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Top 4 Stock Trading Strategies

In this article, We are going to discuss a few popular stock trading strategies that traders use to swing trade. Let's first define what swing trading is.

What is Swing Trading

Swing trading is a short term trading method to trade the stock or the options market. The typical trading period is anywhere from 2 days to 2 weeks. This is different than day trading where the holding time is anywhere from a few seconds to 1 day. Swing trading focuses on short term price movement and make a bet based the chart patterns and technical indicators. Swing trading is different than investing because swing trading does not care about how a company is doing whereas investing requires you to study a company fundamental thoroughly and then buy and hold a stock for a long time.

Swing Trading Stocks

Most of the swing trading strategies involved using technical analysis and stock chart patterns to find trade setups and exit strategies. Let's look at 4 type of trading strategies, the trend following strategy, buy low sell high strategy, breakout strategy and candlestick trading strategy. 

Trend Following Strategy

Trend following is one of the most popular type of swing trading strategy where you recognize a trending stock and ride with the trend. For example, the stock AMZN (Amazon Predictions) is in an uptrend and it is now trading at the upper trend line. One way to trade the stock is to just buy it and hopefully the stock will continue to go up. Another way to trade this stock is to wait for a pull back. Buy the stock when it drops closer to the lower trend line, and then sell it when the stock approaches the upper trend line. If at any time, the stock drops below the lower trend line with strong volume, you would want to get out of the trade because the trend is broken. However, watch out for false signal where the stock drops below the trend line with low volume. You can visit the trending stocks page to find a list of trending stocks or today's top 50 stocks for stock ideas.

Buy Low Sell High Trading Strategy

The buy low sell high strategy for swing trading involved buying stock at support and sell at resistance. For example, the stock GDX (GDX Predictions) is trading in the range of $13-$17 in the past few months, so $13 is the support and $17 is the resistance. Each time the stock get closer or drops below the $13 price level, it bounce back. So one way to trade it is to buy the stock when it approaches $13, and sell it when the stock hit your profit target or near the resistance. You also need to set a stop loss in case the stock drop below $13 and doesn't bounce back. The stop loss level would be a little below the $13, if the stock breaks lower, then sell it to prevent further losses.

Breakout Trading Strategy

When a stock is trading in the range for a while and then it breaks higher with good volume. This is a good breakout setup. For example, if a stock is trading in the $5-$10 range for a long time, and then it breaks higher one day, then I will consider buying especially when the volume is high. False breakout often happens when the volume is low. That is the stock breaks higher temporary and then pull back under the $10 price level, so watch out. Trade breakouts only when the volume is high and above the average trading volume.

For example, the stock BIDU (BIDU Predictions) has a breakout in late October with strong volume. This is a good time to trade the stock. The stock was trading in the down trending and then consolidate for about two months. After the breakout, the resistance becomes the new support, so if BIDU drop below this new support level with strong volume, it is time to sell as the stock is no longer consider as a breakout stock.

Candlestick Trading Strategy

The Japanese Candlestick is a popular charting techniques that traders to find trade setups. It is more useful than the traditional bar charts because it is easier to see and use. Candlestick patterns is a set of patterns that offers bullish and bearish signals. Here are a few of my favorite candlestick patterns.

Bullish Engulfing pattern is a bullish pattern when it occurs on a down trend. The pattern signals a reversal trend coming especially when the volume is high.

Bearish Engulfing pattern is a bearish pattern when it occurs on a uptrend. The pattern signals a reversal trend. When the volume is high, the pattern is more accurate.

The doji pattern is a reversal trend that happens for both the uptrend and down trend. When the doji pattern occurs on an uptrend, it is a bearish signal. When the doji pattern occurs on a down trend, it is a bullish signal. Also, the signal is stronger when the volume is higher than the average trading volume.

Let's look at example, the stock BABA (BABA Predictions) has a Bullish Engulfing pattern early OCT. The stock was in a down trend, and the volume is strong when the bullish engulfing pattern occurs. This signals strength and the stock went from around $60 per share to $85 per share in one month. You can use our free candlestick screener to find these type of stocks.

Stock Trading Software

To find profitable trade setups, you can try this powerful trading software.