Most Americans have long viewed the stock market as an excellent way to accumulate wealth. Whether you’re seeking short-term profits or long-term gains, the stock market seems like a fantastic investment vehicle to many people. Naturally, they wish to try their hand at the stock market, hoping to see a sizeable return on their investments.
Typically, stock market traders and investors have different strategies. Their goals influence the approaches they adopt. It’s not uncommon to hear about Passive and Active investing in the stock market. Active investing usually refers to stock market players who like to trade. They’ll usually try to generate quick profits before closing their positions. Active investing encompasses day traders, scalpers, and swing traders.
Swing trading is one of the most popular approaches that many stock traders utilize. If you’ve ever come across someone from the stock market world, you’ll likely have heard the term before. Although swing trading falls under the umbrella term of active investing, it differs from day trading and scalping.
What is Swing Trading?
Swing trading refers to an approach where traders will purchase a stock and hold it for a short period. Holding an asset, in this instance, stock, is also known as holding a position. Typically, traders utilizing a swing trading approach will maintain their position for a few days. In some instances, they might stretch their position to several weeks.
Swing traders understand that markets swing due to numerous reasons – whether news events, inherent volatility, or investor sentiment. As a result, they try to profit by capitalizing on these swings. For instance, they’ll try to hold a position and wait for favorable news to impact the stock’s price. As soon as the price rises, they’ll sell the stock. Utilizing such tactics enables them to make a quick profit. While it might be possible for the stock to continue rising, swing traders are only looking to profit from a portion of the swing. If they wanted to capitalize on the complete swing, they would have to hold their position longer. However, doing so also increases traders’ risks. Moreover, it negates their potential to make quick returns.
Swing trade often utilizes technical analysis tools such as chart patterns, trends, and trend reversals.
Most Used Swing Trading Indicators
You might be wondering how swing traders identify opportunities. After all, whether they’re looking out for a swing low or a swing high, they’ll need to know when the iron’s hot so they can strike.
Here are some of the most common swing indicators traders use to identify opportunities. They include:
Moving averages are arguably the most used trading indicators. Many traders utilize moving averages because they can help them find a trend. Moreover, moving averages also enable traders to discover dynamic support and price resistance.
Typically, traders will look at two moving averages. They include the exponential moving average and the simple moving average.
When using moving average as an indicator, you’re looking at an adjusting average line of closing prices. The moving average is based on the closing prices of stocks over a predetermined period. Traders use the moving average line because it eliminates concerns of daily market fluctuations.
However, since the moving average is a lagging indicator, you can’t use it to find entry points. Instead, you’re considering previous price movements.
An exponential moving average works similarly to a simple moving average. However, it’s a weighted average placing emphasis on the most recent stock prices. Hence, many traders like to use exponential moving averages as an indicator because it’s more receptive to the latest developments.
Relative Strength Index
The Relative Strength Index (RSI) is also another indicator traders like to use in technical analysis. The RSI measures recent price changes to determine whether a stock is oversold or overbought. Using the RSI enables traders to determine whether investor sentiment regarding a stock is bearish or bullish.
RSI is a line graph that moves from one extreme to another. Hence, many people also refer to it as an oscillator. Readings on the RSI vary from 0 to 100. Typically, an RSI score of 30 or under refers to an oversold stock. Meanwhile, a stock with an RSI rating of 70 or over is an overbought stock.
Another popular technical analysis tool traders use is the Fibonacci Retracement method. It allows traders to set two price points – one high and one low – and determine the support and resistance between them. The Fibonacci Retracement levels are 23.6, 38.2, 61.8, and 78.6 percent.
The Stochastic Oscillator is an indicator that traders have been using for a long time. It enables traders to identify if a stock is overbought or oversold. A stochastic oscillator refers to using a stock’s closing price and comparing it with the underlying stock’s price history. Since you’re comparing a range of prices of the underlying stock, the stochastic oscillator will vary. Typically, it fluctuates around a mean price level. In addition, it’s always range-bound, meaning you’ll get a score of 0 to 100 for any stock. Generally, a stochastic oscillator reading of 80 and above indicates an overbought stock. On the flip side, stocks with a rating of 20 or lower are oversold stocks.
Traders will typically chart the stochastic oscillator with two lines. One line represents the real value of the stock. The other comprises the stock’s three-day simple moving average. Traders believe the intersection point between the two lines signals a potential market reversal.
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