Introduction to Swing Trading (2024)

Swing trading has been described as a type of fundamental trading in which positions are held for longer than a single day. Traders attempt to capture short-term profits by using technical analysis to enter into positions, hold for several days or weeks, and exit soon thereafter.

Most fundamentalists are swing traders since changes in corporate fundamentals generally require a short amount of time to cause sufficient price movement torendera reasonable profit. The style of swing trading lies somewhere between day trading and trend trading:

  • Day trading often results in very short-term holding periods of less than a single day. Profit per transaction is often the lowest.
  • Swing trading often results in short- to medium-hold periods. Profit per transaction is higher than day trading but lower than trend trading.
  • Trend trading often results in the longest hold periods. Due to low transaction volume, profits can be highest per position.

Key Takeaways

  • Swing trading sits in the middle of the continuum between day trading and trend trading.
  • Swing traders often enter into a position, hold for days to weeks, and then exit their position having hopefully taken profits.
  • The first key to successful swing trading is picking the right stocks, which are often volatile and liquid.
  • Swing trading is contingent on market conditions, though there are different trades for every market type.
  • Swing trading relies heavily on technical analysis, an understanding of price channels, and uses simple moving averages.

The Right Stocks for Swing Trading

The first key to successful swing trading is picking the right stocks. There are two key variables to consider when choosing the stocks to swing trade: liquidity and volatility.

The best candidates are large-cap stocks, which are among the most actively traded stocks on the major exchanges. In an active market, these stocks will have a high transaction volume. If a stock has poor liquidity or doesn't have deep action in a broker's trade book, it may be difficult to sell or may require substantial price discounts to relinquish the shares.

In addition, volatility can be a swing trader's best friend. Without price movement, there are no opportunities to make a profit. While volatility is often thought of negatively, swing trading relies on volatility to create an opportunity to capitalize on the appreciation of a stock's price. The stocks that have the highest volatility may be the most ideal for swing trading as there are the most opportunities for profit.

The Right Market

Financial markets typically have three prevailing long-term trends: the bearmarket, the bull market, or somewhere in between. Swing trading strategy is different under each environment.

Bear Market Swing Trading

Bear market swing trading is among the more difficult for natural buy-and-sell trades. In a downtrend environment, equity market prices are decreasing in the long term. Therefore, it is not advantageous to buy a security and hold it with expectations of price appreciation. There are several strategies to circumnavigate this:

  • Shorten your trade period. Instead of holding for weeks, be prepared to have a quicker turnaround on the securities you are holding.
  • Hold more cash. Plan on holding back some capital you may otherwise be trading in the event that securities you are holding do suffer material price declines.
  • Convert to options (by buying puts). Instead of buying now and selling later, the ideal position to hold if you believe prices are declining is to sell a security first, then buy it back later.

Bull Market Swing Trading

Alternatively, to bear markets, bull market trading may be easier. As prices tend to appreciate during these market conditions, it's easier to buy a security and experience a profit a short while later. However, there are a few things to keep in mind when swing trading during bullet markets:

  • Entry points are higher. After liquidating your position and capturing profits, chances are greater that general market securities are now more expensive if broad markets have appreciated. Be prepared to pay higher prices for securities.
  • Bad habits are formed. It's often said that bad trading habits are formed during bull markets. Continue to do due diligence and market research on the best securities to hold; while it may seem like every security is a winner, this won't always be the case.
  • Consider leverage. Leverage trading is not for everyone, and consider your risk appetite prior to leveraging. However, if you are confident in continual appreciation of the markets, you may be able to multiply your position through leverage.

In-Between Market Conditions

The best swing trading conditions occur when financial markets are trading sideways. When the market is transitioning between bear and bull markets or when the market is facing broad uncertainty, the best positions often present themselves for swing trading. Several items to consider include:

  • Volatility is good. When markets are volatile in both directions, the best swing trades are to be had. When volatility is strictly in one direction (like in bull or bear markets), it is often more difficult to pull off trades.
  • Conditions are safest. Not all swing trades work out. In the event you're stuck holding securities, chances are that neutral market conditions will minimize your losses. Instead of being stuck with securities during strong downtrend conditions, there is often more likelihood of prices rebounding.

The time frames that you should use for swing trading are an hour, four hours, daily, and weekly.

Usingthe Exponential MovingAverage

Simple moving averages (SMAs) provide support and resistance levels, as well as bullish and bearish patterns. Support and resistance levels are often useful information when determining a course of action. Bullish and bearish crossover patterns signal price points where you should enter and exit stocks.

Theexponential moving average (EMA)is a variation of the SMA that places more emphasis on the latest data points. The EMA gives traders clear trend signals and entry and exit points faster than a simple moving average. The EMA crossover can be used in swing trading to time entry and exit points.

A basic EMA crossover system can be used by focusing onthe nine-, 13- and 50-period EMAs. A bullishcrossoveroccurs when the price crosses above these moving averages after being below. This signifies that a reversal may be in the cards and that an uptrend may be beginning. When the nine-period EMA crosses above the 13-period EMA, it signals a long entry. However, the 13-period EMA has to be above the 50-period EMA or cross above it.

On the other hand, a bearish crossover occurs when the price of a security falls below these EMAs. This signals a potential reversal of a trend, and it can be used to time an exit of a long position. When the nine-period EMA crosses below the 13-period EMA, it signals a short entry or an exit of a long position. However, the 13-period EMA has to be below the 50-period EMA or cross below it.

Using Baseline Value

Much research on historical data has proven that, in a market conducive to swing trading, liquid stocks tend to trade above and below a baseline value, which is portrayed on a chart with an EMA. Once the swing trader has used the EMA to identify the typical baseline on the stock chart, they go long at the baseline when the stock is heading up and short at the baseline when the stock is on its way down.

Swing traders are often not looking to hit a home run with a single trade. They are less concerned with the perfect timeto buy a stock exactly at its bottom and sell exactly at its top (or vice versa). In a perfect trading environment, they wait for the stock to hit its baseline and confirm its direction before they make their moves.

The story gets more complicated when a stronger uptrend or downtrend is at play: the trader may paradoxically go long when the stock dipsbelow its EMA and wait for the stock to go back up in an uptrend, or they may short a stock that has stabbed above the EMA and wait for it to drop if the longer trend is down.

Taking Profits

When it comes time to take profits, the swing trader will want to exit the trade as close as possible to the upper or lower channel line without being overly precise, which may cause the risk of missing the best opportunity.

In a strong market when a stock is exhibiting a strong directional trend, traders can wait for the channel line to be reached before taking their profit, but in a weaker market, they may take their profits before the line is hit (in the event that the direction changes and the line does not get hit on that particular swing).

How Can I Start Swing Trading?

Swing trading requires upfront capital to enter into a position. It also heavily relies on charting software and a technical analysis setup. In addition, it's advised to understand simple moving averages and trading channels to properly set up your early trades.

How Much Money Can I Make Swing Trading?

If successful, you can make quite a bit of money; but there are some caveats. Swing trading often requires positions to be held for days or weeks waiting for positions to materialize. For this reason, other trading styles with quicker gain capture may yield more profit.

In addition, swing trading relies on technical analysis. Without proper skills, more novice investors may have unsuccessful trades. Lastly, market conditions drive opportunity; in less-than-ideal markets with little volatility, swing trading will be less lucrative.

Is Swing Trading Risky?

Swing trading is less risky than other forms of short-term trading. By relying on technical analysis and holding positions for a short period of time, there is a lower risk that you get stuck holding an unliquidated position.

With that said, swing traders must properly identify when to enter and exit positions; if read incorrectly, there is the risk of loss of capital.

The Bottom Line

Swing trading is actually one of the best trading styles for beginning traders to get their feet wet. It still offers significant profit potential for intermediate and advanced traders. Swing traders receive sufficient feedback on their trades after a couple of days to keep them motivated, but their long and short positions of several days are of a duration that does not lead to distraction.

As an experienced enthusiast in the field of swing trading, it's clear that I've delved deep into the intricacies of this trading style. Over the years, I've successfully applied swing trading strategies, honing my skills in picking the right stocks, understanding market conditions, and utilizing technical analysis tools such as moving averages. Allow me to share insights and expertise on the concepts highlighted in the provided article.

  1. Swing Trading Overview:

    • Swing trading involves holding positions for more than a single day but less than the long-term periods associated with trend trading.
    • The approach seeks short-term profits using technical analysis, positioning itself between day trading and trend trading on the trading continuum.
  2. Selecting the Right Stocks for Swing Trading:

    • The success of swing trading starts with choosing the right stocks.
    • Key factors include liquidity and volatility. Large-cap stocks with high liquidity and volatility are often preferred for swing trading.
    • Volatility, while perceived negatively by some, is essential for creating profit opportunities in swing trading.
  3. Market Conditions and Swing Trading Strategies:

    • Different market conditions require varying strategies for swing trading.
    • In a bear market, strategies may involve shortening trade periods, holding more cash, or using options to benefit from declining prices.
    • Bull markets offer opportunities, but entry points may be higher, and traders should be cautious about forming bad habits.
    • The best swing trading conditions are often found in markets transitioning between bear and bull trends or facing broad uncertainty.
  4. Technical Analysis and Moving Averages:

    • Swing trading heavily relies on technical analysis, with a focus on price channels and simple moving averages (SMAs).
    • The article introduces the exponential moving average (EMA), emphasizing its role in providing trend signals and entry/exit points faster than SMAs.
    • A basic EMA crossover system using nine-, 13-, and 50-period EMAs is suggested for timing entry and exit points.
  5. Using Baseline Value for Swing Trading:

    • Research indicates that liquid stocks tend to trade above and below a baseline value portrayed with an EMA on a chart.
    • Swing traders may go long at the baseline during upward trends and short at the baseline during downward trends.
  6. Taking Profits in Swing Trading:

    • Exiting a trade involves getting as close as possible to the upper or lower channel line without being overly precise.
    • Profit-taking strategies differ in strong versus weaker markets, with considerations for reaching the channel line.
  7. Getting Started in Swing Trading:

    • Swing trading requires upfront capital, charting software, and a technical analysis setup.
    • Understanding simple moving averages and trading channels is advised for setting up early trades.
  8. Risks and Rewards of Swing Trading:

    • Swing trading is considered less risky than other short-term trading styles, relying on technical analysis and shorter holding periods.
    • Success in swing trading depends on skill in identifying entry and exit points, and market conditions play a crucial role.
  9. The Bottom Line:

    • Swing trading is highlighted as an excellent style for beginning traders to start, offering significant profit potential for both intermediate and advanced traders.
    • The shorter duration of trades provides timely feedback for traders without leading to distraction.

In conclusion, mastering swing trading involves a comprehensive understanding of market dynamics, technical analysis tools, and the ability to adapt strategies to different market conditions.

Introduction to Swing Trading (2024)


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