Swing trading is a very simple idea (from a bird's eye view) you get on the swing at the bottom, ride it up (over a week or more), and jump off when it gets near the high point.
What Is Swing Trading?
There tends to be a bit of a middle ground for some in the investing game. This ground represents the place in the stock market that fluctuates between the long, drawn-out process of long-term strategies and the seat-of-your-pants frenzy of day trading.
For these investors, swing trading is an outstanding strategy to deploy, because it’s designed to hit the sweet spot between the other two investment camps. But being in the resting place between the extreme short-term and the long-term is not the only reason this strategy can be appealing.
Swing Trading Defined
The most basic descriptor behind swing trading is that it’s a fundamental trading style where positions are held for more than one day. The reason for this length has to do with the fact that it’s a fundamental trading style, as the type of changes that appeal to the swing trading crowd tend to need several days or even a week to produce the kind of price movement that’s worth noting from a profitability standpoint.
A more expanded definition of swing traders would be that they would typically hold a stock from anywhere between a few days and a few weeks. The precise number will fluctuate up or down on how positive or negative things are looking within a given time frame.
This malleability is decidedly different than day treaters that treat stocks like hot potatoes or the long-term investors that are in it for the long haul regardless of shorter-term fluctuations.
The Fundamentals Behind Swing Trading
It almost goes without saying that an essential step of swing trading is to find the right stocks. This is the case with any stock strategy. The best types of stocks for swing trading are large-cap stocks, meaning that they’re stocks associated with companies that have a market capitalization value of more than $5 billion.
These particular stocks will experience broad fluctuations of defined low and high extremes, which makes it easier for swing traders to target. When these swings happen, the swing trader will hop on board the stock and ride the trend for a few days or a few weeks, then flip flop and ride the other side of the trade once it reverses.
Because of the strategy, it’s important that swing traders be careful in picking the right market. Ideally, swing traders will want to hone in on stocks that stagnate toward the determined baseline. Because the practice thrives on an up-and-down nature of stock, it doesn’t do swing traders any good to see a stock take off in one direction or another for an extended period.
When this happens, there’s not an opportunity for swing traders to “swing” from one side of the baseline to the other to pick up short-term gains.
As one may guess from its nature, swing trading is not always an optimal strategy to deploy. For instance, it wouldn’t have been all that great of a strategy to use during theboom of the late ‘90s, when stocks were skyrocketing to unprecedented heights. The malaise-driven aftermath of that particular bubble bursting in the early ‘00s would have been prime time for swing traders to swoop in and feast.
The Value of the Baseline
The key to understanding the schematics of swing trading are found by following the baseline. This is the line that essentially defines the modulation of a stock price within a given space. Swing traders will note these modulations to pick up profits as it moves away and back from the baseline.
Typically, the baseline is established by finding the moving average. This is the indicator that uses recent stock market movement to establish an average stock price over a given, mobile period. Once this number has been established, investors will set their strategy around this baseline to capture fluctuations. In a bullish upshot, investor will go long, whereas they’ll go short if the stock takes a bearish downturn.
Because their strategy is primarily built on finding and taking advantage of price modulations that riff off a baseline, swing traders aren’t the types of traders that look to land a gold mine on a single trade. They aren’t concerned about hitting the right entry and exit point at the right time, either. They’re comfortable with waiting until the direction of the stock is confirmed. What’s more, they may exhibit strategies that may not make sense under “normal” trading circumstances, such as going long when the stock dips below the moving average in the hopes that it will reverse course and shoot back up in an uptrend.
Swing Trading and Profits
Even though the timing is not necessarily a huge concern for swing traders, swing traders will still want to exit the trade as close to the perceived apex as possible.
The precise point of entry can fluctuate depending on how the market it doing. In a strong market where the stock’s direction is strong, investors may wait until it hits the apex before taking action. In a weaker market, they may exit before this is hit just to make sure some profit is secured.
A Rock Solid Strategy
Swing trading is a terrific strategy for people just getting involved in the market to use.
The very nature of the strategy demands quick entry and exit strategies, but not at the breakneck pace that is dictated by day traders.
They also receive the right amount of feedback on their trade after a couple of days – long enough to retain their interest without feeding them with the nagging feeling that they should be doing something. This pace also enables them to acclimate to a proper strategy at a speed that seems conducive to real learning, as they don’t feel the pressure to learn things “right now” and they can’t necessarily get away with putting off learning certain techniques because they have a long time before they have to act. Swing strategies are also ideal for savvy veteran investors, especially those that are looking to make a profit in the midst of a stagnant market. In other words, investors of any stripes can use swing trading tactics to get into the swing of things.
A Look Inside a Swing Trader’s Daily Routine
Trading can sometimes appear like a glamorous pursuit to the untrained eye.
This great quest may especially be the case in today’s market, where the ability to do online trading may conjure up images of pajama-clad people futzing around on their computer all day while they make a buck.
As any serious trader will tell you, this is a patently false image. Trading is a disciplined activity that demands attention to detail and a massive time commitment. This truism is perhaps best represented by swing trading; a strategy that is jam-packed with news reading, chart studying, stock seeking, and other decidedly non-glamorous activities.
The Mechanics of Swing Trading
Successful swing trading is built around the capacity to pick profits from modulations above and below a stock’s established baseline. It’s a strategy that can serve investors quite well during the market’s idle times. It’s also an approach that typically combines fundamental and technical analysis to catch lightning in a bottle. In this case, the “lightning” is profits captures from stocks that temporarily shoot up or tumble down from the baseline before returning to the established medium.
Position trading is regarded as an ideal strategy for newbies that are still trying to figure out the ins and outs of the market. However, it’s also an approach that requires a pretty huge time commitment on the part of the investor if he or she wants actually to turn a profit one day.
A Day in the Life of a Swing Trader
Presuming the swing trader is on the east coast, he or she will begin the trading day at 6:00 AM, long before the 9:30 AM opening bell. This 3 ½ hour time frame is an essential, can’t miss
Usually, the first thing investors will do to get the ball rolling is to head to a trusted website or turn the TV to CNBC to catch up on the latest news and developments that may have a positive or adverse impact on the market or other stocks. Specifically, they’ll try to pick out three things:
- Market sentiment as a whole
- Sector sentiment
- News on their current holdings
Once this has been taken care of, investors will scan for any potential trades that they may want to execute that day.
- Some software like EquityFeed has real time news scanners in addition to technical information like level II.
Usually, swing traders will lean on fundamental analysis augmented with some technical analysis to craft as complete a picture as possible. During this time, investors will scour sources like SEC filings for potential opportunities like IPOs, bankruptcies, takeover, buyouts, mergers, and the like. They’ll also take this time to seek out sector plays by analyzing news or reputable websites to find out what sectors are performing well.
While the information found in this phase is somewhat tough to decode and a bit risky, savvy investors can unearth some pretty terrific opportunities here.
Scanning For Trades
At this time, swing traders could bring
Once this process is complete, investors will create a list of stocks to keep an eye on during the day, while also taking the time to make sure the position on their current stocks. After this is complete, they are finally prepared for the market to open.
When the market does open, swing traders will essentially do two things: watch and trade. They’ll typically look at level II quotes to find out who’s buying and selling and at what amounts. They may also look to see what market makers are making the trade.
As soon as a profitable trade has been found, investors will turn to technical analysis to locate an exit. A lot of swing traders will use Fibonacci extensions, price by volume, or simple resistance levels to locate this data. In a perfect world, this is completed before the trade has been placed, but a lot of the action will depend on the day’s trading. What’s more, adjustments to the strategy may have to be made later, depending on what happens in the future.
Generally speaking, the trades that are targeted are ones that will incur as little risk as possible, even if this inadvertently means they jump out of the trade before its apex. There is no rigid time frame to when this can happen. The natural fluctuation of the day to day market regarding the stocks typically targeted in a swing trade means every day is different.
When the market closes, swing traders will take a look at their performance and give it a studious evaluation. Performance analysis involves poring over trading activity and pinpointing things that need improvement.
It’s also critical to record all trades and ideas at this time for tax purposes. It’s also an excellent opportunity to review any open positions one final time, especially to see if any after-hours earning announcements or holding-impactful event have happened.
A Long Day Needed to Go After Potential Rewards
As you can see, swing trading is not a simple process.
If anything, investors have to get up pretty early in the morning if they are indeed serious about using the strategy to gain profits while minimizing risk. The copious amounts of study, fundamental analysis, and trade pinpointing that all happens in the hours leading up to the opening bell may be a little off-putting, especially to those that are just getting started in the market and don’t have a full grasp on how much commitment is needed.
However, for the smart investor that has no problem with putting in solid hours day in and day out, swing trading can be a very smart way to pursue potentially consistent profits.
For those that are new to trading and don't have the time to go at it full time (which is most beginners), I would suggest signing up with a stock picking service and paper trading to start. Allowing you to learn while actively trading part time.