• HDFC securities
• 07 Feb 2023
• Knowledge Centre,Understanding swing trading strategies

A trading strategy is a plan of buying and selling stocks to make incredible profits and mitigate associated risks. There are different types of trading strategies you can adopt based on your goals and risk profile. A popular trading strategy you should learn to make profitable trades is swing trading.

A stock price undergoes a series of highs and lows which is known as price swings. Swing trading aims to make profits from these price swings, by planning a suitable entry and exit point. It identifies a stock price’s momentum, headed direction, and possible reversal point. The trading strategy works on the concept that a stock price after being risen or declining to a certain point is due for a reversal. Hence, a possible reversal point is important to plan a swing trade.

Decoding various swing trading strategies:

Fibonacci retracement

Fibonacci retracement is a popular tool for stock market analysis. This indicator helps traders determine the support and resistance level of a stock. A support level is a price you are likely to enter the trade or purchase the stock. The resistance level is the maximum price you are likely to exit the trade or sell the stock. An understanding of the stock’s support and resistance levels helps you identify and plan to buy and sell points of a trade.

The Fibonacci retracement trading strategy works on the concept of retrace and reversal. This indicates the stock price retraces at different prices before its complete reversal. Typically, horizontal lines are drawn at various percentage levels. These are Fibonacci levels of 23.6%, 38.2% and 61.8%. These different percentage markings are potential reversal points. You must consider the stock support, resistance, and retrace points to make a suitable trade.

Support and resistance level

As mentioned, a support level is the price point at which you purchase the stock. Generally, it is the lowest level of the stock price range. Resistance is the maximum price level at which you wish to sell your stock. It represents the ceiling of the stock price range. This swing trading strategy makes trades according to the ongoing trend and considers the stock’s reversal point.

When the stock crosses its price range on either side i.e., the support and resistance level, it is likely to be due for a reversal. Prices going below the support level indicate overselling while prices rising over the resistance level indicate that the stock is in overbought territory. To plan an appropriate trade, you must be mindful of both levels’ reversal points.

Simple Moving Average (SMA)

Simple Moving Average is the average of a stock price over a specific period. It is referred to as the moving average as it is plotted on the stock chart, forms a line and moves along the chart as the stock price changes. The swing strategy considers the analysis of 10 days SMA and 20 days SMA, wherein these two SMA lines are drawn on the stock price chart against each other.

When the smaller SMA line, which is 10 days, crosses the longer line, which is 20 days, it indicates an upward trend. Swing traders can use this level as an entry point. On the contrary, a sell signal is generated when the longer SMA line crosses the shorter SMA line.