Learning to swing trade is a very popular trading style for trading the financial markets. Swing trading is a shorter-term trading style that falls in between day trading and longer-term trading styles such as trend trading and position trading.
Swing traders generally hold positions anywhere from a couple of days to 1 to 2 weeks. Swing traders with a little longer time horizon can hold trades for approximately up to 3 to 4 weeks.
As a swing trader, you are trying to capture the shorter-term price moves – the “sweet spot” – that lies in between two wider significant price points or big enough areas in between strong support and resistance levels.
For Example: If a stock is oscillating between a trading range of support and resistance levels of $30 and $35 respectively, your goal as a swing trader might be to enter the trade at $31.50 and exit the trade at say $33.50 in order to capture the “sweet spot” of this trading range. This would give you a profit of $2 per share if successful. If you had owned say 300 shares your total profit would be $600 (excluding commissions). And say this trade took 12 trading days to hit your price target of $33.50. That’s a little more than 6% earned on this one trade alone in just 12 trading days… Not bad as a swing trader!
Swing Trading & Technical Analysis
Technical analysis is usually the preferred way to go for making swing trading decisions due to the insights it has on price action for identifying profit opportunities in the short-term.
Usually more than one method of technical analysis is used for analyzing price action rather than just relying on any single method alone. This helps to provide stronger trading confirmation and guidance as to the timing of when to enter and exit trades as well as gauging the direction of price trends.
Swing Trading The “Pullbacks” Of An Uptrend (Bullish)
Pullbacks happen when the price temporarily falls during an uptrend. The hope is that the pullback will be short lived and the trend will resume again in its uptrend. In this case, you can set up a swing trade by placing your trading order to enter the position at a price slightly above the pullback area (when prices start to resume again in its uptend) and then sell the position for a profit after the price reaches some significant higher swing point such as the most recent prior high of the uptrend.
Swing Trading The “Rallies” Of A Downtrend (Bearish)
Rallies happen when the price temporarily rises during a downtrend. The hope is that the rally will be short lived and the trend will resume again in its downtrend. In this case, you can set up a swing trade by placing your trading order to “sell short” at a price slightly below the rally area (when prices start to fall again in its downtrend) and then close the short position for a profit (“buy to close”) after the price reaches some significant lower swing point such as the most recent prior low of the downtrend.
Swing Trading The Gyrations Of Trends
Swing trading can also be done by trading the gyrations of trends. This can lend itself to multiple swing trading opportunities by either going “long” or “short” of a particular financial instrument.
As an example, the following technical analysis approaches can be used to swing trade the gyrations of trends:
The Channeling Approach – You can use the top (resistance) and bottom (support) areas of a channeling price trend to enter and exit trading positions. To do so, identify a prevailing channeling price trend and draw top and bottom trend lines across the upper and lower parts of the trend. Swing traders can then enter and exit trades as the price moves from one trend line to the other one as the price gyrates between support and resistance levels within the channeling trend.
The Stochastics Approach – By using a technical analysis oscillator known as “stochastics” it will gauge prices that are oscillating between oversold and overbought conditions. Swing traders can then buy a position on an oversold condition and then sell the same position for a profit on an overbought condition according to the 20/80 readings (20 for oversold & 80 for overbought) of the stochastics oscillator.
More Ways To Swing Trade
There are many more ways to swing trade by using other popular areas of technical analysis including Chart Patterns, Candlesticks, Moving Averages, Bollinger Bands, Fibonacci Retracements and Elliot Wave Theory.
The Swing Trade Setup
Swing traders normally draw their “lines in the sand” by creating acceptable trading boundaries as to setting a price for entering a trade as well as setting profit targets and loss limits.
A swing trade setup would typically consist of the following:
- Profit Target
- Point of Entry
- Maximum Stop Loss
Swing traders usually seek to earn a certain amount of profit in exchange for the risk that they are willing to accept for a given trade. Depending on your risk tolerance and profit objectives, a typical risk-to-reward ratio might be in the range of 1:2 to 1:3 (risking $1 to make $2 or risking $1 to make $3 respectively).
Risk-to-Reward Ratio Example
- 1:2 Risk-to-Reward Ratio
- Stock Price $30
- Maximum Loss Willing to Accept 5%
In this example, the following acceptable trading boundaries for the swing trade setup would be calculated as follows assuming you buy the stock at $30:
- Profit Target — $33
- Point of Entry — $30
- Maximum Stop Loss — $28.50
Generally, tighter risk management rules are used when swing trading compared to longer-term trading styles like trend trading and position trading.
Do I Have To Be In Front Of The Computer All Day Long To Swing Trade?
No. This is one of the cool things about swing trading especially for busy people. As a matter of fact, you can easily swing trade on “autopilot” by having your computer become your own “personal trading assistant.” You can do this by using certain types of stock trading orders such as advanced trading orders which can not only execute your buy orders but also execute your orders for reaching profit targets and stop loss limits as well. Generally this “combo transaction” can all be done with using just one trade ticket.
(To learn more about how to do this, click on How to Trade on Autopilot).
And, you can always adjust your trading orders or even cancel them altogether and completely exit from your trades if you need to at any time. With the flexibility to execute and manage your trades in this fashion, not only will it make trading more convenient to your leisure and discretion, but it will also help to remove one of the worst elements of trading… trading with “emotions.”
(To learn more about the emotions of trading click on psychology of trading).
Is There More Than One Way To Profit From Swing Trading?
Yes. With swing trading (as with other trading styles) you have multiple ways to profit. This will depend on your market outlook as to whether prices may be rising or falling in the short-term.
- Rising prices – you would buy now (go “long”) and sell later for a profit
- Falling prices – you would sell now (go “short”) and buy later to “cover” for a profit
Finally – When You Learn How To Swing Trade
Knowing how to spot swing trading opportunities especially with using technical analysis can give you endless trading opportunities that will be constantly arising all year long – which is what swing traders live for!
