What is Swing Trading?
Swing trading is a trading strategy in which technical analysis is used to identify a stocks underlying trend, trading channels and support and resistance points. Trades are normally held longer than a day and up to a week. This trading style requires a bit less discipline than day trading but you not looking to fall in love with the position either.
Swing Trading Strategies
For example let’s say that a certain stock is identified as having a $10 “support” level and has a “resistance” level of $20, if the stock is trending to the up side then the trader may want to purchase that stock if it pulls back to around $10 but not below it. Once the stock climbs toward its resistance level of $20 the trader then exits the position. At that point if the stock does not “break out” of its channel by closing higher than $20 this may present an opportunity to short the stock back down to $10. Assuming that the pattern continues, he would continue to make a profit. Profits can be sought by engaging in either Long or Short trading.
A very common method used by swing traders is to establish a set of objective rules for buying and selling. This helps to eliminate the emotional aspects of trading; many times these rules are used to create a predictive market trading algorithm, also known as “trading systems”. These trading rules either use technical analysis and or fundamental analysis to find entry, exit and stop loss points on an underlying stock chart.
As with any trading or investment timing plays a key role in success. Knowing when to execute a trade is usually the most challenging part of trading. Swing trading however does not require perfect timing or the impossible feat of buying at the absolute bottom and selling at the very top in order to turn a profit. Instead the swing trader will focus on compounding smaller returns by using very strict money management rules. It should be noted that all trading systems or algorithms will not always work with every financial instrument or in every market situation, breaking news or events can quickly change a trend line.
Swing Trading Risks
Risk of loss will always be present when an investor or trader speculates on any market. The risk of losses for swing traders normally increases when the stock is range bound or trading sideways vs. trading in a bull rally or bearish market where the trend lines are more clearly seen.
The Best Swing Trade Stocks
To be successful traders must be able to identify the proper candidate stocks for swing trading. Under most conditions traders look for large-cap stocks traded on a major exchange such as the NYSE or NASDAQ National Market. Typically these stocks are liquid with good trading volumes and tend to swing between a well defined high and low. This allows swing traders to ride a wave in one direction over a few days or weeks and then take the opposite side when the stock price reverses.
Conclusion
Swing trading is actually one of the best trading styles for the beginning trader to get his or her feet wet, but 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 the duration that does not lead to distraction. By contrast, trend trading offers greater profit potential if a trader is able to catch a major market trend of weeks or months, but few are the traders with sufficient discipline to hold a position for that period of time without getting distracted. On the other hand, trading dozens of stocks per day (day trading) may just prove too great a white-knuckle ride for some, making swing trading the perfect medium between the extremes.
