Swing trading is one of the most popular trading styles you can choose to trade in various stocks with the perspective to gain from short-term to medium-term movement. Short-term fluctuations often serve as key indicators for selecting stocks suitable for swing trading.
However, a temporary swing in price movement is not sufficient criteria to select such stocks, instead, you have to consider various factors while picking the stocks for swing trading. Here we are going to talk about various aspects of how you can find out the best stocks for swing trading with the best indicators and trading strategies for swing trading.
What is Swing Trading?
Unlike intraday or day trading, in swing trading, the trade position is created on the basis of short-term swings in the price of the stock. The swing-based movement is likely to stay for a few days or weeks as per the market trend allowing the short-term traders to gain from such short-term to medium-term movement in the price of the stocks.
As a part of a short-term investment strategy, in swing trading, you need to perform a technical analysis to predict the price movement of stock. You can use chart patterns like candlesticks and popular technical indicators to trade in swing trading.
However, finding the right stock is one of the most important factors to increase the chances of success in swing trading. Let’s find out how you can find out the best stocks for swing trading with the right indicators and trading strategies.
How to Select Stocks for Swing Trading?
The stocks for swing trading must be suitable for the strategy applied for such trades. Basically, the stocks are selected having the potential to trade with swing-based price movement. Hence to find such stocks, you need to consider the various points discussed below.
Volume or Liquidity in Stock
A significant volume of trade on a daily basis is very important to ensure sufficient liquidity in stock for trading. For swing trading, you need to pick stocks highly liquid, so that you can easily find the buyers or sellers to enter or exit from your trade position timely. Look at the daily volume levels, and stocks with a minimum of half a million in daily trading volume are ideal for swing trading.
Volatility in Price Movement
The volatility (VIX) in the price movement of the stock is good for swing trading. However excessive volatility can be risky, as it can move beyond the market trend that is not suitable for swing trading. Moreover, how much the volatility in the stock is correlated with market movement, you can find with the help of beta and other parameters to consider the right VIX stock.
Market Trend and Sentiment
Understanding the trend of the market is very important to find the stocks as per the trend. In a bullish market, look for stocks in an uptrend with the potential for future growth, while in a bearish market, weak stocks that are likely to fall can be suitable for your swing trading strategy. Hence, check the market direction and sentiment of the traders towards a particular stock to find the best one.
Swing-Based Trading Patterns
For swing trading, stocks that typically follow swing-based trading patterns are best for this strategy. You can check the price movement in the historical chart patterns and observe how stock prices reacted in various market conditions. Analyse these patterns to determine if the stock price reacted to favourable or unfavourable news or events related to the economy, industry or company especially any fundamental changes that impacted the stock’s price.
Coming News and Events
Swing-based stocks are also very much affected by the news and corporate events like economic data releases, RBI monetary policy actions and periodic earnings reports of the companies. Hence, you need to screen such stocks and also keep in mind the news and events likely to come and which type of stocks can be affected by such updates.
Right Price of the Stock
While selecting the stocks for swing trading always keep in mind neither trade with too expensive stocks nor take positions in the penny stocks. You can face liquidity problem in both types of stocks, as there is less trade volume in excessively high-priced stocks. Penny stocks are not reliable, as they can get stuck in circuit breakers, making it difficult to easily enter or exit from your trade position, which poses a challenge for swing trading strategy.
Perform the Analysis
Before picking any type of stock you should always perform research and analysis to find the stocks that are fundamentally strong and technically available at the right price with the scope of directional movement as per your expectations. You can use fundamental analysis and technical analysis to screen such stocks suitable for your swing trading strategy.
Use the Technical Indicators
One of the best ways to find the stocks for swing trading is by using popular technical indicators, which can help you to find stocks with a trading range suitable for swings. Applying the indicators on the chart patterns will help you to know the buying point, exit point and also the trading range between which the stock price can swing in upcoming trading sessions.
Best Indicators for Swing Trading?
In technical analysis, a bunch of indicators are available and used by the traders as per their knowledge, experience and applicability in different types of underlying assets. However, for the equity market and particular trading strategy, only a few indicators are more suitable to get the best results. Similarly, for swing trading only a few indicators as discussed below are suitable.
Relative Strength Index: RSI will help you to identify the stock trading in the overbought or oversold zone so that you can choose them as per your long or short trading strategy.
Moving Averages: Moving averages will help you to recognize the short-term and long-term trends in the stocks. You can use the simple moving average or exponential moving average of 10 days 20 days or 50 days to find the short-term trend for swing trading.
MACD: The Moving Average Convergence Divergence will help you spot the correlation between the two moving averages and you can use the crossover of the short-term moving average with the long-term moving average to identify the buy or sell signal in swing trading.
Momentum Oscillators: Apart from this, there are various other momentum-based oscillators like Bollinger bands, ATR, super trend or volume-based indicators that can be also used in combination with other indicators to find the stocks for swing trading strategy.
Best Swing Trading Strategies
Merely using the technical indicators would be not enough to make your trading experience successful, you need to trade with the right strategy suitable for swing trading. Below you can find a few, of the best strategies that can work in swing trading.
RSI Strategy: RSI below 30 levels gives the buy signal, as it’s an oversold zone for any stock trading below this level. While RSI above 70 indicates to enter into the selling strategy, as the stock price trading in the overbought zone can fall anytime.
MACD Crosser Strategy: Two signal lines (moving averages line) crossing these lines indicates a trend to buy the stock or short sell in swing trading. You can use the short-term and medium-term moving average lines to identify such crossovers.
Support & Resistance: Using this strategy you can identify the support and resistance levels of a trading zone of a stock. From swing trading you can use the top or bottom levels to sell or buy the stocks respectively when the price resists or gets support at such levels.
Breakout or Breakdown: The breakout and breakdown of a stock price to exit from a trajectory can be also used for the swing trading strategy. You can enter into a buy position when the stock breakouts above the resistance levels, and sell when a stock breakdowns its support levels. Here you need to also check the volume levels if also rise, as there could be a false signal.
Candlesticks Chart Patterns: The formation of Japanese candlestick chart patterns can be also used for swing trading strategy. You can use the combination of various chart patterns and interpret the candle formation accurately to predict the next move of stock and enter into the trade position accordingly. And you can use the various indicators on these chart patterns to confirm the trend and adopt the right strategy to trade in swing-based trading.
Final Words
Swing trading is a style of trading in which stocks are picked on their swing-based price movement for a short-term duration. To identify the best stocks you need to check the volatility levels, trade volume and sentiment of the market along with technical indicators like RSI and moving averages with the right trading strategy to increase the chances of this strategy.
However, finding the best stocks for swing trading is not easy, as you must have knowledge of technical as well as fundamental analysis to correlate the impact of everything on stock price movement. And last but not least trading with the right risk management is another important point to limit your losses and improve the chances of success in trading.
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