Simple Swing Trading Methods
Swing trading uses technical analysis to study stock charts of previous price movements and attempt to forecast future short-term moves. Swing traders look for particular chart formations that signal good opportunities to buy and sell in trades lasting about 2 to 5 days, buying after a pullback in price and riding the swing upward.
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Identification
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A swing trader looks for long-term trends, to identify profitable short-term moves within that trend. These traders are not concerned with any company fundamentals, only with the stock chart and technical indicators to forecast price movements.
Time Frame
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Essential in the practice of swing trading are entrance and exit strategies to obtain the maximum profit. The trader enters on a price retracement and must have already decided on an exit strategy. Traders can decide to exit once a stock reaches a certain price, or they can set a moving (trailing) stop sell order toward the end of each day, which will automatically sell the stock if it dips back down to a certain level. In a strongly-trending short-term move, this actually can keep the person in the trade for longer than anticipated, an unexpected positive occurrence. The most simple swing trading method is to buy in a pullback when the price begins moving upward again, and sell as soon as it dips back down.
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Types
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Trend lines can be used to identify good places to enter and to take profit. The trader draws a line under the bottom of the uptrend and over the top, and extends these lines into the future. The trend lines point out ideal places to buy and sell as a stock follows the trend upward.
Considerations
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In an uptrending stock that has stalled, support and resistance levels can be used for a simple swing trading method. A support level is the point where a stock has historically stopped dropping in price, and the resistance level is a price which at which a stock historically does not move higher. These lines can be drawn back into the past as far as is reasonable to find a definitive price range. The swing trader buys the stock when it bounces off the support line and sells when it hits the resistance line.
Features
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Another entrance strategy occurs when the stock is trending upward, then drifts downward for several days, enough to draw a short downtrend line over the top. When the price breaks out of this downtrend line with higher-than-usual volume, that is a signal to buy. Exit strategy would be the same as with other swing trading methods---taking a profit at a predefined price, taking profit by following a trend line, or following the upswing with a trailing stop.
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