A beginners guide to swing trading in the stock market
The first 2 years of investing in the stock market, I only knew about long term investment. Buy a stock that I have high conviction in, and hold for many years. One day, I asked myself “Is there a stock trading strategy that can make me a quick profit?”
The answer is yes! Swing trading, is a style of trading that involves holding a position for a short period of time. Anywhere between a few days to a few months.
I want to clarify that this is a strategy to add to your arsenal of trading methods. I’m still a big believer in holding stocks you believe in for the long-haul. This is a strategy I use to make some extra cash as quickly as possible and continue adding those profits to the long term hold.
Okay, let’s get into swing trading in the stock market.
What is swing trading?
Swing trading is all about catching a stock when it’s getting an upward momentum. This type of trading strategy is meant to profit you at least 20% income gain in a short period of time.
Look at the blue line in the image above. The stock starts falling from a new recent high, it then trades sideways, and follows up with an upward trend.
One of the objectives to swing trading is to buy in when the stocks is starting to swing up, but I’ll cover how to seek for that later this article.
Step 1: Use Stock Charts for swing trades
Truth be told, you can use any stock charts out there that provide the right indicator tooling for you. I recommend StockCharts.com because it’s free, and really easy to configure.
Go ahead and search the symbol or company you want to look up. I’m going to pick Apple ($AAPL) for this example.
Step 2: Setting up the indicators for your swing trades
Once you’ve selected the stock you want to analyze, you want to make sure you have the right configurations:
- Time interval
- SMA – Simple moving average
- EMA – Exponential moving average
- RSI – Relative strength index
- MACD – Moving average convergence divergence
Setting up your time interval, SMA and EMA overlays on StockCharts.com
When you’re looking at a stock chart, make sure to make the time interval daily.
Add add the following overlays with these given values:
- SMA – 20
- SMA – 200
- EMA – 5
Setup RSI and MACD indicators
The next step is to add the following indicators with these given values:
- RSI – 14
- MACD – 12,26,9
Now that you have the stock you want to trade, and your configurations set up. You need to see what the stock has been priced at by analyst.
This is a crucial part, because it will let you know if their’s enough profit margin to squeeze out of a stock trade. The minimum profit margin you should aim for is 20%. Nothing less.
Step 3: Use tipranks.com to see what the stock price target is
TipRanks.com is a website that evaluates public stocks by financial analysts and financial bloggers. The stock is ranked based on their accuracy and performance.
I’m going to search for the Apple stock ($AAPL), and see what the analysts have to say about as of May 20th, 2021.
As you can see, the financial analysts have put a price target on $AAPL for $159.55. That has a +25% profit margin from its current price. This lets me know that this swing trade can be a great pick.
Now that you know that it checks the profit margin box, it’s time to analyze the charts and see if it checks the other boxes that make for a good swing trade.
Step 4: Reading the stock chart
The stock has to cross of these items, otherwise it doesn’t give me the confidence to buy in.
- Stock has been trading sideway first
- The RSI is below 55.
- Candlestick & EMA (exponential moving average) is above the 20MA (simple moving average)
1. Is the stock moving sideways first
A swing moves in 3 directions. Down, right, and up. If you try to swing trade during a choppy market (up, down, up, down) then expect choppy results.
Let’s analyze the $AAPL stock chart below:
Let’s start with the red arrows first. Notice how it never traded sideways first. So there were sharp increases of profit, and it followed up with sharp downward trends. This makes swing trading very difficult and less predictable.
Also notice how the second red arrow went even lower. This now forces you to wait longer to reach profitability. Try to avoid stock movements as such.
Now analyze the blue lines. When it trade sideways it lets you know the stock isn’t acting funny. It gives me a peace of mind that my trade isn’t going to act out.
Just because the stock is trading sideways, it doesn’t guarantee that it’s going to follow up with an upward trend. Let’s look at the RSI indicator to give you a better idea of where stock stands.
2. Check that RSI is below 55
The RSI is an indicator that let’s you know when a stock is being overbought or oversold.
When the value of the chart is nearing 70 or is above, that is a good indicator that it’s not a good time to buy in because at some point every stock is going to fall to correct itself. If you have positions, this may be a good indicator to let you know to lock in some profits.
If the stock is below 30, it let’s you know that it has a huge runway to move upward and you don’t have to prematurely sell a stock from the price target that you set out for. From my experience, low 50’s and below is a good RSI value for a swing trade..
StockCharts.com will give the RSI line graph above the candlestick chart.
The RSI is not 100% accurate but it’s pretty darn close. Let’s look at some example on the Apple stock ($AAPL).
Look at the red circles. Every time it has crossed over the 70 marker, or neared it their was huge selloffs.
The blue circles indicate buying opportunity because they are at a low RSI value. Low RSI value means it’s been oversold and it usually follows up with an upward trend. The goal is to buy low, sell high.
Now let’s look at current $AAPL RSI value:
In the image above, it shows that the RSI value is 48.45. This lets me know that the stock has a good runway for growth in value and that it’s not nearing to a selloff.
Again, this is not 100% accurate but it’s pretty close according historical patterns.
3. Make sure the candlestick & EMA5 is above the 20MA
The last step is to check if the candlestick ended in an upward trend and above the 20MA. If it doesn’t crossover then it lets me know it’s not ready swing trade.
Let’s look at the $AAPL chart.
Look at the blue circles. When the candlestick ended in upward trend and above the 20MA (blue line), the value of the stock skyrocketed.
Now let’s look at the red circle at the end of the chart. At the current time of this snapshot, the candlestick is on an upward trend but it has NOT gone above the 20MA value.
You can always take the gamble and make the bet it will, but I prefer consistency and to just wait it out when it has. So to me, this did not check my third box.
Again, this is not 100% accurate. The stock can always go further down even when it has crosses over the 20MA, but historical record show that it usually follows with an upward trend when it does.
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