Swing Trading Tips: Top Strategies for Technical Analysis

Written By
Paul Tracy
Updated January 16, 2021

This article provides you with an in-depth look at swing trading strategies, tactics, principles, and attitudes. By studying and incorporating these swing trading tips into your existing market framework, you’ll learn how to be a more successful swing trader.

1. Align Your Trade with the Market Direction

When you discuss trades and trends, begin with the market's primary and intermediate trends as measured by the S&P 500.

These trends provide the context for every trader to make short-term trading decisions. If you only focus on the short term – even if your trade is successful for a limited time period – the larger trends are likely to reassert themselves. At best, your profit potential will be limited. You need to identify the longer-term trends to make sure you go with the flow (not against it).

"Surprises" such as news announcements, analyst upgrades/ downgrades, and earning hits/misses almost always occur in the direction of the larger trends. Traders should always be aware of where the S&P stands in relation to its longer-period moving averages (e.g. 40-, 30-, 10-week).

2. Long Strength and Short Weakness

Once you know the overall trend, don’t fight the tape. Look for long trades during periods of bullishness. Find appropriate short trades during periods of bearishness.

Assume there’s a bear market, where the 40- and 10-week moving averages slope downward and the S&P is beneath both. In this scenario, look for stocks to go short (NOT long).

When possible, incorporate “Price Relative” to the S&P 500 ($SPX) into your chart analysis. This indicator will tell you how the individual stock is performing in relation to the overall market. During bear markets, seek out stocks whose relative strength line is trending downward in relation to the S&P. Do the opposite during bull markets.

3. Trade in Harmony

You’ve probably heard, “the trend is your friend,” but which trend are people referring to? Use moving averages to become attuned with both the short- and intermediate-term trends (even though swing traders focus on the short term).

Many short-term traders focus their technical analysis exclusively on the short-term chart. However, this type of technical analysis will always end up being partial or limited because these traders can't see the big picture.

On the other hand, don’t focus exclusively on the primary trend when swing trading. 

Even in a bear market, there are periods where the intermediate trend turns positive and stocks soar. Fueled by short-covering, the S&P 500 and other major averages can climb 20% or more in a period of just several weeks during bear market rallies. Meanwhile, volatile stocks with high "betas" can move much, much more than this.

Even though you’re a short-term trader, it’s vital to know when the intermediate-term trend is changing (and when a countertrend rally is taking hold).

4. Get a Bigger Picture 

Use your telescope as well as your microscope when you look at charts. Too small of a “look-back period” can be deceptive and costly.

When analyzing a stock, view the two-year weekly chart, which is ideal for looking at the bigger picture. To determine the overall trend, examine the shares in relation to a long-term moving average. 

Next, focus on the 6-month daily chart. Here, you’ll see finer details that the weekly chart obscures. Use much shorter-term moving averages to ascertain a stock's short-term trend. Finally, hone in on the hourly chart to discern the prevailing trend over the last couple of weeks. Moving averages are extremely helpful here.

Synthesize all of this analysis. Is the stock telling a clear, relatively unambiguous story? Are the shares breaking out from resistance or breaking down from support with confirmation from volume and other indicators (such as RSI)? Is this story sufficiently similar in all three time frames? 

Pro tip: Not all stocks communicate clearly. In fact, some remain in extended periods of sideways consolidation. A symmetrical triangle formation, for instance, is almost impossible to predict and trade. Similarly, an MACD that gives signal after signal within a short period of time is a highly unreliable indicator.

5. Enter the Trade Near the Beginning 

It's never too late to hop on the elevator, but the quicker you recognize a trend, the more profitable your trade will be (and the less risk you’ll assume). The most important step is to pay close attention to the overall market averages. When they’re overbought or oversold, they’re usually prone to reversal. When the market tests a major zone of support and resistance, it’s extremely useful to look at new highs, new lows, and the advance/decline line.

Most "industrial," or non-resource stocks (e.g. papers, metals, oil, gold) are highly correlated with the direction of the overall market. Therefore, when the market turns, they’re likely to turn as well. Candlesticks and momentum indicators (e.g. RSI and stochastics) are “early warning lights”, often anticipating or leading a turn in the stock.

By contrast, trendlines and moving average crossovers are lagging indicators that simply confirm the message of the early warning signals. Depending on your willingness to take on risk, you can trade on either a leading or a lagging indicator. When both types of signals have been given, you can generally enter the trade with a high probability of success.

Swing Trading Indicators 

Researchers and analysts have developed a variety of indicators to detect when the broad market is prone to a reversal, including: 
    •    The McClellan Oscillator

    •    The Arms Index

    •    The Volatility Index

    •    The Put/Call Ratio

6. Apply the Rule of “Multiple Indicators” 

Highly profitable trades usually occur when all available technical tools give the same message: The stock is about to sharply rise (or fall). 

Remember: There is no magic bullet for profitable trading the market, nor is there such a thing as “free money.” Technical analysis can only increase the probability of making a correct swing trading decision. Great trading opportunities, however, do have signatures. For starters, many indicators all give the same message within a short period of time (about 2-3 days). 

7. Track a Consistent Group of Stocks

As a swing trader, it’s easy to flit from hot stock to hot stock. While it’s okay to follow the action, you should also have a core group of stocks that you track daily and learn to understand. 

Use a variety of websites to look up analyst upgrades and downgrades, earnings reports, and overseas markets events, as well as the price of oil, gold, and the US dollar. Determine which stocks are active in pre-market trading and add several of these to your regular tracking screen. 

Be sure to check a core group of regulars from a large variety of sectors (not just the volatile ones). Several times a week, look at their charts and make mental notes about breakout levels and prices at which they would make good trades. 

By tracking a comfortable number of stocks in a portfolio package, regularly checking the charts, following the news, and analyzing company fundamentals, you’ll find yourself in a much better position to make winning trading decisions.

8. Enter a Trade with a Clear Plan 

Swing trading can lead to impulse buying. Sometimes your impulses can turn out to be profitable, but more often than not, they won’t. Without a clear plan, you’re gambling, not trading.

Capital preservation is key, so establish a stop-loss for each trade. The best time to set one is right before making the trade. If you’re not watching the market from day-to-day, set this stop-loss with your broker. If you’re watching at all times, keep it as a mental stop but be sure to execute it.

As a general rule, the maximum loss we advise to take on any trade is 8% of the capital invested. If there is no technical analysis basis for limiting the stop-loss to this amount (usually a support level or nearby trendline), the market may be telling you that your trade is late.

You'll often come across times when a trade is going beautifully – you can almost feel the next price. If you originally bought 1,000 shares, you might want to add between 200 and 500 more. When you add on, don't pyramid: A sudden decline in the stock can quickly turn a healthy profit into a loss.

It's always a good idea to determine an appropriate re-entry point each time you close a trade, particularly when that trade was for a healthy profit. Are you selling because the stock is in a strong uptrend (but you are concerned it will pull back)? If so, where is there sufficient support to allow you to get back in comfortably? If the market continues higher, at what price would it be worthwhile to re-enter your original position?

9. Put the Odds in Your Favor 

Don't risk a dollar to try to make a dime. On good trades, your chart analysis should always show more upside possibility than downside risk.

When you enter a trade, it should be based on your technical analysis. Select trades whose target allows strong profits if you’re correct, but where your potential losses are fairly limited. In general, look for opportunities where there are 1.6-to-1 odds.

Market conditions can make this difficult. For example, toward the end of a large move in the overall market, a large part of the gain or decline in a stock may have already taken place. If possible, however, seek to find set-ups where you can meaningfully set a stop loss of 8% in order to capture a profit of 16%. If you can’t find those opportunities, look for potential 12% gains while risking just 8%.

You may need to take profits before your target is hit. If your analysis leads you to conclude that your target will be exceeded, you may want to raise that target. The key to trading success – as many successful traders have proclaimed – is to cut losses short and let profits run. Unfortunately, many untrained swing traders let losses run and cut their profits short.

10. Integrate Fundamentals into Your Technical Analysis

Day traders in positions for 15-60 minutes have little need for fundamentals. Swing traders, on the other hand, may often hold positions for several days to several weeks. As such, they can greatly benefit from a better understanding of each company's fundamental, inherent value. Look at measures such as the PEG ratio to help determine value.

Normally, technicians and fundamentalists are like the boys and girls at a sixth-grade dance: they seldom speak to one another. Yet both forms of analysis can help one make more effective stock market decisions. After all, you'd be hard-pressed to find a technical analyst who isn't in awe of legendary value investor Warren Buffett's incredible track record of success.

If both forms of analysis are good, why would anyone believe that a combination of both isn't better? When used correctly, they don’t contradict each other. Rather, they’re supplemental.

11. Great Trading Is Psychological and Technical

Always keep a positive mental attitude about your trading and don’t let bad trades affect you longer than necessary. Learn from your mistakes and poise yourself to make your next trade.

Making a trading mistake can be painful. Not only does it often result in a loss of trading capital, but it also hurts one's self-esteem. The lesson to learn here is that no one is perfect: Everyone makes mistakes, but technical analysis can only increase the probability that you will make correct decisions.

Always try to treat bad trades as a learning experience. Was there something you didn't see on the chart that you should have? Did you enter the trade too late or set your stop too close? The winning trader is committed to improving over time.

Apply the Information from Today's Lesson

If you missed one of Dr. Pasternak's lessons, we encourage you to go back and take a look:

1) Start Swing Trading Today

2) How Swing Traders Harness the Power of Swing Lines

3) Swing Trading Support & Resistance Secrets

4) How to Use Candlesticks for Successful Swing Trading


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