversold. The best use of RSIis to identify the oversold conditions for buying opportunities and findingoverbought conditions for selling opportunities.

From the below chart, you can see that RSI is below 30 levels, itindicates that there might be no more sellers left in the market and the currentmove could be over. Price may get reversed and headed back up over the nextcouple of weeks.

RSI is useful for conforming trend formations. If you want to confirm thetrend, you can check the level of RSI. If you are looking for an uptrend, thenmake sure that the RSI is above 50 and for the downtrend, it should be below 50levels.

RSI forTrend Confirmation

From this example, you can see that the possible downtrend was forming atpoint A. At the same time, RSI passesbelow 50 levels, so it is a good confirmation for the downtrend that formed.

2. Lagging Indicators MACD Indicator

Moving Average Convergence Divergence is an important indicator of our swing trading strategies. It is useful for identifying a new trend, whether it is bullish or bearish. As, trade with the trend is the priority in this strategy, so we have to understand the settings of the MACD indicator first.

MACD Setting:

The default setting for MACD is (12,26, 9)

• The 12 stands for the previous 12 bars of thefaster-moving average.
• The 26 stands for the previous 26 bars of thefaster-moving average.
• The 9 stands for the previous 9 bars of the differencebetween the two moving averages. It is plotted by the vertical lines called ahistogram.

The MACDHistogram plots the difference between the fast- and slow moving average. Ifyou look at the chart, you can see that, as the two moving average separate,the histogram gets bigger.

• In the above chart, MACD represented as a BLUE line.
• The red line is the MACD signal line.
• MACD line and trigger line moves above and below thezero lines, it means that the MACD can be a negative or a positive reading.

MACD Interpretation:

• MACD isbelow the 0, it indicates a downtrend. (see A point in chart)
• MACD abovethe 0, there is an uptrend. (see Point B in the chart)
• MACD lineis above the trigger line (signal) line, is a bullish signal
• MACD lineis below the signal line, it gives a bearish signal.
• When MACDbelow 0 and the signal line – it is a strong downtrend. (see point C)
• MACD isabove 0 and the trigger (Signal) line is a strong uptrend. ( Cheek point D)

• MACD lineis below zero but above the trigger (signal) line indicates a possible trendreversal.

MACD Trading Signal

• There aretwo moving averages with different settings (‘speed’), the faster one willquickly react to price movement than the slower one.
• When a newtrend occurs, the fast line will react first and eventually cross the slowerline.
• When thisCrossover occurs and the fast line starts to diverge or move away from theslower line, it indicates that there is a new trend started.
• When theMACD line crosses the signal line and the MACD line is above – it gives a buysignal.
• After thecross over, if the signal line is above the MACD line – it gives a sell signal.

In this given example, during thecrossover of the MACD line and the signal line, the downtrend was over andthere is starting of an Uptrend. And the MACD cross over gives Buy signal.

How to Use the MACD Indicator? – Complete Guide

PSYCHOLOGY of HIGH and LOW

• The recent high range of any stock shows the maximumpower of bulls or buyers and the recent range of low reflects the maximum powerof the bears during the trading range.
• The closing price of the stock is the most important.Price may be pushed higher or lower during the day but the closing willindicate which group (buyer or sellers) is capable of closing the market.
• If the bulls are unable to close the market near thetop of a rally, they are weaker than they seem and it creates a shortingopportunity.
• If sellers cannot close the market near the lowsduring a decline then they are weaker than buyers and it crates buyingopportunity.

Swing Trading Strategies

We have seen the two important indicators that we are going to apply in the strategy. Now from below section, we will learn step by step Swing Trading strategies for intraday trading and Investors.

Swing Trading Strategies: Investors

Tools:

• Trend
• Area ofDemand / Supply
• MACD
• RSI

How to identify Supply and Demand Zones on a chart?

Time frame: Daily Chart (Need at least 3-6 month for are of demandand supply)

Steps for Swing Trading Strategies for Investors:

Use a daily chart of a minimum of 3 to 6 months.

• Now add RSIand MACD indicator with default parameters
• Check trendof the stock.
• Draw trendline
• Look forthe price making a high and higher high pattern or low and lower low pattern.
• Check theMACD is below or above 0.
• If MACD isbelow 0 and finds positive divergence. (Long Opportunity)
• If the MACDis above 0 and finds the negative divergence. (Short Opportunity)
• Now lookfor trend line breakout.
• RSI mustcome out from the oversold level (30) when there is a positive divergence inMACD.
• RSI mustcome out from the overbought level (70) when there is a negative divergence inMACD.

For Buy Trade

Entry:

• AfterPositive divergence, wait for bearish trend line breakout.
• Now check,MACD – buy signal.
• If MACDdoesn’t give a buy signal then wait for it.
• Forentering into a trade, take confirmation from RSI, it must be above 30 level

Stop Loss:

• Close belowthe immediate bottom

Target:

• Next are ofResistance 1 and 2

Exit:

• If youdon’t get the target and get a Sell signal from MACD, then exit immediately.

Example for Buy Trade:

For Sell Trade

Entry:

• After anegative divergence, wait for the bullish trend line breakout.
• After trendline breakout, check for sell signal by MACD.
• If there isno sell signal, then wait for the sell signal.
• Forconformation, see RSI. It must be below 70 levels.

Stop Loss:

• Close abovethe immediate top

Target:

• Next areaof support 1 and 2

Exit:

• When MACDgives a Buy signal.

Example:

Swing Trading Strategies for Intraday Trading

• Use intraday chart of the last 5 days with the 15-minute timeframe.
• Add RSI Indicator with default parameters
• Check RSI above 50 or below 50 level
• If RSI is above 50, find negative divergence ( For selling opportunity)
• If RSI is below 50, Find the positive divergence ( Long opportunity)
• Conform to entering into the trade with the help of MACD Buy and Sell Signals.
• Target is an immediate demand area ( Support area)
• Stop loss is immediate supply is ( Resistance Area)

For Buy Trade

Entry:

• AfterPositive swing divergence with RSI.
• Forentering into a trade, take confirmation from the MACD buy signal.

Stop Loss:

• Close belowthe immediate bottom

Target:

• Next are ofResistance 1 and 2

Exit:

• Sell signalfrom MACD

Example:

For Short Trade

Entry:

• After anegative swing divergence with RSI
• Forconformation: check MACD sell Signal

Stop Loss:

• Close abovethe immediate top

Target:

• Next areaof support 1 and 2

Exit:

• When MACDgives a Buy signal.

Example:

Money Management for Swing Trading:

Money management plays an importantrole in the trader’s journey. Here we will discuss four important parts ofmoney management, that every swing trader should use.

1. Stop loss:

Stop-loss is a pre-determined priceat which trader/investor will exit if the price moves adversely. If a stock isbought at 100 ₹ then you can put the stop loss at 98 ₹. If the price movesbelow 100 and reaches 98, trader will exit the buy position by taking loss of 2₹.

2. Trailing Stop loss:

When a trader enters into aposition, and in the profitable situation trader continues to increase the stoploss to take advantage of any profitable trades.

As the price increases, the traderincreases the trailing stop loss. If the tailing stop loss hit, then the traderwill take the profit.

3. The risk to Reward Ratio:

It is theratio between the amount of risk and the expected return.

• Risk:Difference between the entry price and the stop loss.
• Reward:Difference between the entry price and the target.
• The idealrisk to reward ratio is 1:2 ( i.e. risk of 1 ₹ and reward of 2 ₹) and 1:3
• R: R can beincreased by using trailing stop loss

Importance of Risk to Reward Ratio

From the above table you can seethat with an R: R of 1:2, money can be made even if you are right 40% of thetime.

4. Position Sizing:

Positionsizing is about making decisions regarding the number of shares/contracts to beentered in for a particular trade. Theamount of money at risk in a single trade sets the ‘Size of Position’.

Now let’sdetermine how much money to lose in a single trade? By an example.

If you start with 5, 00,000 ₹ of initialcapital and risk per trade is 1% of total capital = 5,000 ₹. So if you buy a stock at the 100, yourstop-loss is 95 with 1000 qty of share.So the maximum loss you can bear is 5,000 ₹ in one trade as per 1% risk appetiterule.

Now, let’s see how risk appetitehelps us to protect our capital.

Therefore, to lose the wholeamount (5, 00,000 ₹), how many times do you have to go wrong continuously? Now look at the 4 different scenarios:

Capital Preservation: Strict stop loss

So from, the above example, wesuggest you always go with scenario 4, for better risk management.

Swing Trading Part-1

Note: Tradingfuel.com provides free education through blogs. Strategies given in this blog is only for education purpose. We are not responsible for your profit or loss. Do backtest before using our swing trading strategies.