Swing Trading
Thanks to the internet and a wealth of online platforms, trading is accessible to the masses. Many people are enticed by the potential for speedy gains but fear they don’t have the skills or knowledge to be successful.
Often, when people think of trading at home, day trading is the first thing that comes to mind. However, the day trader approach is incredibly intense, and some beginning investors may shy away from it.
Additionally, day trading isn’t always right for experienced traders. Unless you have a lot of time to dedicate to trading, ensuring you can take advantage of quick price movements is difficult, to say the least.
However, longer-term approaches often lack a level of involvement. Whether it’s maintaining a buy-and-hold methodology or even participating in trend trading, the method isn’t particularly active. In fact, it’s easy to become distracted along the way, leading to missed opportunities.
If day trading sounds too involved, but the idea of using a long-term buy-and-hold strategy leaves you uninspired, you may be worried that there isn’t an effective trading strategy for you. However, it is possible to find a happy medium, often by embracing swing trading.
What Is Swing Trading?
At its simplest, swing trading involves holding positions for more than a day but also for less time than you would with traditional trend trading. It is usually considered a short-term trading strategy, even though it includes holding a stock or exchange-traded fund (ETF) for longer than day traders would.
The goal is to keep the position long enough to earn a healthy profit, usually by waiting until a value oscillation works in your favor. However, it doesn’t go as far as to rely on longer trends.
In general, swing traders keep a particular security in their portfolio for anywhere between one overnight and about three weeks. When the value of a stock shifts favorably during that time and allows for a reasonable gain, they switch to the opposite of it.
The approach is less active than day trading, where a person may hold a stock for a few seconds or several hours, but almost always less than a full day. However, it is more involved than trend trading, where finding stocks with long-term potential is more commonly the goal, making it closer to a traditional buy-and-hold approach.
Which Stocks are Right for Swing Trading?
No stock is a guaranteed winner for swing traders. Small- and large-cap stocks are both options. Keep this credo in mind: It’s more about the opportunity than the stock’s price.
The goal is to ride each profit-bearing wave, picking up a stock when it swings toward an extreme low and waiting for it to reach a high before switching. Often, the entire process takes anywhere from a couple of days to a few weeks.
One benefit of swing trading is that you don’t have to avoid securities that are trending upward. If the potential for additional gains is clear, you can still buy into a stock that isn’t selling at a rock bottom price. Instead, you can take advantage of the positive movement and sell when it increases in value, allowing for profits.
At times, swing traders purchase shares from companies just ahead of the release of financial reports. If they expect that the company is going to outperform Wall Street expectations, a swing trader can capitalize on the favorable news and exit after the stock’s value receives a solid bump up.
Which Markets are Best for Swing Trading?
Since swing trading relies on oscillations. If there is a bear or bull market, stock values trend in one direction, making gains harder to obtain. Even stocks that are typically active won’t see the same up-and-down fluctuations. Instead, things tend to favor a single direction.
When the markets are relatively stable, marked by indexes rising for a few days, falling for a short period, and continuing on that cycle, conditions are more favorable for swing traders. Even when stocks are seemingly going nowhere over the long-term, short-term movements create opportunities for dedicated swing traders.
One of the core challenges surrounding swing trading is identifying the current state of the market. Plus, bear or bull markets can carry on for long periods, potentially limiting the effectiveness of swing trading during those times.
What Metrics Should Swing Traders Monitor?
Often, traders look to Simple Moving Averages (SMAs) for information about support and resistance levels. An SMA can serve as a signal of a bearish or bullish market, with the crossover pattern identifying potential entry and exit points for stocks.
However, swing traders may derive more value from the Exponential Moving Average (EMA). This variant of the SMA focuses more on the latest data points instead of longer-term trends. With an EMA, you can see potential trends in development as well as entry and exit points, thanks to the crossovers.
With EMA, a crossover system that focuses on nine-, 13-, and 50-period can be beneficial. When prices cross above the moving averages after being below for a period, it’s a bullish crossover. This could signal an upward trend, with the nine-period crossing the 13-period showing a long entry as long as the 13-period is above the 50-period.
When the opposite occurs, with the price of a security falling below the EMA, it’s a bearish crossover. It can indicate the reversal of a trend and may be helpful for identifying when to exit a long position. If the nine-period goes below the 13-period, it suggests a short entry, though the 13-period has to be below the 50-period as well.
How Do You Use the Baseline for Gains?
After monitoring the EMA, you can identify the potential baseline of a stock. This allows you to figure out what is normal for a particular security, positioning you to take advantage of any deviations.
When a stock starts on a downward path, swing traders short it. When a security is heading up, then going long is the better choice.
The intention isn’t to use a single trade to make a bundle over the long-term. You don’t have to perfectly time your activities. For example, looking to buy at the lowest point possible and sell at the top isn’t necessary. Instead, it’s about taking advantage of shifts in value.
Once a stock hits the baseline, the goal is to anticipate how it will move. Then, you can go long or short to profit from the expected movement.
Now, this doesn’t mean you have to short a stock just because it is going to fall for a period. If the decline is likely incredibly short term, and then a more dramatic upswing is likely in the cards, going long is appropriate. This allows you to factor in trends, even if the activity on a single day appears contrary to your decision.
When Do Swing Traders Exit the Trade?
For swing traders to earn profits, they have to exit at the proper time. Precision timing isn’t a requirement. Instead, the aim is to exit as near to the upper or lower channel line as possible without risking a missed opportunity.
If the market is showing a strong directional trend, then waiting until it reaches the channel line can be smart. There is less risk that the market will shift dramatically, so holding on isn’t as likely to result in a missed opportunity for profits.
However, in weaker markets, exiting before the line is hit might be wiser. Since directional changes are more likely in weaker markets, this approach limits risk.
Is Swing Trading Right for You?
Whether swing trading is right for you depends on your preferences and goals. However, it does provide some benefits.
Should Beginners Try Swing Trading?
Swing trading can be great for beginners — some think of it as a way to get your feet wet in the trading world without the pressures of day trading.
Potentially, swing trading can be less risky than day trading when you’re learning about the market. Since day trading relies on quick action, it can be a bit intense for those who are still familiarizing themselves with the basics. Swing trading gives you more space to learn and grow without as much financial risk or stress.
Since swing trading focuses on days or weeks, and not months or years, it also holds your attention. Trend trading relies on the long-term, and some traders will get distracted while holding a position or will get antsy, leading them to exit at a less than ideal time.
Essentially, by being a swing trader, you access a happy medium.
Should Experienced Traders Swing Trade?
Even though intermediate and experienced traders are beyond learning the ropes and may even be comfortable with the white-knuckle ride associated with day trading, swing trading is still well worth exploring.
The swing trading approach can also give trend traders something more active. Even if they’re successful trend traders, taking part in something more involved may be enjoyable, especially if they have the time and energy available.
Now, this doesn’t mean experienced traders should abandon what is working for them. If you like your current approach and are hitting your profit goals, you don’t need to reinvent your personal wheel. However, if you’re seeking something different or aren’t seeing the level of success you were hoping for with your current methods, swing trading is an option to consider.
The Ideal Personality for Swing Trading
Swing traders want to be active in the market and aren’t afraid of the demands. The “set it and forget it” approach doesn’t always feel right to swing traders or, at least, they don’t want all of their investments to be based on that approach.
However, day trading may be a bit more than a swing trader wants to embrace. After all, nothing is as involved as day trading, and the level of risk can be incredibly high.
Swing traders also need to be able to separate their emotions from their decisions. The ability to develop and follow a strategy is often a necessity, ensuring that they have a rational approach to managing their entries and exits.
It’s important to note that, if you decide to try swing trading, that doesn’t mean you have to abandon other approaches to trading and investing that are working for you today. For example, keeping a retirement account based on long-term potential is fine and so is continuing to trend trade if you are bringing in good earnings. Similarly, you don’t have to stop using a successful day trading strategy just because you want to integrate some swing trading into your life.
Just bear in mind that managing multiple approaches does take additional work, as each one relies on different principles, methods, and analysis.
Is Swing Trading a Guaranteed Winning Approach?
It’s important to understand that no form of trading is guaranteed to bring you profits. There’s always risk when you buy any security, regardless of how long you intend to hold it.
Unexpected events happen to companies all of the time. Even if you monitor EMAs and keep up with the news, you can’t know the future definitively. Every trader is caught off guard at some point, and the same is almost sure to happen to you as well.
Plus, traders with access to the same information as you may see the picture differently. Think of it this way: If you’re able to sell a stock, that’s only because someone else thinks now is the right time to buy. And when you buy, you can only do it because another person believes that selling is the right move.
Now, that doesn’t mean that your assessment isn’t “right” at that time. However, you can (and, at times, will) be wrong.
Swing trading takes both consistency and discipline. Without that, your chances for success are significantly diminished. But, if you aren’t afraid of dedicating yourself to swing trading, it might be a great trading fit for you.
Does swing trading sound appealing to you? Why or why not? Leave your comment below and share on social.
