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Swing Trading: Popular Technical Analysis Strategies for 2022

Trading

Megha Parmar

13 Dec, 2022
8 mins read

Swing trading is a tricky yet fruitful trading tactic. Those who have been exploring the stock market for a while now must be well-acquainted with swing trades and how to identify them. But swing trading still poses a labyrinth for the traders who have just started. So, what should be done to walk out of this labyrinth? As in, how to identify swing trades? Well, here we are with an insightful piece on swing trades and a handful of efficacious technical trade strategies to identify them.

What is Swing Trading?

Swing trading is a method by which traders invest in the direction of the market trend to make lucrative gains. The market trend usually encompasses the price fluctuations and movements of a security or an asset persisting for days and sometimes weeks. Swing trading stands a class apart from other trading techniques, including day trading. This is because swing trading involves holding a position, be it long or short, for some time while day trading is all about trading stocks on a particular day.

Swing trading can be neatly branched out into two categories:

  • Swing Low

When the price hits a low point just to be followed by two consecutively low points that are slightly higher than the latter, then it is termed a swing low.

  • Swing High

This happens when after hitting a high point, the price makes two more highs that are higher than the latter.

Identifying the swing low and the swing high is easier said than done. And this is the reason why new traders usually land in troubled waters while practicing swing trading. Then, why should you dampen your feet in the waters of swing trading?

If It’s Tricky, Then Why to Opt for Swing Trading?

Almost every second novice trader has this question in mind that if swing trading is this tough, then why give it a try? Well, there is a reason behind that.

Initially, every person starts trading as a part-time work. You work at a designation in some firm for a specified number of hours and once done, you see how’s the market doing. Since our lives are so fast-paced, we hardly have time to devote the entire day to the trading screen. This is where swing trading comes into the picture. With swing trading as your trade strategy, you can easily mint a handsome amount of income from trading.

On top of that, for swing trading, one isn’t bound to stick to a bad-performing stock as is the case with a long-term investment. In such a scenario, just book your loss and move to a better-performing asset or stock.

Now, let’s move to the significant concern of the blog which is on using technical trading strategies to identify swing trading trends. 

Technical Tools for Identifying Swing Trading

The Indian stock market often witnesses the usage of technical tools such as trends, trend reversals, candlestick, or chart patterns and to name a few for identifying the respective swing low and swing high, and, henceforth the swing trading opportunities. In this section, we have laid out the most popular and efficacious of the lot:

       1. Relative Strength Index (RSI)

Swing trading is usually governed by a couple of momentum indicators. One such momentum indicator is the “relative strength index”. A relative strength index shows how oversold or overbought the prices of a stock are. It does this by putting the stocks into zones.

Since it is an index, it comes with already designated or already-specified levels or zones. Following are the two broadly categorized zones:

  • Overbought Zone: Whenever the prices cross level 70, the stock immediately lands in the overbought zone. Here, the prices tend a reversal, i.e., they can become a downtrend.
  • Oversold Zone: Whenever the prices are below level 30, the stock is said to be in the oversold zone. Here, the prices tend a reversal, i.e., they can become uptrend.

These very tendencies make this indicator beneficial in swing trading.

       2. Moving Averages (MA)

This is a technical method by which one can compute the average of the stock price during a period. It helps in ruling out abrupt short-term spikes. It can be classified into time-based categories such as short-moving averages, medium-moving averages, or long-moving averages. But a clear classification has been laid out by the money and financial experts:

  • Simple Moving Averages: Here, the average is computed by considering all the closing prices of a particular period.
  • Exponential Moving Averages: Here, the average is computed by considering the prices that are closer to the current date.

Swing traders can identify a change in the prevailing trend whenever a short-moving average intersects a long-moving average. Along the same lines, whenever a faster-moving average intersects a slower-moving average from below, then it is a sure shot bullish trend. On the other hand, when an intersection is made from the above of a slower-moving average, then it is an indication of the bearish trend. However, ‘moving averages’ as a technical tool is lackadaisical in nature since it doesn’t consider the past history of trading transactions made in the context of a particular asset or security. This constricts the use of ‘moving averages’ as a validation of the prevailing trends. 

       3. Stochastic Oscillator

Just like the relative strength index, the stochastic oscillator is also a momentum indicator. This oscillator helps in comparing the closing price of a security or a stock with the range of a period’s prices.

Just like the relative strength index, the stochastic oscillator too comes with already-designated or already-specified levels or terms. Following are the two broadly categorised zones:

  • Overbought Zone: Whenever the prices cross the level 80, the stock immediately lands into the overbought zone.
  • Oversold Zone: Whenever the prices are below the level 20, the stock is said to be in the oversold zone.

The stochastic oscillator distinguishes itself from the relative strength index by comprising of two lines instead of one. Here, one of the lines shows the current value of the oscillator and the second line shows the three-day ‘moving average’.

       4. Volume

This indicator gives you a fair idea about the strength of the prevailing trend. A high-volume trend is generally considered stronger whereas a low volume one is weaker in nature. As the dynamics of the market change with myriads of traders engaging on the trading grounds, the volume helps in formulating a clear picture of price movement.

As per money and financial market experts, volume is of paramount importance whenever a trend breaks out. Breaking out from a trend puts the market amidst low volume spiking the volume indicator, overall. Volume indicators are of umpteen types and signify whether the volume is increasing or decreasing in the case of a particular stock or security.

       5. Ease of Movement (EOM)

Labelled as a momentum indicator, the ‘ease of movement’ denotes the relationship between the rate of change in the asset’s price or the security with the change in its respective volume. This indicator is widely used in time frames and charts and is plotted with the baseline zero. The EOM indicates two things:

  • Rise of EOM: When the EOM rises above the zero baselines, we can say that there is relative ease in the advancement of the market price. A further rise indicates an increase in the intensity of ease of advancement.
  • Fall of EOM: This indicates a relative ease in the falling of the market price.

 

Final Words:

We hope that this blog has helped you in deciphering the most popular technical analysis strategies for swing trading. As quoted rightly by Martin Zweig, “The trend is your friend," so, go ahead and mint lucrative profits with the help of the tools as mentioned above.

Happy swing trading!

 

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