Every indicator has its own pros and cons, if we apply an indicator in the chart and start trading according to the bookish knowledge, we will never be able to make money, infact we might end up losing our money.
So what is the solution, why these indicators do not perform alone?
The solution is within the problem. Every indicator meant to be to do some specified job. We should not apply stochastic to understand strength and the market direction. Yes, that is the job of ADX indicator. Just like that, every indicator has its own field of expertise and we should apply them according to the market scenario and what we need to analyse from that.
In this article, we will share a swing trading strategy which is a combination of Market trend, strength, and momentum.
Before we continue to the strategy we would like to mention that this trading strategy is an outcome of a combination scan which is only available to the Stock Edge premium member. To avail this feature and many more exciting trading ideas, you can join us as a prime member.
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What is swing trade?
Swing trading is a positional trading. The duration of the trade is very short. These types of trades continue from one week to up to three weeks. This is unlike intraday trading where you have to square off your position within the day.
This is the most suitable type of trading for those who are not into full-time trading. You do not need to seat all the day in front of your system.
In the swing trades, traders just play the momentum. Until there is the presence of momentum you stay in the game. When the momentum starts getting saturated you have to exit.
Strategy
There are four pillars to this strategy. MACD is the main pillar in this strategy. Alongside MACD we will be using RSI, CCI, and MFI.
Why particularly these indicators?
Yes, this question might have stuck to your mind. First of all, we have to understand what we are looking for and what components we need to find out - what we are looking for.
MACD: We are taking the help of this indicator to understand the market trend and momentum. MACD helps us by showing crossovers between the signal line and the MACD as well as market trend (Bullish or bearish).
RSI: This indicator is used to understand the market momentum more prominently.
CCI: To understand a new trend or cyclical trends we will take the help of this indicator.
MFI: This indicator helps us to understand buying and selling pressure by measuring the price and volume. This indicator shows reversals and price extremes.
Conditions for a Bullish move
We have already discussed the components we are going to use in the scan. Now it is the time to define them. Define means we have to set some conditions for the indicators. Based on those conditions the scan will find the perfect match for us.
MACD: MACD crossing signal line from below.
RSI: RSI trending up (RSI crossed level 50 from below)
CCI: CCI trending up (CCI above zero)
MFI: MFI trending up (MFI crossed level 50 from below)
We have seen and understood the process of how to apply the combination scan in the stock Edge application. Now this is the time to analyse the stock and taking a trading decision.
Stocks appear in the application based on the pre-defined criteria. So whenever there is a match a stock will pop up in the “perfect match” box.
We have to remember that this application shows results based on the End of the Day’s data (EOD). Stocks appear in the perfect match box have just satisfied that pre-defined condition and for your ease, we will term this day as a signal day.
Entry
The best entry would be whenever the stock price is crossing the highest price of the previous day (signal day). This is the safer entry as compared to just jumping into the stock no matter what is the market scenario. This is because if the price crosses its previous day’s high we can assume that the market sentiment is still intact or the same for that stock and the up move will continue.
Exit
There are so many ways by which we can take an exit decision. We can simply add 9 EMA lines on the chart and when the price will close below this line we can exit from the trade.
Except this, we can also take the help of other indicators like MACD, RSI etc. If a negative crossover happens in the MACD indicator, we can get out from that trade and for RSI if it closes below its 70 level, we can also close our trade.
Examples
This is the daily chart of Infosys, a buy signal generated on the day of 11/01/2018. A buying position was initiated on the next day. We can see from the above chart that how the stock moves up, gave a rally of approximately 350 points.
Trade was closed when the price moved below the 9 EMA line and closed.
Another example is from the Reliance industries (One-day chart). A buy signal was generated on the day of 4th June. The trade is continuing and we can see how beautifully price moving upward direction.
This is basically a bullish setup. But for the bear market scenario, we can use just the opposite conditions to get short trades. However, the possibility of getting a short is very less compare to long trades.
Conditions for a Bearish move:
MACD: MACD crossing signal line from above.
RSI: RSI trending down (RSI crossed level 50 from above)
CCI: CCI trending down (CCI below zero)
MFI: MFI trending down (MFI crossed level 50 from above)
Entry
For selling short, the entry would be the just opposite of the long trades. Here we will initiate sell trade when the price breaking the low of the signal day.
Exit
We can close our trade if the price close above the 9 EMA line or else we can take the help of RSI and MACD. In case of RSI, we will get out from the trade if RSI crosses its level 30 from below and for MACD we should look for a positive crossover.
Stop loss
For this strategy stop loss will be the below of the last swing’s low (for the bull market condition) and for the bearish market scenario take the last swing high as a stop loss.
Bottom-line
So far we have understood this strategy and how to make proper entry and exit decision. But one more important thing we have to understand, that is the importance of Risk to Reward ratio. A good strategy does not always guarantee a good return. That is why we are using stop losses. But it is also important to calculate the Risk to Reward before we enter in any trade. Know your risk appetite before calculating the Risk to Reward ratio. Another important factor to keep in mind is that we should never trade against the trend. We should always go with the market trend.
Lastly, we would love to mention - in the Stock Edge application, you will find multiple trading ideas and customizable scans just like we have shared here. In the StockEdge club, we continuously share multiple trading ideas, quality combination scans and ELM level Matrix and many more. These will not only help you to make a good amount of profit it also helps you to understand the market in a better way.
Below, we have attached a sample image of ELM level Matrix, take a look.
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Author Bio
Titas Ghosh is Research analyst at Elearnmarkets.com and Stockedge.com. He has completed B. Tech in Mechanical Engineering from Haldia Institute of Technology. Currently, he is pursuing CRTA from KREDENT ACADEMY.