Swing Trade Trending Stock Strategies

By Michael Griffis, Lita Epstein

Technical-analysis patterns are applicable to swing trading. Patterns repeat in all time frames; the difference is in how swing traders use and interpret these common patterns. Trend-following strategies are more aggressive for swing trading than they are for position trading.

Trading pullbacks

A pullback is another name for a consolidation within a trend. Consolidation patterns include the flags and pennants. Swing traders use daily charts and intraday charts to identify the dominant short-term trend and any pullback patterns within the trend.

They try to enter a position when the price of a targeted stock stops declining or pulling back so they can capture the next move higher in the trend.

After you identify a trending stock and find a flag or pennant pullback pattern by visually examining the daily charts, you must try to enter a position just as the pullback is ending. The classic setup is finding an orderly pullback in which the high of each bar on a chart of the pullback is lower than the previous one.

[Credit: Illustration courtesy of StockCharts.com]
Credit: Illustration courtesy of StockCharts.com

Entering a position is done by placing a buy stop order with your broker. A buy stop is like any stop order; when the price is hit, the order is executed. Entering a position to trade pullbacks is an iterative process, so you should use a day order instead of a GTC order. Here are the steps:

  • Select your buy-stop price so it’s just above the intraday high price shown in the last bar of the chart.

  • If the stock price trades above your buy-stop price, your order is executed. Otherwise, the order is canceled at the end of the day.

  • As long as you’re still interested in this trade, adjust your buy-stop price to just above the intraday high of the most recent bar on the chart and reenter your order.

  • After your order is filled, place a stop-loss order using a stop price just below the intraday low of the lowest bar in the pullback on the chart.

  • As long as the trade is active, continue adjusting the stop price to be just below the intraday low of the most recent bar on the chart.

This price chart shows stock of National Oilwell Varco, Inc. (NOV), that’s showing a strong uptrend. Several opportunities for trading pullbacks are also shown on this chart.

[Credit: Chart courtesy of StockCharts.com]
Credit: Chart courtesy of StockCharts.com

The first pullback occurred after NOV traded to a new high of $30.44 on January 23, 2007. That new high is labeled Bar #1 on the chart. After identifying the pullback, you begin the iterative process of setting the buy-stop price just above the high of the last bar on the chart.

At the end of each day, you reset the buy-stop price, again setting it just above the high of the last bar, and reenter the order.

In this example, the trade is triggered on Bar #2, which occurred January 30. You had set the buy price just above the January 29 high, which was $29.44. NOV opened January 30 at $28.90. The trade was triggered when the stock climbed above $29.45, rising as high as $30.01 before backing off to close at $29.80.

You could expect your order to fill very near your $29.45 buy-stop price. For the sake of the example, the fill price is $29.50.

Immediately following the trade execution, you set a stop-loss order below the low of the previous bar, $28.74 in this case. Or you may set the low at $28.90, the trade day’s low. Either approach makes sense, so it’s your call. Each day that the trade remains active, reset the stop order just below the low of the previous bar on the chart.

The thrust of this trend lasted through February 12, 2007, a duration of ten trading days. This position hit the stop price on February 12, labeled Bar #3, when the stock traded below the February 9 low of $33.03.

The next opportunity to trade a pullback occurred during the pullback that began after NOV traded at a new high on February 13, labeled Bar #4. The trade was triggered on February 21, shown as Bar #5, when NOV traded above the February 20 high of $33.85.

The position hit its stop price on February 27, shown as Bar #6, when the stock traded below the February 26 low of $34.91. Given slippage and transaction costs, this trade was no better than a breakeven trade.

The next opportunity came following the poorly formed pullback that began with Bar #6. You entered the trade on Bar #7 when NOV traded above the February 28 intraday high of $35.00. The trade would stop out two bars later for a loss.

NOV traded at $66.32 on April 26, 2012. There were many trading opportunities for a swing trader using this stock between 2009 and 2013.

Surfing channels

Swing traders also use a channeling strategy to identify entry and exit points. After a channel is identified on the daily charts, channel lines are treated as lines of support and resistance.

[Credit: Chart courtesy of StockCharts.com]
Credit: Chart courtesy of StockCharts.com

After identifying support and resistance levels for a channeling stock, you can monitor its chart for reversals near the channel lines. As the stock price approaches the lower or support channel line, you have an opportunity to take a position in the direction of the trend.

After entering a position, your stop-loss order is entered just below the support channel line. As the stock price approaches the upper or resistance channel line, it signals when to exit your position.

You hold this long position until either it stops out or the stock approaches its upper channel-resistance level. Again, you need to monitor the intraday charts for hints of a change in direction and exit the trade whenever you see the reversal. After that, you wait for the stock to head back toward the lower channel line to initiate a new long trade.