Swing Trading Guide: What Is Swing Trading and How to Do it

Swing trading is commonly hailed in entrepreneur circles as one of the best ways to generate fast returns on investing.

But, is swing trading all it’s cracked up to be?

It depends.

Swing trading is a difficult trading style to master. While many have used swing trading to generate million-dollar returns in a single day, it’s not as simple as it sounds.

Let’s dive into this swing trading guide where we’ll cover what swing trading is, common swing trading strategies, and how to manage risk in the stock market.

What is Swing Trading?

Swing trading is an investment strategy in which a trader seeks to profit from price movements in asset prices over a period of time.

It is a trading method mainly done on short term charts (the daily charts or less) to maximize short term gains.

A swing trader typically uses technical analysis and chart patterns to trade stocks during strong bullish price actions. The key is finding the right entry point, enjoying an uptrend in the market, and then selling before the retracement or pullback.

This is not a long term buy and hold strategy. Trades are made in a short time frame based on fundamental analysis and holding until you hit a profit target.

Swing Trading Definition: Swing trading is a short-term tactic whereby an investor seeks to capitalize on changes in stock prices, otherwise known as swings, in an attempt to buy and sell fast for quick profits.

The Basics of Swing Trading: What Is A Trend And What Are Swings?

Prices tend to move in trends and those trends can be short-term, medium-term, and long-term in nature. Traders mostly exploit short and medium-term opportunities to make returns.

A typical trend starts with a move (up or down) followed by a breather (consolidation). This cycle gets repeated a few times before the trend gets exhausted and price reverses and starts trending in the opposite direction.

Below is a chart of the world’s most valued company, Apple Inc. While the iPhone maker’s every successive product robs us of hundreds of dollars, its share price keeps rewarding traders with huge swings (marked in black) of up to 30%. These swings are preceded and followed by consolidations (marked in red).

Apple Stock Swing Trading Chart

Clearly, your best odds to make money while swing trading such charts is when you enter your trades right when the price breaks out of a consolidation zone and enters a new swing zone.

The interim moves in the trend are referred to as swings and traders place their trades around these swings to generate profits in swing trading.

Alternatively, prices can consolidate, gyrating between support and resistance levels for long periods of time. Such patterns also present swing trading opportunities, wherein, traders buy at support levels (the level at which price turn back up) or sell at resistance levels (levels at which prices turn back down). Here is a chart of America’s biggest retailer that presented a number of swing trading opportunities while consolidating in a range.

Walmart Swing Trading Chart

Now when we know a little bit more about swing trading, let’s get to how we actually do it.

How Do You Swing Trade?

Swing trading is highly rewarding for methodological traders who have set rules for pattern identification, entries, exits, position-sizing, stop losses and risk management.

Most of these traders work around a strategy or a set of strategies to trade profitably. You will also find traders who trade only one pattern and even only one stock for their entire life and still make a fortune with that kind of laser focus.

Thus, the most important aspect of swing trading is to pick up and master a profitable strategy or devise one that suits you the best.

While the internet is filled with swing trading strategies that you can follow, knowing about the strategy will only make you knowledgeable and not profitable in the real trading world.

That’s because traders have to spend considerable time in the market to become experts in any form of trading in financial assets.

Therefore, even when you know the strategy well theoretically, you will need to try your hands on trading with real money in real-time for a long period to be a swing trading pro.

You might have to spend years trading before you will be making serious money out of your trading. All those hours of watching, studying, analyzing, buying, selling, winning and losing will add up at some point in time to generate huge returns for you as a swing trader.

Once you have your skin in the game, you will learn to handle your emotional reactions to market movements. These emotional reactions are what really separates good traders and bad traders.

That said, the most important starting point will still be to know about the strategies. Here we present some strategies that one can look into to build knowledge on swing trading. You will still need to test these strategies in real-time to figure out which one suits you the best. You can also make alterations to these strategies as per your comfort and risk appetite.

Swing Trading Strategies

Now that you are familiar with swing trading basics, it’s time to learn actual strategies to use when starting to swing trade.

Let’s jump directly into the basic swing trading strategies that you can build on while trading.

Breakouts and Breakdowns

Breakouts and breakdowns can be the simplest and most rewarding trading strategy in swing trading.

In this strategy, traders look for trending prices and place their trades betting on the continuation of the trend. As mentioned earlier, the best time to place a trade at a trending asset price is just when it breaks out of a consolidation.

Thus, all a trader has to do is find trending assets (stocks, commodities, currencies, etc.) and watch the consolidations closely for breakouts or breakdowns.

For example, let’s have a look at the chart of Facebook Inc. below. In the chart, Facebook consolidated a few times while the price was uptrending and presented a number of swing trading opportunities. A smart trader would have placed buy orders when the price broke out of consolidations and could have ridden the entire move till the time the trend reversed.

Facebook Swing Trading Chart

In times when the price is trending, a trader would not know the exact exit point. It is often the case that traders overstay with their positions in trending prices, causing them to lose their profits when the reversal happens.

To overcome this, you can form a rule of not entering a position when the trend has gone through four or more consolidations because such patterns are often prone to failures. You can also fix a percentage profit that you would take and leave the trade irrespective of how strong the move looks.

Breakouts and breakdowns signals are even stronger when they appear with increases in volume.

Traders who become good at trading these moves find a plethora of opportunities in all sorts of markets. You can develop your own screeners to filter trending stocks that are in a consolidation zone to become good at identifying swing trading opportunities.

Some popular consolidation patterns traders use to trade are head and shoulders patterns, flag patterns and cup and handle patterns.

Stop losses are generally placed near the consolidation zone in the strategy as the reversal of price back to consolidation levels might signal a fake breakout or breakdown. Traders will then close their positions and wait for the next breakout/ breakdown to trade.

Support and resistance

Sometimes prices move between two levels for long periods of time presenting traders with profit-making opportunities. These levels are called support and resistance.

At the support level, price tends to stop moving down and reverses its direction upwards while at resistance, price tends to reverse an upward direction and start moving downwards.

Traders looking to trade such moves buy (go long) at support levels and sell (go short) at resistance levels and ride the move all the way to the other end for exits.

Putting stop losses is relatively easier in this approach as traders generally put their stop losses slightly below support for longs and slightly above resistance for shorts. A breach of these levels might also signal the end of sideways consolidation and it may be the time for the asset to start trending.

Moving averages and trendlines

Another strategy that traders use for swing trading is using moving averages and trendlines. Moving averages and trendlines act as support and resistance for trending stocks. Traders plot them on charts and buy into an uptrend or downtrend when the price touches the moving average line or trendline.

Within trading platforms, one of the most popular moving averages used by traders to identify short-term trading opportunities is the 20-day simple moving average (SMA).

For example, in the Amazon Inc. chart below, the price hits the 20 DMA line multiple times and jumps back up providing multiple swing trading opportunities to traders.

Amazon Stock Chart

Smart traders enter their trades when the price nears the moving average keeping their stop losses slightly below the moving average.

Swing trading can work inside your trading account in either bearish or bull markets. Before we conclude let’s also touch upon the most important aspect of any form of trading, including swing trading – risk management.

Risk Management in Swing Trading

Swing trading is no different from any other form of investment in that it’s prone to risk.

In addition to general money management, when looking to swing trade, you need to add risk management to your trading plan.

Here are a few of the best techniques to manage your risk when swing trading.

Leverage: Don’t bite more than what you can chew. Leverage has the potential to enhance your returns but it can also wipe out your capital if you do not use it responsibly. Excessive leverage is almost always damaging and traders are advised not to be too greedy when using leverage.

Position sizing: You must always size your trading positions appropriately. Putting all your money in one trade or putting 1% of the money in 100 trades, both aren’t good practices. You should balance concentration and diversification in their trading portfolios to generate optimum returns from swing trading.

Stop Losses: Not all your trades will be right, and when they are not, it should not drag your returns down. To ensure that you do not lose out, keep your losses to the minimum. Accept that you are wrong and move on!

Exits: Don’t stay too long with a position to give it all back when the price starts moving against you. Make strict profit-taking rules as well, just as you will make stop-loss rules. Your exit rules can be as simple as a fixed percentage profit or can be highly complex that uses a mix of technical and fundamental technical indicators. No matter what it is, there must be a profit-taking rule based on price changes.

Risk management is probably the most important aspect of swing trading. Even the best of the strategy fails if not doubled up with top-notch risk management. An average strategy with great risk management will anytime beat a great strategy with shoddy risk management in swing trading.

Final Thoughts

Like any other trading strategy, swing trading also works on a simple principle:

“Win big when you are right and lose small when you are wrong”

That said, swing trading suits a patient trader who is willing to take the risk that comes with keeping overnight positions.

Because the churn (number of trades) in swing trading is lower that in day trading, traders tend to squeeze out higher profits from each position when they take an overnight risk.

Therefore, they end up entering a lower number of trades with a higher profit per trade as compared to a higher number of trades and lower profit per trade in day trading.

While the profit potential of a day trader is theoretically higher than that of a swing trader, profits generally vary a great deal based on the trader’s style, psychology, and strategy.

Keeping overnight positions exposes traders to wild movements at market openings, which is why risk management is of utmost importance in swing trading.

In most cases, traders take calculated risks with the responsible use of leverage to execute their swing trading strategies. They consider the overnight risk while entering the trades and never make a single trade a large part of their trading capital.

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