Often you have heard traders talking how they could get 50 to 60% or sometime even 110% returns in just 2 months or 25% to 40% in 10 to 30 days. And taking that profit they simply made an exit from their position, growing their capital for trading. That’s swing trading and in this article, we shall share how to select socks for swing trading – a stock market strategy that has potential to good returns as well as wealth creation with swing trading stocks.
What is Swing Trading?
Swing trading is a trading strategy of the stock market where traders and investors can capture price movements in stocks or any other financial assets such as currencies and commodities in short- to medium-term.
Swing traders use technical analysis to identify entry and exit points based on price trends and patterns. They typically hold positions for a few days to a couple of months, aiming to profit from an anticipated price move. Swing traders can use various strategies, including trend trading, breakout strategies, and moving average crossovers, to capitalize on market trends and price movements.
Here are five strategies on how to Select Stocks for Swing Trading:
Simple Moving Averages (SMAs): SMAs are good signal for making an entry in Swing trading or even for long-term position. For example, if the 50-day SMA crosses above the 200-day SMA, it is known as a “golden cross,” signalling a good uptrend – allowing traders to go long. It is always better to make an entry in the stock when it is trading above the golden cross. Use scanners and screeners on the internet to find stocks trading above golden cross.
Fibonacci Retracement: Traders can use Fibonacci levels (23.6%, 38.2%, 50%, 61.8%, and 100%) to identify potential reversal points after a significant price move. For instance, if a stock price rises and then retraces to the 38.2% Fibonacci level before bouncing back up, traders may see this as a buying opportunity.
Trend Trading: This strategy involves identifying and following the current trend of a stock. For example, if a stock has been consistently rising over several weeks, a swing trader might enter a long position to ride the upward trend until signs of reversal appear.
Reversal Trading: Traders using reversal trading focus on spotting potential trend reversals. An example would be when a stock has been in a downtrend but shows signs of bottoming out, indicating a possible trend reversal. Traders might enter a long position anticipating an upward move.
Breakout Strategy: In this strategy, traders look for assets that break through significant price levels, signaling potential strong momentum. For instance, if a stock price breaks above a key resistance level with high volume, traders may interpret this as a signal to enter a long position to capitalize on the expected upward momentum.
By applying these strategies with careful technical analysis, swing traders aim to profit from short to medium-term price movements in the market effectively.
What are the Best Stocks for Swing Trading? How to Make the Right Entry in any Swing Trading Stocks?
Look for stocks where the 9-day SMA (short-term moving average) is higher than the 50-day SMA (long-term moving average) on the daily chart. If this just happened, it suggests the stock might go up for a month or two. If the same crossover occurs on the hourly chart, expect the stock to go up for about four to six hours, maybe even two to three days.
However, ensure that these stocks have good fundamentals as well, and are listed on both NSE, BSE, have a decent P/E ratio (if not great). Several swing traders have a list of 20-30 stocks of good companies in their watchlist, and they do swing trading on these companies regularly. For instance, while a long-term investor went from Rs. 7 to Rs 40 in Suzlon, a swing trader made several entries and exits in Suzlon’s short journey from Rs 7 to 40. I, for instance made 3 entries and made around 30 to 40% in each of my entry in about 2 to 3 months or maybe less.
Also Read: 11 Top Dividend Stocks Whose Dividend Yield Is More than FD Interest Rates
Next, Make an Informed Decision on the Swing Trading Stocks that you have Selected
Relative Strength Index (RSI): Look for RSI, a momentum oscillator that measures the speed and change of price movements, indicating potential breakouts when it reaches overbought or oversold levels.
Moving Average Convergence Divergence (MACD): Check out MACD levels. It is a momentum indicator showing the relationship between 2 moving averages of a stock’s price.
Trading Volume: Watch the Trading volume – High volume indicates a strong trend. By watching the volume as well as price action, swing traders can identify the direction in which the stock will/can move.
For example, consider the stock of a company in the banking sector. By analyzing the stock’s chart, a trader might notice a pattern of higher highs and higher lows, indicating a bullish trend. The RSI is also showing an uptrend, suggesting that the stock is gaining momentum. The MACD is crossing above its signal line, indicating a potential trend reversal. Additionally, the stock’s candlestick pattern shows a bullish engulfing pattern, further supporting the bullish trend.
Based on this technical analysis, the trader might decide to enter a long position on the stock for swing trading, aiming to capitalize on the anticipated upward price movement. They would set a stop-loss order to limit their losses in case the trend reverses and the stock starts moving downward.
So, if you are wondering – How to Select Stocks for Swing trading? This is the basic steps to find the best stocks for swing trading.
Also Read: Sensex at 1 Lakh: Is It a Realistic Milestone or Just a Dream?
