The Hustler's Digest StaffLearn about swing trade and its strategies by reading this detailed guide. Open and fund your trading account. Start swing trading to potentially profit from your trading edge.
Swing trading is a trading strategy that focuses on profiting off changing trends in price action over relatively short timeframes. Swing traders will try to capture upswings and downswings in stock prices.
What is swing trading?
Swing trading is a strategy for capturing short- to medium-term gains in a stock (or other financial instrument) over a few days to several weeks.
Technical analysis is generally used by swing traders to find trading opportunities. In addition to evaluating price trends and patterns, swing traders can use fundamental analysis.
Swing trading for beginners
Swing traders look for patterns in trading activity to buy or sell stocks in order to profit from price swings and momentum trends. They usually target large-cap stocks because they are the most regularly traded. Due to their huge trading volumes, these stocks provide investors with insight into how the market views the company and the price movements of their securities. This active trading provides the data required for technical analysis, which we’ll discuss in the next part.
Swing trading, like every other type of trading, is fraught with danger. Swing traders face a variety of risks, the most prevalent of which is gap risk, which occurs when a security’s price rises or falls dramatically due to news or events that occur while the market is closed, whether overnight or on the weekend.
Any unexpected news will be reflected in the starting price. The larger the danger, the longer the market remains closed. Swing traders may lose out on longer-term trends by focusing on shorter holding periods, as well as abrupt shifts in the market’s direction.
Swing trades vs. Day trading
In some ways, swing trading and day trading appear to be comparable. The holding position time is the key difference between the two procedures. Day trades close within minutes or before the market closes, whereas swing traders may keep equities overnight or for several weeks.
The positions of day traders are not held overnight. It usually means they don’t put themselves in danger as a result of breaking news. Their increased trading frequency results in higher transaction costs, which can significantly reduce their earnings. They frequently use leverage to increase profits from tiny pricing increases.
Swing traders are exposed to the unpredictability of overnight risks, which can result in large price swings. Swing traders can monitor their positions on a regular basis and react when key levels are reached. Moreover, Swing trading, unlike day trading, does not necessitate constant monitoring because the trades last several days or weeks.
Trading frequency
Within a single day, day traders open and close many positions. Swing traders, on the other hand, engage in deals that last several days, weeks, or even months.
Number of transactions
Swing trading is a fast-paced kind of trading in which trades are made over a period of days, weeks, or months. Swing trading, as a result, accumulates earnings and losses at a slower rate than day trading. Certain swing trades, on the other hand, might result in large wins or losses quickly.
Assume you’re a swing trader who puts 50% of your money at risk on each trade in the hopes of making 1% to 2% on winning deals, and you gain 1.5 percent on average for winning trades while losing 0.5 percent on failing trades.
Each month, you make six trades and win half of them. As a result of the lower costs, you may make 3% on your account balance in a typical month. Over the course of a year, that works out to roughly 36%, which sounds excellent but is less than the possible earnings of a day trader.
Traders who seek rapid compounding of returns are drawn to day trading. The word “day trading” refers to the practice of traders buying and selling securities on the same day, often numerous times.
Day trading, on average, has a higher profit potential than swing trading, at least for smaller accounts.
The one percent risk rule is widely used in the day trading world. You should never risk more than 1% of your portfolio on a single trade, according to this rule. Assume you’re a day trader who puts 0.5 percent of your capital at risk with each trade.
You will lose 0.5 percent if you lose, but you will gain 1 percent if you win (a 2:1 reward-to-risk ratio). Assume you win 50% of your transactions as well. On average, if you make six trades each day, you’ll add around 1.5 percent to your account balance each day, minus trading expenses. Even 1% a day will increase your account uncompounded by more than 200 percent in a year.
Time horizons
Swing trading is a trading method that involves making multiple deals over a period of days, weeks, or months. The idea is to profit in the short to medium term when market patterns alter.
Day trading involves making repeated trades over the course of one or two trading days in order to profit from daily price movements in as many small increments as feasible.
Time required
Day trading and swing trading both take time, but day trading takes far longer.
Traders who trade for at least two hours every day are known as day traders. When you factor in preparation time and chart/trading review, you’re looking at a minimum of three to four hours at the computer. If you trade for more than a few hours a day, your time commitment increases significantly and trading becomes a full-time profession.
Both methods of trading can take a long time—swing traders may spend more time researching and day traders may spend more time trading.
Swing trading requires significantly less active trading time. If you’re swing trading on a daily chart, for example, you may locate new trades and change orders on existing positions in around 45 minutes each night. These actions might not even be necessary every night.
If you trade for weeks or months, you may only need to seek trades and update orders once a week, reducing your time commitment to roughly an hour per week rather than per night.
How do you trade?
Swing traders can use their online brokerage accounts to construct positions and trade because their time horizons are significantly longer. They aren’t in as big of a rush and don’t have to react to price changes in milliseconds.
To get started with swing trading, you’ll need to open and fund a brokerage account. You can start trading on their site once you’ve been funded.
To get the most out of your trading activity, you’ll need the most up-to-date software and technology if you’re day trading. Because prices can change before you decide to trade, automation is required to make trading lucrative.
To start day trading, you’ll need to open an account with a broker and have a computer system and software that allow you to see and access all of the information you need.
Swing trading strategies
Swing traders can use the following strategies to look for actionable trading opportunities:
- Fibonacci retracement
A Fibonacci retracement indicator can be used by traders to determine support and resistance levels. They can spot market reversal possibilities with this indicator. 61.8 percent, 38.2 percent, and 23.6 percent Fibonacci retracement levels are thought to be possible reversal levels. When the price is in a downward trend and appears to find support at the 61.8 percent retracement level from its previous high, a trader may enter a buy trade.
2. T-line trading
The T-line on a chart is used by traders to determine the optimal timing to enter or leave a transaction. When a security closes over the T-line, it means the price is likely to rise further. When a security closes below the T-line, it indicates that the price will drop further.
3. Japanese candlesticks
The Japanese candlestick charts are preferred by most traders because they are easy to read and analyze. Traders look for trading opportunities using certain candlestick patterns.
Advantages and disadvantages of swing trading
Many swing traders evaluate bets based on their risk/reward potential. They select where they will enter, establish a stop loss, and then forecast where they might exit with a profit by evaluating the chart of an asset. That is a favorable risk/reward ratio if they are investing $1 a share on a setup that could reasonably produce a $3 gain. Risking $1 to make $0.75, on the other hand, isn’t quite as appealing.
Due to the short-term nature of the deals, swing traders rely heavily on technical analysis. Fundamental analysis, on the other hand, can be used to improve the analysis. If a swing trader finds a bullish setup in a stock, for example, they may wish to double-check the fundamentals.
Swing traders will often look for opportunities on the daily charts and may watch 1-hour or 15-minute charts to find a precise entry, stop loss, and take-profit levels.
Pros
- It requires less time to trade than day trading.
- It maximizes short-term profit potential by capturing the bulk of market swings.
- Traders can rely exclusively on technical analysis, simplifying the trading process.
Cons
- Trade positions are subject to overnight and weekend market risk.
- Abrupt market reversals can result in substantial losses.
- Swing traders often miss longer-term trends in favor of short-term market moves.
Swing trading time frames
Primary, intermediate, and short-term trends can all be characterized. Markets, on the other hand, exist in multiple temporal frames at the same time. As a result, depending on the time span being evaluated, there may be competing trends within a single stock. It’s not unusual for a stock to be in a primary uptrend while also experiencing intermediate and short-term downtrends.
Beginner or beginner traders frequently focus on a single time frame, ignoring the more strong underlying trend. Alternatively, traders may be following the main trend but overlook the significance of fine-tuning their entries in a suitable short-term time frame. Continue reading to find out which time frame you should monitor for the best trading results.
What time frames should you be tracking?
The larger the time frame, the more reliable the signals are, according to a general rule. The charts become more cluttered with false moves and noise as you dive down in time frames. Ideally, traders should determine the primary trend of whatever they are trading using a larger time frame.
Once the underlying trend has been established, traders can define the intermediate trend with their desired time frame and the short-term trend with a faster time frame. The following are some examples of using several time frames:
- A swing trader who makes judgments based on daily charts could define the primary trend with weekly charts and the short-term trend with 60-minute charts.
- A day trader might use 15-minute charts to establish the primary trend, 60-minute charts for the secondary trend, and a five-minute chart (or even a tick chart) for the short-term trend.
- A long-term position trader would concentrate on weekly charts, with monthly charts defining the main trend and daily charts refining entrances and exits.
Each trader chooses which time frames to use based on his or her own preferences. Ideally, traders will select a primary time frame and then select a time frame above and below it to complement the primary time frame.
As a result, the long-term chart would be used to define the trend, the intermediate-term chart would provide the trading signal, and the short-term chart would be used to refine the entry and exit. However, one word of caution: don’t get caught up in the whirlwind of a short-term chart and over-analyze a move. Short-term charts are frequently used to support or refute a theory derived from the principal chart.
Is swing trading profitable?
One of the most important questions to ask when deciding whether swing trading is right for you is whether you can make a lot of money. So, how profitable is swing trading?
Swing trading can be successful, and you can surely outperform the market over time. This, however, necessitates a sound trading strategy as well as the perseverance to stick with it through the ups and downs.
How to make money from swing trading?
There are a lot of factors that determine how much money you can make, but these three are the most significant ones:
- The trading strategy
- Opportunity
- Position size
Let’s take them one by one.
The trading strategy
The approach you adopt is one of the most important factors in determining how much money you can make. A good approach, by definition, is more likely to produce a lot of money than a bad one.
However, even if they believe they do, most people who wish to start trading don’t have a good trading plan. To be certain that you have anything that works, you must first test it against past data. In our post on how to construct a trading strategy, we go through this in further detail.
Opportunity
The opportunity, or how often your approach produces a buy signal, is the second key factor to consider. The quantity of signals you receive is determined not only by the strategy, but also by the number of marketplaces you trade that strategy on. A mean reversion strategy that trades nearly all of the stocks in the S&P 500, for example, will present you with a large number of signals to pick from, resulting in higher returns because your capital isn’t sitting idle for long periods of time.
Position size
This one is self-evident. You’ll make or lose more money on each transaction if you put more money at stake.
The amount of your transactions, on the other hand, should be defined by how much you can risk rather than how much you want to make. Trading is a marathon that should be undertaken over a lengthy period of time. As a result, it’s critical that you protect your capital so that you can trade not only today, but also tomorrow.
Generally speaking, you should never risk more than 2% of your account balance on a single deal! This ensures that you can continue to trade even if you have a string of losing trades!
How much money can you make from swing trading?
We’ll talk about what types of returns are reasonable now that we’ve reviewed the three criteria that affect how much money you’ll make.
In general, we believe that any return of 10% to 30% is acceptable to expect in the long run, given that you have a viable plan and are able to execute the signals correctly.
These gains will not be uniformly distributed throughout all years, as they are in the stock market in general. It’s fairly uncommon to suffer drawdowns that last for a year or more. On the other hand, you’ll have excellent times when everything seems to be going your way and you’re able to produce outstanding annual returns!
This is why, in trading, a long-term vision is critical. Profits tend to increase over time. This is why, in trading, a long-term vision is critical. Profits come in great chunks now and again, and many inexperienced traders will cease trading during a long drop just to see their trading method take off again soon after.
Best swing trade stocks
Are you looking for stocks to swing trade? These stocks are updated on a regular basis to help you make informed decisions with a few stocks that are perfect for swing trading and the always shifting markets. Your decision-making must be more nimble when your trading time period shortens. Swing trading is riskier than buying and holding, so get out of bad trades as quickly as possible and set profit targets on your winners.
Meta Platforms (NASDAQ: FB)
With 2.5 billion monthly active users, Meta is the world’s largest online social network. Users communicate with one another in a variety of ways, including sending messages and sharing news, photographs, and videos. On the video side, the company is working to establish a library of premium material that will be monetized through adverts or subscription money.
This is referred to as Facebook Watch by Meta. The Facebook app, Instagram, Messenger, WhatsApp, and other features that surround these products make up the company’s ecosystem. Facebook is available on both mobile devices and desktop computers. Advertising income accounts for more than 90% of the company’s overall revenue, with 50% coming from the United States and Canada and 25% from Europe. Meta runs at a 30%-plus margin, with gross margins exceeding 80%.
227.85 -2.01 (-0.87%)
Volume
25.59M
Market Cap
620.19B
Day’s Range
226.71 – 231.151
52 Week Range
185.82 – 384.33
Caterpillar (NYSE: CAT)
Caterpillar Inc. is the world’s leading construction and mining equipment producer. Diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives are all part of this equipment. Construction industries, resource industries, energy and transportation, and financial products are Caterpillar’s four business segments.
The construction company has a market capitalization of $87 billion and an earnings per share (EPS) of $7.45. It pays out a $4.12 annual dividend per share. Caterpillar has a high level of liquidity, trading around 2.1 million shares each day and generating $53 billion in sales in 2019.
223.12 2.08 (0.94%)
Volume
2.51M
Market Cap
119.57B
Day’s Range
220.7 – 225.8799
52 Week Range
179.67 – 246.69
NextEra Energy Partners (NYSE: NEP)
NextEra Energy Partners LP was founded to buy, operate, and own clean energy projects that have been contracted. It has stakes in North American wind and solar projects, as well as natural gas infrastructure assets in Texas. The renewable energy projects are completely contracted, employ industrial technology, and are located in areas where wind and solar energy can be generated. The company’s natural gas pipelines are all strategically positioned, supplying power producers and municipalities in South Texas, Eagle Ford Shale processing plants and producers, and commercial and industrial clients in Houston. Renewable energy sales bring in the most money for the company.
84.12 1.86 (2.26%)
Volume
61.53K
Market Cap
7.06B
Day’s Range
81.89 – 84.225
52 Week Range
63.59 – 88.7974
Kellogg (NYSE: K)
Kellogg is a significant global maker and marketer of cereal, cookies, crackers, and other packaged foods, having been founded in 1906. Its products are made in 21 different countries and sold in over 180 different nations. Special K, Frosted Flakes, Froot Loops, Rice Krispies, Pop-Tarts, Eggo, Kashi, and Morningstar Farms are among the company’s well-known brands. In 2012, the company added the Pringles brand to its portfolio. Kellogg’s consolidated sales base is made up of about 40% of sales outside of its native turf.
64.08 0.23 (0.36%)
Volume
1.58M
Market Cap
21.75B
Day’s Range
63.44 – 64.12
52 Week Range
59.54 – 68.6
Kohl’s (NYSE: KSS)
Kohl’s is a department store chain with over 1,000 stores across the United States, but like most shops, they’ve been hit hard by the coronavirus lockdowns. Also, Kohl’s stock has dropped about 60% in the last three months, while not as bad as department retailers like Macy’s and Neiman Marcus.
Kohl’s has all the ingredients for a great swing trade: a high beta, over 15% short interest, and an average daily volume of 14 million shares traded. Kohl’s will also have a catalyst in the form of an earnings call on May 19.
The bottom line
Swing trading is a popular technique for beginning traders to get their feet wet in the market, with most traders starting with $5,000 to $10,000, but less is okay. However, the most important guideline is that this capital must be money that the investor can afford to lose. Even with the most stringent risk management, the unexpected can happen at any time.
Swing trading, therefore, does not necessitate the same level of active attention as day trading, allowing the swing trader to begin slowly and gradually increase the number of trades. However, it does necessitate a deep dive into technical analysis on the part of the investor, so a knack for charts and figures is required.
Swing trading gives the opportunity to build attractive gains slowly but gradually over time for traders prepared to invest time researching equities and learning technical analysis.
