Updated: May 25, 2021

How to swing trade stocks with the best swing trading strategies.



How To Swing Trade with multiple Swing Trading Strategies.

Many refer to swing trading as being the sweet spot, commonly using both technical and fundamental analysis for trade selection.

The aim of the swing trader is to hunt for stocks in a trend and take chunks of profits, then quickly look for new opportunities trying to maximise the use of capital. A flat stock price is seen as an opportunity cost and does not yield market beating returns.

A trade typically lasts a few days through to a few months and can often yield excellent annual profits.

We take a look at the process and strategies used in order to make swing trading a full-time business endeavour.

Today we present ‘How To Swing Trade’.

Swing trading is generally identifiable by a swing low and a swing high.

The job of the swing trader is to try and identify these points, whilst attempting to capture the movement in between.

In this example the trader is looking to buy (or go long) at the swing low and follow the trend to the swing high.

Alternatively, if the trader wanted to sell the stock (or go short), they would sell at the swing high and follow the trend until the swing low.

However, consistently pinpointing the swing high’s and low’s is near impossible, it is therefore more realistic to look for the bulk of the move rather than all the move.

In fact, some of the move should be missed in order to confirm the change in direction, or confirmation of pivot points seen here and here.

You may have heard the terminology ‘Buying the Pullback’ or ‘Buying the Dip’, in essence, this is swing trading.

The pivot point not only tells us that the trend has temporarily changed, but it also holds significance regarding risk management, meaning we need to know where to logically place a stop loss limit.

Once confirmed, the pivot point is also considered a support level, or a level in which if price returned, there is some probability it could bounce off or perhaps consolidate.

Therefore, placing a stop loss a few points below here could make sense.

In our videos we often refer to the risk reward ratio and it is accepted that a 2 to 1 ratio is a minimum for any time frame being considered. Setting the stop loss is the foundation of this equation.

In this example, we decide the change in trend is confirmed and we look to enter our swing trade at this point. Let’s assume the purchase price is $10 per share and our stop loss is at $9 per share.

We have therefore established a 10% or $1 per share risk.

To achieve our 2 to 1 risk reward ratio we need the price to rise to at least $12.

The price continued the trend upwards beyond the minimum $12 level to the swing high, but remember, the swing high is only confirmed once the trend has changed direction creating the pivot point.

We decide at this point the trend has changed direction and exit the position banking a $2 per share profit and confirming our 2 for 1 risk reward.

Part of this strategy and the psychology of the trader is the acceptance of having to sacrifice profits to allow for trend change confirmation. Not easy, but a necessity in this method.

Brian Pezim, author of How To Swing Trade suggests risking a maximum 2% of your account balance against each trade position, and says;-

“Limiting how much you risk on every trade ensures that you will survive to trade another day even if you have a few bad trades in a row”

To reinforce this message, let’s look at how a 2% account risk and a 2 to 1 risk reward ratio could impact a trading account.

Assuming we have a trading account of $10,000 and a maximum risk of 2%, we can determine a maximum risk of $200 per position. We will also assume an average win rate of 50%.

Let’s look to see how an equity curve would look and the impact of a losing run would have.

Here we have the win rate, maximum $200 risk and the $400 win amount, making the trades a 2 to 1 proposition.

We make 200 trades and run the Monte Carlo simulation 100 times. This presents the best and works case scenario over the 100 simulations.

The maximum profit we achieve is almost $26,000 and the minimum profit achieved is just over $10,000.

But the important metric for this exercise is the losing streak possibility, here we can see that we had a maximum losing streak of 13 trades in a row, therefore assuming we used the maximum 2% risk per position, the account would have dropped by 26%.

This remember is based on a reasonable 50% strike rate, reinforcing that any trade risk greater than 2% could make a huge dent in equity value.

We can see such an example here; a long losing run gave significant drawdown before making healthy returns.

The key message, control your risk…..

Shorting stocks is also an important strategy for a swing trader, stocks tend to drop more quickly than they rise, generally 3 times as fast.

An old adage is bulls take the stairs up and bears take the window down.

Human psychology is often the driver for such action in the market, where the fear for loss is more powerful than the desire for potential gain.

But how do we take advantage of these scenarios using swing trading…….. Let’s look at a chart and a powerful indicator.

Here we see the stock chart of the company Uber Technologies.

We use the MACD (or Mack D) indicator here, this stands for Moving Average Convergence Divergence, which measures the momentum of price and helps spot a change in sentiment. For this example and to keep it simple, we are looking for the black line to cross above the purple line. This is a bullish signal.

Swing traders use many different indicators, but my experience tells me the Mack D is the most useful indicator, other than price action itself.

The Mack D, like most indicators is a lagging indicator, meaning it reacts only after price has moved, but remember with swing trading some sacrifice is part of the strategy, so a small lag must be accepted.

Let’s pretend we can only see this piece of the Uber chart, we recognise through price action an uptrend with a number of supportive inflection points.

We see the Mack D black line cross above the purple line and recognise this as the moment to place a trade.

We place a stop loss here below the support line and look to stay in the trade until either the stop loss is hit, or the Mack D black line crosses below the purple line, signalling the end of the trend momentum.

Over the next 22 days we see the price increase until the black Mack D line crosses below the purple line here. We close our position and lock in a 6 to 1 risk reward trade.

Knowing we are unable to perfectly time an exit, we sacrifice some gains prior to the swing high in anticipation of the changing trend momentum and sentiment.

We wait for a significant change in trend to look for an opportunity to place a short trade, which we see here, this time we look for the black Mack D line to cross below the purple line, here.

We place a short trade here and place a stop just above the tail of the candle.

So far 12 weeks into the trade the price has dropped significantly, and we are showing a risk reward ratio of 9 to 1. We wait for the next cross of the Mack D line and must accept there will be some price sacrifice at some point.

Let’s calculate this current 3 month period in terms of profit. If we assume a stop loss risk of $200, the long trade would have made a profit of $1200.

A $200 stop loss for the short trade would have generated a $1800 profit up to this point.

A total $3000 profit in 3 months.

This is a great example of a long and short swing trade strategy.

There are many technical patterns swing traders also use to time entries and to create logical stop loss placements. Here we see one of my favourites, the Bull Flag.

The Bull Flag is classed as a continuation pattern and usually occurs after a strong trending move.

Research tells us that the Bull Flag pattern has a 67% success rate, the pattern is considered successful when the upper trend line is broken, shown here, and price travels beyond the length of the original flag.

In this example the swing trader would place an entry here, and a stop here just under the swing low.

This is where a very important lesson is offered, and once fully understood it will transform your trading level from amateur to professional.

We revert back to our risk reward, the risk is predetermined here and our reward is predetermined here. Giving a 2 to 1 risk reward ratio.

Hopefully the penny has dropped. The pattern has a 67% chance of success AND we get a 2 to 1 ratio.

To quickly put these stats into perspective let’s put these figures into our Monte Carlo trade simulator.

Here we put in the success rate of the Bull Flag pattern, we enter the risk and target profit providing the risk reward ratio of 2 to 1 and we run 100 simulations of 200 trades to see the results.

We can see all the equity curves are stable and the lowest return is $28,000 and the highest $47,000.

A maximum losing streak of 8, therefore a 2% account risk for each trade would have given a 16% drawdown.

We can also calculate overall return on risk, we use the sample size of 200 trades multiplied by position risk of $200 which equates to $40,000, our average return is $38,000, therefore this strategy produced a return of 95% on risk.

The same principle and success rate remain for a bear flag, we see a swing high on a downtrend and look for the break of a flag to enter the trade.

Combining these patterns with the Mack D indicator is a very powerful swing trading strategy.

We can however improve the chances of success further by combining these technical set ups with fundamentals. There are many books on how to assess a company from a fundamental perspective and which aspects should hold the most weighting, but for me this process should be kept as simple as possible.

I have covered this in another video but I recommend using a service through a website called Stockopedia. The service offers a simple screening process.

The service offers a rating which is classified by the term Stock Rank, it combines Value, Quality and Momentum scores.

By using a portfolio of the top ranked stocks you would have achieved an 139% return from 2013 through to the end of 2019. This compares to the FTSE all share index of 27% over the same period.

The information can be filtered in many ways to suit your preference.

Combining such a simple, proven filter with the technical aspects of a swing trader would be very effective.

As a long-term member of Stockopedia myself, they have kindly offered a 25% discount link below coupled with a 7 day free trial for our subscribers.

Lets quickly review key components of a typical swing trading strategy.