Swing trading has gained a lot of popularity in recent years, mostly because people are looking for ways to supplement their primary income.
With the creation of many user-friendly trading apps, this type of investing has become much easier. But what does swing trading entail, and how is it different from other types of trading?
Here, I'll break down how to be a swing trader.
What is Swing Trading?
Swing trading involves maintaining a position for a period ranging from a few days to several weeks.
The active trading strategy helps you track swings in market sentiment so you can enter and exit at the best level possible.
Swing trading strategies rely on technical analysis. The best way to approach it is in trending markets and fluctuating markets.
Here are some pros and cons of swing trading:
Takes less time than traditional “buy-and-hold” investing
Captures upward and downward swings in price action
You can rely on technical analysis
Holding positions for longer (than, say, day trading) means more risk
Sharp reversals in the market can cause losses
Can’t take advantage of leverage from day trading
Now that you have a clearer picture of what day trading entails, here are some ways that swing trading and day trading differ.
Swing Trading vs. Day Trading
Swing trading is different from day trading because you are supposed to hold your positions overnight. Swing trades typically last between days and weeks.
The strategies you will use are like those of day trading. The primary difference is the length of time you hold your position.
Day traders move in and out of trades during a session, but swing traders must be more patient. Since day traders don't hold onto positions for long, it's easier to avoid market gaps brought on by the news.
With swing trading, there's a risk that the asset's price is starkly different from the closing price of the previous night.
Day traders deal with increased liquidity risks because the bid-offer spread of an asset could potentially grow within a certain time frame, taking a chunk out of your profits.
Swing traders get to hold a position until the big-offer spread shrinks.
Day traders benefit from improved leverage. The buying power of day trading is up to four times the buying power of non-leveraged positions. This leverage can mean larger returns.
Finally, day traders must focus on several positions and always scout for new chances throughout the day to replace their exited positions. For that reason, day trading is a large commitment in terms of time.
What Does it Take to be a Swing Trader?
Swing trading takes a lot of time and patience. To be a successful swing trader, you must create strategies that are effective for you. You should also develop risk management techniques.
Swing traders should be calm under pressure and react using logic rather than emotion. Swing trading also involves technical analysis in the form of discovering patterns and responding according to those patterns.
Losing is sometimes part of the experience, so don't feel discouraged if trading doesn't always work out the way you expect.
As a swing trader, it’s also important to have reliable internet access–which most of us do now–but it’s critical here since even a minute of downtime could cost you a profit. You can find free screeners online to help you make trading decisions.
Related: How to Create a Trading Plan
Swing Trading Strategies
When you swing trade, your goal is to find an overall trend and obtain bigger gains within that trend.
There are many strategies you can use to swing trade, depending on your unique trading style.
Trending stocks don't typically move in a straight line. Rather, they move in a pattern that resembles stairs. For example, a stock might rise for many days, then down shortly before it goes up again.
When these zig-zag patterns happen consistently, that stock is on an uptrend.
Swing traders can look for upward movement followed by a reversal (referred to as the countertrend). After the countertrend, you want to see upward movement.
Get Gains on the Upside
It's impossible to gauge how long a countertrend will last. Swing traders should think about making trades only after the stock seems to be rising.
Strategic swing traders can isolate the countertrend. They start by figuring out their point of entry, or the price paid to buy a stock. A solid entry point is when the investment trades higher than the counter trend's high point from the day before.
Then, find the lowest point of the countertrend, (stop out point or the swing low). If the price goes lower than that point, you should let go of your position to minimize losses.
Next, find the highest point of the uptrend. That will be your profit target. If the price inflates to that point or higher, it may be smart to sell a part of your position.
The best way to assess risk is to use a 2:1 ratio. What that means is that your potential gain should be twice the amount of your potential losses.
Enter Your Trade Correctly
Swing traders that buy stocks can enter trades with a buy-stop limit order, or an order to purchase a security at a decided price.
If you are trading in-the-money options, you can choose to use a contingent buy order (two transactions completed simultaneously).
When a call option position or stock is open, you can enter a one-cancels-other order and sell when it reaches your stop-loss price or profit-taking price.
Orders like this make sure that when a sell order is executed, the other order gets canceled.
Get Gains on the Downside
Bearish swing traders can use some of the tactics listed above during an uptrend and make use of a downtrend. It’s challenging to estimate how long a countertrend will last, so your best bet is to enter a swing trade only after seeing that a stock’s performance is heading downward.
Analyzing downtrends is a bit harder than analyzing uptrends, but they also move in a stair-like pattern.
When a stock goes lower than the previous day's counter-trend low, traders can assume a bearish position.
Like bull market investing, only enter swing trades after assessing the potential risks and profits.
The process is the same as it is for bullish swing trades. Look at the entry point and compare it to the profit target point and stop out.
With bearish swing trades, the swing high is the highest price point of a countertrend. If a stock increases higher than the swing high, exit the trade to avoid a loss.
When a stock reaches the profit target or the lowest price of a downtrend, consider exiting and locking in gains.
Remember, profit target and entry point are not the same things. The difference lies in the reward of the trade. The difference between your stop-out point and your entry point is the risk involved.
You can find out whether a trade is worth it by using the same 2:1 ratio mentioned earlier.
Related: Best Tax Software for Investors
For Unconventional Traders
To play it safe, most swing traders go with the primary trend of a security. Others like to trade the countertrend. The practice is sometimes called fading or counter-trend trading.
Fading during an uptrend is taking a bearish position close to the swing high because you believe the security will retreat.
Fading during a downtrend is when you buy shares close to the swing low because you think it will rise.
Remember to exit the trade before the countertrend stops and returns to the primary trend.
If you aren't the type that likes day trading, swing trading may be your way into the world of strategic investing.
Managing Your Trades
Successful swing traders can benefit over days or even weeks. That's why you should know how to scale out of the position you're holding effectively.
Scaling out is when you sell your position in several orders to get a better average exit.
Since swing trades last for days and sometimes weeks, you’ll not likely get the best exit price on one order. Scaling out gets you a better average exit price in the long term. Traders typically scale-out in three or four orders, but you are free to scale them out more if you think it will benefit you.
With swing trading, you must know how to track a watchlist, perform technical analyses, execute a trade, and many other concepts.
One of the reasons many traders don't do well with trade execution is that their emotions influence them. It would help if you thought logically about when to exit trades.
Creating a strategy and following strict guidelines that you set for yourself will help you avoid making mistakes because of emotions.
Become systematic with trading, and you will see better results. Swing trading might seem difficult and risky, but it's worth it when you use the right strategy.
Related: Best Social Trading Platforms
Best Investment Tools for Swing Traders
There are many different investment tools on the market. It can be challenging to look through all the different options, but try and find the one that fits your trading style.
Related: The Best Stock Research Tools
First, you’ll want to have some type of technical analysis tool. This will help you analyze historical prices, estimate future prices, and do any other type of technical research you need to do.
TradeMiner scans historical prices and market trends to look for patterns of profitability. Once it finds them, it’ll bring up a list of stocks with varying degrees of confidence that the price will soon fluctuate.
There is a learning curve, though, so make sure you check out their educational videos.
TradeTracker is a simple piece of software that allows you to keep track of all your trades. When you start swing trading, things can become jumbled quickly, so it’s helpful to have something that will assist you in keeping track of what you’re trading on.
Finviz is a cool platform that allows you to get real-time stock alerts, retroactively test a particular strategy to see how it does, and best of all, scans for specific chart patterns. At first glance, Finviz is overwhelming, so make sure to watch their guided tour first.
StockTwits is amazing. It’s like Twitter for stock trading, and is a really helpful resource for swing traders, too. You get real-time news on your favorite stocks and you can see what real investors are saying (in real-time) about stocks for free.
Check this out–here’s what a feed from Apple’s stock looks like as of this writing:
You’ll also need a solid broker to swing trade correctly. Here are my favorites:
E*TRADE is one of the leading online brokerages. It lets you make stock trades and conduct stock research without having to interact with a broker.
Many people also love E*TRADE for its user-friendly interface. The customer service staff is prompt and eager to resolve your issues.
You can make many different types of investments on E*TRADE. These include stocks, penny stocks, ETFs, bonds, options, forex, mutual funds, and futures.
There are lots of options when it comes to the type of account you can open. You can choose between taxable, joint, Traditional IRA, Roth IRA, SIMPLE IRA, SEP IRA, Trusts, Coverdell, Solo 401(k), and Custodial.
You can gain E*TRADE access via the following options:
- The web
- An iPhone app
- An Android app
- The Apple Watch
For broker-assisted trades, it costs $25. For options trading, it's $0 per trade + $0.65 per contract ($0.50 per contract for over 30 trades).
It's a full-service platform with many tools:
- Allows trades within 77 international markets
- No account balance minimums
- No transaction fees on over 1,300 no-load mutual funds
- Ability to link E*TRADE checking account
Ally Invest is one of the best low-cost brokers. It’s an especially good option for active traders. With a $0 account minimum and no trading commissions, it’s a great platform for all traders. Options traders can expect an ultra-low $0.50 options-contract fee.
Ally Invest works best for:
- Active trading
- Options trading
- Forex trading
- Commission-free trading
One of TD Ameritrade’s primary selling points is the lack of commissions. It also has a $0 minimum, free research and tools, and several different trading platforms.
It's a great option for both beginner investors and active traders. In addition to the no commissions promise and $0 minimums, TD Ameritrade offers ETFs, options, and online stock trades, along with an expansive collection of mutual funds.
The platform guides you while you build your portfolio. There are almost 300 branches of in-person customer support centers.
TD Ameritrade is best for new investors and professionals alike. Use it if you like being educated about investing and offered advice.
Webull has a user-friendly and responsive interface that makes tracking market performance easy.
It also lets you track the performance of specific stocks. You can use Webull on a desktop or a mobile device.
It's a good option for traders who are very active and hands-on. Best of all, Webull doesn't charge commissions on trades.
It works well for new traders and experts. Webull focuses on stocks, options, ETFs (exchange-traded funds), and cryptocurrencies.
Learn More: The Best Stock Trading Apps
Swing trading requires a combination of fundamental and technical analysis from traders. Without these skills, it'd be impossible to catch price movements and avoid idle time. By focusing on smaller gains in short-term trends and cutting losses sooner, you can accumulate high annual profits.
Remember, swing trading positions should be held for days and sometimes weeks. In that sense, it differs from day trading.
Swing trading is made easier when you have the support of a powerful broker with a user-friendly platform. It makes it easier to monitor the market, track specific stocks, trade via a mobile device, and more.
When you consider your options, make sure you consider fees and features, and weigh the pros and cons. Look for a platform that has low fees and no commissions. Keep in mind that some platforms are self-directed, meaning they work better for active traders.
If you're a beginner, you may want to find a platform that takes a guided approach. Also, consider whether the broker offers research and insights that can help you make decisions and develop an investing strategy.
No matter what, always remember that investing is personal. Your strategy depends on many factors, mostly your own goals and preferences. And remember not to make decisions using emotion. When it comes to investment strategies, approach each decision with a clear head and logic.