Swing trading is a type of short-term trading that occurs over days or weeks. Traders who use fundamentals to form their trading ideas tend to be swing traders, as these corporate fundamentals change weekly.
The act of swing trading is different from day trading, as day traders typically only hold their position for a single trading day. Trend traders who focus on price trends may hold a stock position for days, weeks, or even months.
Understanding the Basics of Swing Trading
Becoming a successful swing trader means understanding the market and choosing the right stocks to trade. The best stocks for a swing-trade strategy are large-cap stocks that are the most active on major exchanges. Stocks like this have a very board swing when looking at weekly or monthly charts.
Swing trading strategy means looking at the history of a stock’s performance in both bear and bull markets. Choosing the right market is crucial because it dictates which way the trader should focus, long or short.
Most traders want a market that oscillates between highs and lows, like waves crashing onto a beach. Extreme bear and bull run markets are not ideal for swing trading since momentum carries the price in one direction.
Why Are Moving Averages Important?
Since swing traders are looking for a market that oscillates back and forth, simple moving averages (SMA) can provide a bigger picture. Support and resistance levels can be a good indicator of whether to buy a stock. Crossover patterns might indicate good entry and exit points.
Exponential moving averages (EMAs) is a variation on the SMA that gives more focus to current data. EMAs gives traders signals for entry and exit points faster than SMA.
A bull crossover occurs when prices rise above an SMA or EMA after a period of being below. This kind of trend signals a reversal of price may be for the stock.
A bear crossover happens when the price of a stock or security falls below EMA. This crossover signals a reversal of the high trend and provides an excellent indication to find an exit point for any current positions. These crossovers can also be used to create short swing trades, too.