The Right Stocks for Swing Trading

The first key to successful swing trading is picking the right stocks. There are two key variables to consider when choosing the stocks to swing trade: liquidity and volatility.

The best candidates are large-cap stocks, which are among the most actively traded stocks on the major exchanges. In an active market, these stocks will have a high transaction volume. If a stock has poor liquidity or doesn't have deep action in a broker's trade book, it may be difficult to sell or may require substantial price discounts to relinquish the shares.

In addition, volatility can be a swing trader's best friend. Without price movement, there are no opportunities to make a profit. While volatility is often thought of negatively, swing trading relies on volatility to create an opportunity to capitalize on the appreciation of a stock's price. The stocks that have the highest volatility may be the most ideal for swing trading as there are the most opportunities for profit.

The Right Market

Stock trading Strategy 

Financial markets typically have three prevailing long-term trends: the bear market, the bull market, or somewhere in between. Swing trading strategy is different under each environment.

Bear Market Swing Trading

Bear market swing trading is among the more difficult for natural buy-and-sell trades. In a downtrend environment, equity market prices are decreasing in the long term. Therefore, it is not advantageous to buy a security and hold it with expectations of price appreciation. There are several strategies to circumnavigate this:

Shorten your trade period. Instead of holding for weeks, be prepared to have a quicker turnaround on the securities you are holding.

Hold more cash. Plan on holding back some capital you may otherwise be trading in the event that securities you are holding do suffer material price declines.

Convert to options (by buying puts). Instead of buying now and selling later, the ideal position to hold if you believe prices are declining is to sell a security first, then buy it back later.

Bull Market Swing Trading

Alternatively, to bear markets, bull market trading may be easier. As prices tend to appreciate during these market conditions, it's easier to buy a security and experience a profit a short while later. However, there are a few things to keep in mind when swing trading during bullet markets:

Entry points are higher. After liquidating your position and capturing profits, chances are greater that general market securities are now more expensive if broad markets have appreciated. Be prepared to pay higher prices for securities.

Bad habits are formed. It's often said that bad trading habits are formed during bull markets. Continue to do due diligence and market research on the best securities to hold; while it may seem like every security is a winner, this won't always be the case.

Consider leverage. Leverage trading is not for everyone, and consider your risk appetite prior to leveraging. However, if you are confident in continual appreciation of the markets, you may be able to multiply your position through leverage.

In-Between Market Conditions

The best swing trading conditions occur when financial markets are trading sideways. When the market is transitioning between bear and bull markets or when the market is facing broad uncertainty, the best positions often present themselves for swing trading. Several items to consider include:

Stock Strategy

Volatility is good. When markets are volatile in both directions, the best swing trades are to be had. When volatility is strictly in one direction (like in bull or bear markets), it is often more difficult to pull off trades.

Conditions are safest. Not all swing trades work out. In the event you're stuck holding securities, chances are that neutral market conditions will minimize your losses. Instead of being stuck with securities during strong downtrend conditions, there is often more likelihood of prices rebounding.

 The time frames that you should use for swing trading are an hour, four hours, daily, and weekly.

Using the Exponential Moving Average

Simple moving averages (SMAs) provide support and resistance levels, as well as bullish and bearish patterns. Support and resistance levels are often useful information when determining a course of action. Bullish and bearish crossover patterns signal price points where you should enter and exit stocks.

The exponential moving average (EMA) is a variation of the SMA that places more emphasis on the latest data points. The EMA gives traders clear trend signals and entry and exit points faster than a simple moving average. The EMA crossover can be used in swing trading to time entry and exit points.

A basic EMA crossover system can be used by focusing on the nine-, 13- and 50-period EMAs. A bullish crossover occurs when the price crosses above these moving averages after being below. This signifies that a reversal may be in the cards and that an uptrend may be beginning.

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