It is essential to understand what swing trading entails, know how these traders think and operate. In essence, swing trading is a process of catching short- to medium-term fluctuations of stock prices (usually for a period of several days up to a few weeks), riding on the volatility of the market to benefit from the bargains created by fluctuations that occur within prevailing trends.
Crucial to the concept of swing trading is the analysis of trends and reversals. The price chart and the technical analysis with indicators such as moving averages, relative strength index (RSI) chart or Fibonacci retracements are often used to find potential entrance/exit points of a trend or reversal. The identification of graphical patterns like head-and-shoulders or double tops can offer hints of what might happen with a stock next.
The other is risk management. Swing traders need to set solid stop-loss levels on their trades because it is virtually inevitable that prices will at some point move against at least some of their positions. This means defining how much loss they’re prepared to endure on any particular trade, ensuring that all their positions can be fully funded by their risk budgets.
Moreover, it’s important to grasp market sentiment, as that also drives much of swing trading profits. Watching for news events triggering buys or sells, monitoring earnings reports and big economic releases can often indicate the direction of expected price swings based on the psychology of markets.
Ultimately, swing trading involves learning to bring technical analysis and risk management together, along with being flexible and adjusting to what is actually happening in the market.
Finding the right stocks for a swing trader takes work. Not only will you need more market cadence as the day stock turns to hours, you’ll need technical analysis and long-term market trends, and a sense of the economy at large. Start with liquidity. The more an equity is traded, the tighter its bid–ask spread, which means it will be more cost-effective to get into (and out of) a swing trade, versus losing illiquidity-impacted slippage. So, seek stocks with a minimum in their average daily trading volumes, for example.
Second, volatility: if you want to make money from swings in the price over a short time period, you want stocks that do this consistently. Historical price charts can be useful in identifying patterns, and in identifying likely support and resistance points – the levels where you’d be looking to enter or leave a position.
Another key variable that needs to be accounted for is the wider context of the stock market. Watching for important news events, the latest earnings results and how those announcements correspond with broader sector movements can help to identify impending catalysts that might accelerate the short-term volatility of a stock. Stocks that reside within sectors displaying some momentum or are in front of important news are often well suited for swing trading.
In the last stage, using technical indicators, such as moving averages or relative strength index or RSI, could help in identifying entry and exit levels. Combining these factors taking into account liquidity, volatility, market sentiment and technical signals can enable the trader to have a higher probability of choosing the right stock for their swing trading strategy while keeping risk on their side.
For example, the information you need when looking for stocks to trade on a swing basis, with the aim of holding for a couple of days (Carley’s timeframe for this discussion), involves technical analysis of indicators in order to determine possible entry points, as well as exit points along the way. Technical indicators are mathematically derived, through the use of historical data on price and volume of an enterprise, and they reflect trends and momentum in the market for a stock. One of the most popular examples of a technical indicator is known as a moving average, which goes over a certain interval of time and smoothes out the fluctuations in the price moving in a certain direction over that time period. The smoothing process, for example, involves taking the average of an enterprise’s price over 20 days. A shorter moving average might be used for an enterprise with a sharp fluctuation in the price in the short term over, say, five days. A trader can compare the changes in the values of short-term and long-term indicators; if the short-term moving average becomes less than the long-term moving average, then that could be read as a bearish signal – an instance when the shorter line goes under the longer line, as it were. Conversely, one might do the same calculation with, say, a 20-day moving average and a 100-day moving average. If this shorter one crosses above the longer one, then this could be read as a bullish signal – an instance when the shorter line crosses over the longer one.
Still another important gauge is Relative Strength Index (RSI), which measures how fast and how far the price has moved and gone in either direction. An RSI above 70 can signal that a stock is overbought; an RSI below 30 suggests the stock might be too cheap, or oversold. This information helps traders judge whether a stock has room to run or stop in their direction.
Volume counts too; when a price development is confirmed by an expanding volume, the trend is considered strong. If it is confirmed by low volume, it is interpreted as a weak trend or a lack of conviction among the traders. The idea is that candle height and shape carry information about the intensity of market sentiment for specific time periods. For instance, long white candles illustrate buying pressure, while long black candles show selling pressure. When a candle is thin, it indicates a lack of conviction as few trades are taking place at the respective prices.
Eventually, successful swing trading is often an artful ability to bring together multiple technical indicators into a sort of mosaic view to discern market conditions and trade with sound risk/reward ratios that fit your goals.
When you enter the world of swing trading, you still need to do your evaluation of market trends and conditions before you settle on a stock to trade. In the early days, you should still look at broad levels of the market and major indices (eg, the S&P 500 or the NASDAQ). You’d want to analyse the broader market conditions before settling on a stock. This would help determine if it’s a good environment to buy stocks (bullish trend) or to short-sell stocks (bearish trend).
Technical analysis can also add another layer of significance to assessment of market conditions. Sometimes price movements and volumes follow patterns that can give an idea of whether reversals will occur (where prices move in the opposite direction of prior ones) or a trend will continue (where there are extensions of what has already happened). Moving aver ways of smoothing fluctuations in prices to reveal, when certain averages such as 10- and 20-day moving averages cross above 50- and 200-day moving averages, it is seen as a sign that bullish momentum is building and it’s usually better for a swing trader.
On top of that, there are macroeconomic conditions such as interest rates, inflation reports, geopolitical events, and so on that tend to have an impact on the stability of markets. This affects sentiment among investors, increasing volatility – and as you already know, that’s exactly what swing trading requires.
Finally, look at sector performance; certain sectors could outperform in a specific cycle or because of a news event or development. As you become more sensitive to these trends, you’ll be able to shorten your time frame, and adjust your strategy to direct your attention towards tapping into stocks with big up-front potential in the swing trading game.
One of the crucial issues they have to address is risk management. How do you protect your capital while taking the most advantage of rising or falling markets? One of the answers is using a stop-loss order. Technically, a stop is an order that will sell a stock at a chosen price – a limit. It’s a safety net that rounds up any loss on a given trade, and it allows you to get out of a position no matter what your emotions are at that moment. You can set your stop wherever you want but, for trend trading and swing trading, a good guideline is to pick a spot just below a key support level.
Position sizing is the other key to risk management for any swing trader. Either 1 per cent or 3 per cent of your trading capital is the largest you should be betting any single trade. This way, if a losing trade occurs, it has minimal effect on the other holdings in your portfolio. And you know that no one loss will harm your entire portfolio.
Moreover, traders should be heedful of market conditions and avoid excessive leverage. While margin allows traders to lever their gains, it also magnifies the extent of risk exposure. It is prudent to consider market-wide trends and volatility before opening positions.
And also, second, diversification – so even if one stock is very risky and likely to crash, the swing trader will just have it as a small part of a broader portfolio that will be OK.
Good risk management, however, employs these techniques as part of an integrated strategy to maintain the integrity of capital for swing trading opportunities.
You can most effectively conquer the stock market by developing a personalised plan for your swing trading activities. Your plan helps you focus on your objectives, the timing for your trades, the risk you’re willing to take with your portfolio, and the methods you’re going to use to achieve your goals.
Define your goals. If you are looking at guidelines this might include short-term trading for profits or long-term growth. These goals will determine which stocks you select and the timing of your positions. Then calculate your risk tolerance, defining the amount of capital to deploy and how much loss you are willing to endure before asking a hypothetical question and saying to yourself: ‘If I sold this stock at this price would I be happy?’
Add technical analysis to the mix by identifying a variety of indicators that you like: moving averages, volume trends, momentum oscillators, whatever works for you – to give you an idea of when to buy and when to sell, and to reveal more about what is happening in the market.
Similarly, stay up to date with sectoral news and market performance to gauge the direction of the stock, as external factors may have a notable impact on share price. On a regular basis, review and revise your plan to enhance your strategy. Modify our approach in line with outcomes and market performance to build an approach that continually improves over time. You’ll be far better equipped to strike a balance between personal insights and structured methodology, developing your swing trading strategy to achieve your financial objectives while taking on risk in a prudent manner.