Swing trading is a style of trading that centers around changing price trends throughout short to medium timeframes. Swing traders try to profit from big downswings or upswings in prices. There are several swing trading strategies and technical indicators available. The best strategy to use depends on personal preference and trading style.
Keep in mind there is no perfect strategy, and even the best setups can go against you. However, traders that use a strategy and trading plan have better success. This article goes over 4 swing trading strategies commonly used by swing traders.
Bollinger Bands Strategy
Bollinger bands consist of two outer volatility bands with a moving average (typically a 20-day MA) in the middle. The upper band adds 2 standard deviations of the moving average and the lower band subtracts 2 standard deviations.
Note: Bollinger Bands® are a registered trademark of John Bollinger.
The upper and lower Bollinger Bands can turn into support and resistance levels. When the market price reaches the lower band watch for a reversal. Enter as soon as the reversal is confirmed with a tight stop loss, then take profit at the opposite band. Consider adjusting your stop loss to break even or use a trailing stop depending on the price action.
When the market price reaches the upper band, you’ll again want to watch for a reversal. Once you have confirmation you can sell short and take profit at the bottom band.
Both trading strategies depend on a consistent trend. If the trend changes you will see the price continue to breakdown below the lower band or breakthrough the upper band. It’s important to wait for confirmation before you enter and plan your exit.
Lower Band Bounces and Upper Band Pullbacks
The chart above uses a 4-hour timeframe and illustrates buy/sell signals using Bollinger Bands. You can see the price bounces off the bottom band and gets rejected off the upper band.
Relative Strength Index (RSI) Strategy
RSI is an indicator used to identify oversold and overbought conditions. Standard overbought levels are above 70 while standard oversold levels are below 30. Some traders prefer to use 80 as overbought and 20 as oversold. The time period is usually 14 days although it is common for traders to use a 10-day period.
Buying price dips while the RSI is below 30 and taking profit at 50 or 60 RSI levels is a simple and effective swing trading strategy. Short selling stock with an RSI above 70 and taking profit around 50 or 40 RSI levels is another strategy. RSI is a very popular trading indicator, but it’s not flawless, the price can stay at overbought and oversold conditions.
The chart above uses a 4-hour timeframe and 14 day RSI. It shows an example of the price pulling back at overbought levels and bouncing at oversold levels.
Trend Lines Strategy
Trendlines are the most basic tool available for a technical analysis trader. They are mostly used to determine possible support and resistance levels. To draw a trend line, focus on connecting the major price points or bounces. A downtrend line will have a downward slope and is formed by connecting two or more points. A downtrend will have lower lows and an uptrend will have higher highs along with higher lows.
Trend Line Breakdowns and Breakouts
Using the trend line breakout technique will help you time your entry and capitalize on major upward swings. You can also use trend line breakdowns to find short entries and profit from large downswings. If a trendline breaks, wait for confirmation to see if it holds. Another trend line strategy is to simply buy bullish trends and sell bearish trends. Trend lines are additional
The chart above uses a 1-day time frame, it’s common for traders to compare long and short term trend lines. You can see the major trend break resulted in a large downswing.
Moving Average Crossovers Strategy
This swing trading strategy forms a sell signal when the fast moving average crosses below the slow moving average. And a buy signal when the fast moving average crosses above the slower moving average. Your entry should be when the MA lines cross and your exit should be when they cross back. The 10- and 20-day simple moving average (SMA) is commonly used for swing trading, although other timeframes can be used. Shorter time periods can create more false signals than longer time periods.
The chart below uses a 4-hour time frame along with a 10- and 20-day simple moving average. You can see the buy signal is created from the 10-day MA moving above the 20-day MA. There is also an example of a somewhat false signal, the 10-day drops below and the quickly goes back above. This is where using additional indicators like trend lines can come into play and help you choose a proper exit. Soon after the 10-day crosses down again, it confirms the start of a downtrend and generates a sell signal.
4 Swing Trading Strategies
- Bollinger Bands – Buying lower band bounces and selling upper band pullbacks.
- Relative Strength Index (RSI) – Buying oversold prices under 30 RSI and selling overbought prices over 70 RSI.
- Trend Lines – Buying trend line breakouts and selling trend line breakdowns.
- Moving Average Crossovers – Buying when the faster MA crosses above the slower MA and selling when the faster MA crosses below the slower MA.
These 4 swing trading strategies use basic technical indicators to generate buy and sell signals. They can be used in conjunction with other strategies and technical analysis. All of the charts used in the article were created using TradingView. Remember that no strategy is perfect and there is no guarantee these signals will work every time. It’s important for swing traders to keep their losses small and let their winners run.