What Is Swing Trading?
Swing trading is a type of trading in which positions are held for a few days or weeks
in order to capture short- to medium-term profits in financial securities. Swing traders
use technical analysis to make trading decisions.
Most fundamentalists are swing traders since changes in corporate fundamentals
generally require a short amount of time to cause sufficient price movement to
render a 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 and 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 and stock signal
Financial markets typically have three prevailing long-term trends: the bear market,
the bull market, or somewhere in between. A 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 stock signal
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 bull 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: