My 3 All Time Favorite Swing Trading Strategies

In the realm of swing trading stocks, there are no shortage of patterns and strategies that traders keep in their tool kits at all time. For me personally, I have just 3 stock swing trading strategies I tend to focus one. And no, I’m not going to charge you to see them. I’m going to give you them for free. Just take a look below.

I will briefly talk about each one and then provide a link at the bottom of each section if you wish to learn more about that particular swing trading strategy and it’s intricacies.

The First Swing Trading Strategy: The Oversold Bounce Play (Least Favorite)

CRTO Oversold

The idea behind this pattern is pretty simple. Grab shares when they are in the oversold zone and wait for the bounce, then get out at the first sign of resistance. The RSI indicator is saying oversold (14 day), meaning the stock has had a prolonged period of selling and could be due for a bounce (according to the indicator anyway).

This doesn’t mean the selling will end with a guaranteed bounce just because of the RSI indicator (Relative Strength Index). That’s ludicrous. Stocks can become oversold and remain oversold with no chances at a profitable bounce for swing traders ever again. RSI (or any indicator for that matter) is a tool of the trade; nothing more.

Being oversold will only trip my scanners and have me look at the stock. It’s not guaranteed to hit my watch list because it’s oversold. A few things have to pass my inspection.

Namely, a solid level of support, a track record of coming out of oversold for big bounces in the past, and of course a candlestick pattern (bullish engulfing, bull harami, morning star, etc) of some kind that confirms my suspicions of an upcoming bounce play.

This use to be my favorite swing trading stock pattern (likely because it was the first I learned). To me, the pattern made the most sense because I always knew when the trade was over. If it broke below the low of the lowest recent candlestick, I was out. Seemed very simple at the time.

The problem with this type of trade however is glaringly obvious to most seasoned traders; as I came to learn over the next several weeks and months. That problem is… TRADING AGAINST THE TREND.

Trying to catch bounces on oversold stocks is, for the most part, trying to catch a falling knife. There is no other way to look at it. The short term trend says the stock is heading lower. Even with a bounce, if the trend stays intact, the stock will continue it’s journey lower.

As a swing trader, it’s not your job to seek out or call out trend changes. Don’t waste time on that. You identify the trend, you wait for your entry into that trend, you follow it’s direction, you exit the trend with a profit. It’s a phrase I learned later in my stock swing trading journey but it rings true — THE TREND IS YOUR FRIEND!

With a trend, even if there is a pullback and you have to sit through it, the TREND indicates the price SHOULD resume upwards after the pullback is complete. This is a CRUCIAL piece of information for swing traders. Trading against the trend means there is very little room for error with entry and exits.

Important Note: Trend analysis is another important tool of swing trading, but you need to have your own rules for entry and exit with the trend in mind. Don’t let a loss snowball into a crippling blow because the overall trend says up and you refuse to take the loss. Stick to your rules of exit and entry at all times!!!

Anyways, with the Oversold Bounce play, you essentially have to call the bottom (close to it) AND be able to take profits quickly at the top before it turns down again. This is easier said than done. Considering the downturn will continue (should the trend hold),  it will blow right past your stop if you don’t sell at the right time.

As I said this WAS my favorite pattern when I first started out. It no longer is. I still use it if I see a really juicy set-up with excellent risk/reward action, but it’s not on the front lines.

My Second Swing Trading Strategy: The Traders Action Zone (TAZ)

BFAM taz chart

This was the second type of swing trading strategy I learned and it’s now my 2nd favorite type of trade. Once I learned more about it, it quickly knocked Oversold Bounce Plays off it’s perch as champion. It’s taken me on some wild rides for some of my best wins ever and I trust it WAY MORE than oversold bounce plays.

I moved to this pattern after I learned more about the whole “trend is your friend” mindset. Essentially, even if you miss the perfect entry (which is very common), the trade is still on so long as the trend is in place. So while you may go into the red for a brief period of time, so long as you stick with the trend, you should come out a winner.

It’s quite simple and it’s far more forgiving than the oversold bounce play (which I do NOT RECOMMEND for beginners).

You simply time your entry between the 10ma and the 30ema (a common pullback area for stocks). Now, you don’t buy as soon as the stock hits this zone, that’s not how this swing trading strategy works. You use your tools of technical analysis to determine the correct time to enter. You have to see a confirmation signal that tells you the stock is ready to continue it’s upward movement.

There have been plenty of times in which the stock enters the TAZ and continues right on through it to another level of support. The TAZ is just a way to see all of the stocks that are pulling back before their next possible leg up — a scanning tool basically. There’s nothing magical about the zone itself and it’s completely fine for a stock to crash through it and come back even stronger later.

My Third Swing Trading Strategy: The Breakout (My Current Favorite!)

jblu breakout

Now in my third year of swing trading stocks, I have to say the breakout pattern play is my absolute favorite of all the swing trading strategies and I wish I would have started using it much sooner.

The premise with this type of play is to buy a stock right after it’s broken out from a period of consolidation. Literally the day after it’s breakout right at the opening bell; unless there is a large gap up, market is rolling over with big news, earnings report, or a lower time frame (15, 30, 60 minute) shows a reversal candle.

Why Many Traders Avoid This Type of Pattern

A stock which has just moved 5, 10, or even 15% keeps a lot of swing traders at bay. After all, it just had a big move and swing traders know big moves to the upside normally mean immediate pullbacks to the downside. Plus, the RSI (14 day) will likely be reading oversold or near oversold which is another “flag” of an upcoming pullback.

Essentially, most of the technical signs point to “HALT! Do not buy. Wait for retrace. Stock is up too much and the risk is high! STAY AWAY!”.

I can’t argue against that assertion. It’s logical and it’s what many swing traders have been taught and firmly believe since day one. However, I noticed something unique about breakouts of stocks in a strong uptrend — they keep going higher!

This breakout pattern is exclusively used with stocks in a strong uptrend which have a pattern of consolidating, breaking out even higher, and then creating a new level of support from which they repeat the process!

With proper technical analysis — identifying previous support zones, upcoming historical resistance zones if any, volume levels during consolidation phase, volume on breakout day, etc. — it’s possible to pick stocks with a VERY STRONG possibility of continuing upward for the next few days.

Even for those stocks that break out and then immediately pull back, they often do not pull back to close BELOW the LOW of the breakout candle. If they do, the breakout may have been a head fake and you have a clear stop point. However, you normally will know if it’s a head fake by volume and candlestick analysis.

I personally give a little room for the breakout stocks to pullback before pulling the plug on them. Previous resistance becomes support, so that zone is my hard stop area. If it breaks through that as well, the trade is most definitely off.

Obviously, risk/reward analysis needs to be in mind for every trade. Every trade must be PLANNED OUT so you don’t make sudden emotional changes based on the forming of the daily candles. I learned long ago that a candle is not a candle until the closing bell sounds. You’d do well to burn that into your brain now.

The Mental Aspect of The Breakout Trading Strategy

The biggest obstacle when using The Breakout Play is the mental gymnastics you have to go through as a swing trader. Stock traders typically have the mind set of buy low, sell high. It’s stock trading 101.

While “buy high, sell higher” doesn’t have the same ring to it, that is the mindset you need to get into with this type of swing trading strategy. Convincing yourself to buy the stock when it’s at a high point typically goes against what many new traders know and have learned about swing trading strategies — buy low, sell high.

If it’s ingrained into you like it was me, it”s incredibly difficult to initiate this type of trade without a much higher than normal fear level — a fear level that calls every action into question. After all, it is quite the drop to a support area if you trade a breakout; the loss won’t be pretty if you’re wrong!!

The easiest way I overcame this fear (before putting money at risk) was to paper trade these breakouts for several weeks to learn their ins & outs. This helps GREATLY with any new pattern you are looking to trade.

The irrational fear of big losses from trading breakout patterns subsided more and more each week. Yes, they were indeed possible, BUT they were not likely given the tendency of a strong stock with a breakout to head higher after said breakout.

Think of it this way… When near a cliff’s edge, why do you have a sudden, incredibly powerful fear of falling? (If you don’t, well, bully for you! Most people do however!)

Edge-of-the-Cliff-608x400

  • Are you going to suddenly lose control of your motor functions and plunge over the side?
  • Are you going to fling yourself over on purpose because it looks like fun?
  • Is there a crazy man nearby whom you worry might push you over the side? (This is a legitimate concern, haha)
  • Might you slip and fall over because you’re performing a complicated dance routine near the edge?
  • Is today the day you’re going to find out if you can fly?

Why are you suddenly so afraid of going over the edge with no realistic expectation of that actually happening?

I’m not a psychologist and I don’t pretend to be one. In fact, the above example might be a horribly inept one; which only made sense as I was typing it out, lol. However, I can tell you that we, as human beings, think the worst about every given situation we are in. Swing trading stock breakouts is no different in this regard.

We throw away any thoughts as to WHY a particular stock has reached these new heights — the good — and all we see is the long, LONG trip down — the bad. We ignore all the signs that the stock is still strong (strong volume breakout being the most obvious sign) and we convince ourselves the only direction the stock is going is DOWN DOWN DOWN.

These thoughts are irrational to their very core. Once you realize it and accept it, you’ll be more open to taking on these types of trades and less fearful of a stock suddenly tanking and wiping out your investment; even though it has been in a 28 week uptrend with no signs of slowing AND a recent breakout on mega volume.

That’s not to say breakdowns don’t happen. They do. However, with smart planning and solid risk/reward tactics, you’ll be equipped to deal with them and will be able to cut your losses and move onto the next winner quickly.