5 Swing Trading Strategies for Canadians | How To Profit From Changing Trends

December 18, 2021 | Editorial Team

What is Swing Trading?

Swing Trading is a trading strategy that aims to profit from the short to medium-term gains in a stock. It seeks to take advantage of changing trends in a stock’s value over a short time period. Unlike day trading, a typical timeframe for swing trading is one week, but it can range from one day to a few weeks or even longer. Swing trading strategies use technical analysis to look for trading opportunities such as the rising and falling value of a stock (see blue-chip stocks for maximum value).

Swing trading involves identifying patterns and trends to predict where the value of the stock is likely to move next – just as we explained in our predictions for Air Canada stocks. Once a potential asset has been identified, a swing trader will enter a position. It is not the aim to capture all of an asset’s potential movement, but instead to capture a chunk. The trader will then exit the trade and move on to the next stock opportunity.

Swing trading is one of the most popular types of active trading. It requires fewer time commitments than day trading, but it can still maximize short-term profits. There are many swing trading strategies that investors and shareholders use to take profits like investing in the stock market before Christmas. Today, we will look at swing trading in more detail, particularly focusing on the main five swing trading strategies. Let’s begin.

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What is a Swing Trader?

Swing traders primarily use technical analysis to look for trading opportunities – see technical vs fundamental analysis post. They aim for short to medium-term gains. They primarily trade in stocks (see how to start investing as a beginner here), but may also invest in other assets such as ETF, cryptocurrency and even forex trading. Swing traders are usually individual investors rather than financial institutions. This is because larger financial institutions usually trade amounts that are too large to exit the trade fast enough.

Some swing traders choose to trade volatile stock, with lots of movement and higher potential gains. Others prefer more sedate stocks where the risk level is lower (see if Air Canada stocks are good or if you should invest in Rogers stocks). Many swing traders make their trading decisions based on a risk/ reward basis. They will analyze chart patterns to decide when to enter a trade and when they are likely to take profits. The potential reward should significantly outweigh the potential risk, though you can still end up owing money on your stocks.

Unlike day traders, swing traders are less likely to trade full time. Anyone who has stock trading knowledge – see how often to check on stocks – and capital to invest can swing trades. Swing trading work can be done using a standard brokerage account. Many swing traders complete their trades from a computer or mobile device.

Advantages Swing Trading

Swing trading is one of the most popular forms of trading. For those thinking of getting started in swing trading, we have compiled a list of some of the advantages of this investing style. And if this looks too risky for you, remember that you can even take advantage of a stock market crash.

  • Time – Swing trading is less time consuming than other forms of trading, such as day trading. Once you have analyzed the trends (see also buyback trend) this should be indicative of future results. This allows you to establish a time frame that you will withdraw from the trade. Many swing traders invest alongside other employment and commitments. In contrast, day traders usually have to commit to this full time.
  • Returns – By taking advantage of price trends, you can follow the stock market’s natural flow. You can increase your profits by following swing trading strategies and looking at a stock’s past performance. Entering a stock when the value is lower, like when company issues additional shares to remain financially solvent in the business, and using the technical indicators to determine when to exit will maximize your returns. On a side note, to estimate projected returns as a common shareholder, you must use common equity (see also what common stocks are).
  • Risk Management – Swing trading makes it easier to minimize risk. A stop-loss usually results in lower losses compared to a long term trade. The stop loss on a swing trade might be 100 pips for a five-hour chart, but over a week, this might be higher than 400 pips. This means you can place larger positions in long term trends. You can also place multiple stop losses to protect your stocks further. Additionally, swing trading allows you to spread out your risk by having less capital per trade.
  • Identifying Opportunities – By analyzing chart patterns, you can see the moving average of a stock and the swing trading indicators. This helps you to see the best investment opportunities to increase your liquid net worth – for example, Canadian nickel stocks or POW stocks can diversify your portfolio, but they bring fewer investment opportunities . By entering and exiting trades regularly, your experience level will build. You will then be able to identify opportunities in different markets.
  • Niche Trading – As swing traders specialize in a particular area of the stock market, their expertise in this market quickly develops. It becomes easier to develop trading strategies and to understand the swing trading system. This makes it easier to identify when an investment is not behaving as expected or when market reversals occur. You should know when to cut your losses and exit a trade, even if this results in no profit or even a loss.

5 Swing Trading Strategies

1 – Fibonacci Retracement

The Fibonacci Retracement Tool is an embedded tool that is on all trading platforms. Fibonacci retracement is based on the work of mathematician Leonardo de Pisa. It is used to predict trends in the stock market. The tool measures how much a stock price has retraced. Retracing is a short-term movement against the typical trend, or after a company is bought out, which is then expected to return to the original trend. Stocks usually retrace a percentage of the previous movement before they reverse.

This tool helps a trader to identify when a retracement is occurring so that swing traders can decide to enter a trade. Following market trends using the Fibonacci tool allows traders to identify patterns that are separate from immediate upturns and downturns in the stock. Fibonacci retracements usually occur at set percentage points – 38.2%, 50% and 61.8%. It is possible to plot retracement levels and watch for signs of a reversal.

2 – Support and Resistance Triggers

Support and resistance is popular way of swing trading. Support is the point where a downward trend is predicted to pause, usually as a result of the concentration of demand. It is the point on the chart (which is below the current market price) where buying pressure is stronger than selling pressure. The price decline stops, and the value begins to rise. Swing traders enter a trade with the aim of placing a stop loss below the support line.

Resistance is the point where an upward trend is predicted to pause as a result of the concentration of supply. Resistance is the point above the market price, where selling pressure overcomes buying pressure. The price then goes against the upward trend and turns down. Swing traders aim to enter a trade with the aim of placing a stop loss above the resistance line.

Swing trading based on support and resistance triggers can be an effective trading strategy. By analyzing the chart pattern and reading the stock market reports you can find the optimal market conditions for busing and selling. Ideally, swing traders aim to buy near support points and sell near resistance points. If a trade price breaches the points of support or resistance, the two switch. Support then becomes resistance, and resistance becomes support.

3 – Channel Trading

Channel trading is a swing trading strategy that involves several types of technical analysis. It helps a stock buyer to decide when to enter and exit trades and helps them with risk management. A channel occurs when the stock price is moving between two trendlines that are parallel to one another. The upper trendline connects the swing high price, and the lower trendline connects the swing low price.

Trading channels can be potted on charts to help you see these upper and lower trendlines. If stocks move out of their upper trendline, this suggests the price is moving up, and the stock is in a buy position. If the price goes below the lower trendline, this indicates a sell position. Channel trading works best on stocks that do not have low or high volatility (see small-cap Canadian stocks or penny stocks).

Channel trading can help to estimate buy or sell positions and can help to predict stop loss. The length of time the channel has lasted indicates the strength of the channel. The time it takes for the price action to move from low to high or high to low (energy sector stocks, for example, are wise to buy at their lowest) can give an estimation of how long it may last.

4 – 10 and 20 Day SMA

Simple Moving Averages (SMA) is a popular swing trading strategy. A moving average helps to define trends. This is because a moving average helps traders to see swing trading positions, i.e. is the stock in an upward or downward trend. Price action above a certain moving average is showing strength. Price action below a certain moving average is showing weakness.

SMA’s calculate the average price of trade stocks and constantly update this price. The average price is calculated over a specific time frame. A 10 day SMA calculates the daily closing price of a stock over the last ten days, adds this amount together and then divides by 10 to get a daily average. A 20 day SMA follows the same formula but looks at the 20-day average.

These averages are connected together to make a smooth line. The 10 and 20 days trading strategies involve inputting each of these lines on to your chart. When the 10 days SMA line crosses above the 20 day SMA line, this shows that an uptrend is occurring and automatically generates a buy signal. When the 10 day SMA crosses below the 20-day SMA, this shows a downtrend is occurring, and a sell signal will be generated.

5 – MACD Crossover

The MACD crossover is a simple swing trading strategy. It helps traders to identify swing trading stocks that may be profitable. MACD consists of two lines that represent the moving averages. The MACD line is the faster moving line, and the signal line is the slower moving line. When the MACD line crosses above the signal line, this shows the markets are in an uptrend and will give a buy signal. If the MACD line crosses below the signal line, this shows the markets are in a downtrend and will generate a sell signal.

Once the two lines have crosses, swing trading strategies come into play, and a trade entry will begin. Traders will place a buy stop or a sell stop order. To maximize gains, traders will place their stop order a significant distance from the entry point of the trade. The trader will then wait for the opposite trade signal before exiting the trade. So if your entry point was ‘buy’, your exit point will be ‘sell’ and vice versa.

This swing trading strategy can be very profitable in a trending market. However, sometimes signals can appear late, meaning that the markets have already moved on and may be ready for a reversal. This means you may get stopped out. This issue is mainly applicable to forex markets. Paying attention to the exponential moving average can help as this gives more weight to the most up-to-date and recent data.

Trend Trading

Trend trading is another one of the popular swing trading strategies. It aims to analyze a stock’s movement in a particular direction and maximize on this movement. When a trade moves in one direction, this is known as a trend. Trend trading involves entering a long position when trades are trending up and a short position when trades are trending down.

Trend trading presumes that the current trend is going to continue in the same direction. To prevent losses, if a trade reversal occurs, investors will usually include a stock loss or take profit provision. It may also help to have a profit target – a pre-determined point that you plan to exit the trade. Speaking of profit, one should also be aware of taxes in Canada (see also stock gains tax).

This swing trade setup involves looking at a stock’s price movement on a chart. An uptrend will show the price move upwards, with higher swing highs and higher swing lows. A downward trend will show the price dip low, with lower swing highs and lower swing lows.

Counter-Trend Trading

Counter-trend trading is a swing trading strategy that predicts a current trading trend is likely to reverse. Swing traders aim to profit from this reversal. This trading style involves looking for stocks that are overbought or oversold. Counter-trend traders tend to be more experienced and confident traders compared to those who only possess swing trading basics. This is because counter-trend trading has a higher risk level.

In order to trade by counter-trending, you should draw a trend line when you see stocks making a move. This will allow you to see whether the move is a counter-trend move or an impulse move. Once you have established a counter-trend, you need to watch for when the move is coming to an end. You should then open a position. If the move is bullish, you should open a long position. If the move is bearish, you should open a short position.

This trading strategy also involves you deciding where to place the stop. The general rule for this is to hold your position until the price correction touches the general trend line. This is when you should exit the trade. Although counter-trend trading can be done by day traders, it is usually most effective when you hold a position for several days or weeks.

Bull Flag on Daily Chart

This trading strategy involves looking at the bull flag pattern when making your trading decisions. Bull flags are seen in stocks that have a strong upward trend. The pattern is easy to recognize and is named so because it looks like a flag on a pole. The pole is a vertical rise in the stock. You will then see a small pullback and a period of consolidation. This looks like a flag.

After this pullback, the stock should begin to rally. The size of this rally can be predicted by measuring from the bottom of the flag. Bull flag strategies can be used to find an entry point on stocks that were previously high momentum. Successful trading using bull flag strategies should involve a profit target. Having an exit plan once you have entered a bull flag trade usually involved placing a stop at the lowest part of the flag. This helps to minimize the risk of your investment.

Bull flags are used by both day traders and those who swing trade. If you do not have the ability to give the time requirements needed for day trading, it is still possible to use the bull flag as an effective trading strategy. The bull flag can take a variety of forms, such as a horizontal rectangle, tilted downwards or even a triangular shape. This is not important to the success of bull flag strategies.

The Bottom Line

There are several popular swing trading strategies that can prove profitable for investors. Swing trading is a unique trading style that shows key differences in day trading, position trading, and options trading (see options trading in Canada). A day trader usually has to devote a lot of time to trading, often doing it as a full-time job. Swing trading is much less time-consuming and can be done alongside other work commitments.

Opening a trading account has never been easier, with so many brokerages available to help you do this. Different brokerages offer different levels of support. Opt for one that provides you with the support level you are comfortable with. For example, do you require research tools, trading information and access to their charts? Do you want to trade stocks on the weekend when the physical stock market is closed?

Before beginning to swing trade, familiarise yourself with the different trading strategies (see also options trading). You should also research the charts and tools and learn the jargon. You can look for advice from current swing trading experts on forums, websites and social media such as Facebook/Twitter. You can also use the ‘contact us’ section of swing trading platforms to ask for any advice.