Swing Trading 101
20-Day Simple Moving Average
Per Investopedia, the moving average (MA) is a simple technical analysis tool that smooths out price data by creating a constantly updated average price. The average is taken over a specific period of time, like 10 days, 20 minutes, 30 weeks or any time period the trader chooses.
The 20-Day Simple Moving Average is the average price of the past 20 days. In this swing trading strategy, we consider price to be bullish when it is above the 20-Day SMA bearish when it is below the 20-Day SMA.
Relative Strength Index
Per Investopedia, The relative strength index (RSI) is a momentum indicator used in technical analysis that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset.
RSI > 70 signals an overbought condition, and RSI <30 signals an underbought condition.
Moving Average Convergence Divergence
Per Investopedia, Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA.
Looking at the MACD on the chart, crossovers occur when momentum has changed from bearish to bullish or vice-versa.
Tying It All Together
None of these 3 indicators are full-proof. Used by themselves, many would even consider them useless. However when used in conjunction they can be extremely helpful in predicting future price movement.
Therefore, in order to enter a trade we are looking for:
- Price to close above the 20-Day Simple Moving Average
- RSI that is not overbought (approaching 70)
- MACD momentum shifting or pointing to the upside
BONUS: Support, Stop Losses, and Price Targets
Before taking a trade, you should map it out. Where you will take profits and where you will take a loss if the trade moves south.
Price Targets: Price Targets are set at previous highs or previous resistance, as well as 70 RSI. Decide how much you will sell at each sell target. I typically opt for 1/5. You could also choose 1/3 or 1/4.
Stop Losses: Stop Losses are placed at support levels. If price drops below these levels you take a loss. You can sell your full position, 1/2, or any other amount. Others choose not to sell any and will wait for price to move sideways again and average down.
See how I prepared for a $GRPN Swing Trade in the image below.
Remember, price has memory…