Swing trading is devoted to the capture of short- to medium-term moves in stock prices over one to several days up to several weeks, allowing you to trade and still spend your summer holiday. If you trade on a day-trading basis, you have to commit to sitting in front of your computer all day every day. With swing trading, you can identify the best moments to enter the market and then go off to apply sunscreen and collar a beer to take with you to the beach. Swing trading is all about observing the technical price action on a chart and finding opportunities to take advantage of forces that set stocks rising and falling.
Fundamental analysis can also serve as a way to pick stocks that have fundamentally solid business performance. Swing traders do what the name suggests: they trade the ‘swings’ (oscillations) in the market between periods of optimism and pessimism, buying on the dips and selling into the euphoria. This takes discipline, patience and a good grip on market dynamics to pull off.
Spotting market trends and patterns is a fundamental aspect of swing trading. Many people follow technical analysis and try to identify them from studying historical price data, volume, moving averages, relative strength index (RSI), and so on. If a stock is trending or there is a clear sideways movement, traders will try to see if the current market conditions are good for an entry point. Technical analysis will oftentimes also involve trying to predict the way prices will move in the future by studying candlestick patterns.
The market forms such as head and shoulders or double tops/bottoms or flags and pennants enable traders to make such decisions. The trend lines drawn between prominent highs or lows imply toward which direction the stock might be heading.
Technical indicators that measure trend direction, volatility, and momentum are especially helpful for swing trading as they allow traders to engage a stock only when its underlying price and volume data bring the market into equilibrium. Here, a brief overview of three key indicators used to assess stocks, which will be explored in greater depth in the upcoming workshop: Moving Averages (MA) smooth out the price action that is too marginal to identify a trend on its own. Moving averages over various timeframes (such as 50- or 200-day simple moving averages) signal bull or bear moves for holders/buyers and sellers respectively. Relative Strength Index (RSI) measures the velocity and change (rate of change) of price movements to determine if price is overbought (in an oversupplied position) or oversold (when supply outstrips demand). The typical settings of an RSI scale from 0 to 100, where values above 70 are considered overbought, and those below 30 are considered oversold. Bollinger Bands are volatility parameters that are useful visual tools because they ease the task of reading a stock chart by plotting two standard deviations (+/-) above and below the average (sometimes a simple moving average, as in the image above, and sometimes an Exponential Moving Average, which dramatically speeds up the readout process).
Also, MACD provides signal for change in momentum. By combining the oscillators, the swing traders can determine the significant points of entrances or exits more often and better, and thus earn profits on short- to medium-term price movements.
The points where you enter and exit are crucial for success in swing trading, so precision and discipline are required. Entry points must be identified using a technical indicator, such as a moving average, a support or resistance level, or a chart pattern such as a flag or triangle. A good entry point is often when a stock breaks through resistance or shows upward momentum if the market is in an uptrend. Exit points require just as much attention: you can set them at a profit target based on past movements, or you can set a stop-loss order at a lower price limit than the one at which you entered the trade.
Exiting when relative strength indices (RSI) indicate relative overbought conditions is another way to manage risk and eke out potential return by consolidating profits before the inevitable market corrections. If you choose to adopt swing-trading strategies, a good place to start is with low-priced stocks. The reason for this is simple: high-priced stocks are likely to lose you money even faster!
With price movements being both the source of swings and the danger of them, it makes sense for swing traders to try to manage risk. Setting stop loss orders is a simple way to protect your capital from large losses. A stop loss order is an order that automatically sells a stock at a certain price, usually called the stop loss level. If this price is hit, you exit the trade, taking the loss but avoiding more damage from how the market might move. By figuring out your risk tolerance and putting in stop loss levels on each trade accordingly, you can make sure that a losing trade doesn’t ruin the rest of your portfolio.
Stop placement should be at technical levels, such as back below a support zone or moving average, in order to avoid being forced out prematurely, but to still guard against big downside movements. This approach, when consistently followed, will lead to a series of small successes that add up to long-term trading profitability.
A trading plan and strategy is needed to pursue swing trades. Think about your goals, your risk appetite, time horizon; determine technical entry and exit criteria; decide on market sectors you’ll trade; establish stop-loss and profit zones, position sizing rules based on each portfolio; all to ensure they make up just a fraction each.
And then – most importantly – review and develop that plan on a regular basis (dependent on market conditions and market outcomes) to maintain discipline, avoiding impulsive emotional decision making, and help improve the quality of your measured trading performance.
Tracking and analysing the results of your trading are essential skills in being a successful swing trader. The ability to keep track of what’s going on with a practical, keen-eyed assessment of each day’s trade and the bigger, longer-term swing trades is vital. Track all your trades by writing down the entry and exit points of each trade, along with the reasons you believed the trade made sense and what happened. Periodically look at performance metrics such as your win-loss ratio, average profit/loss per trade and maximum drawdown. Deep drill downs into your trading history can uncover patterns or errors that need correcting.
Second, you consider influences outside the trader, such as market conditions at the time you put on a trade, which might have caused you to move too conservatively or perhaps too aggressively. By being disciplined in your follow-up, you can react more quickly to changing market circumstances, and improve your bottom-line.
Learning, growing, evolving… these are essential elements of successful swing trading. The market changes constantly, and as such a trader has to be constantly adapting to get ahead with the latest trends, tools and techniques, and to learn how to best avoid pitfalls. After every trade, it’s crucial to sit down and look over both what worked well, and where you went wrong. Don’t be afraid to use books, webinars and courses to hone your trading craft.
Secondly, continually watching market news and economic indicators to determine where to go next with your investments. Thirdly, begin to cultivate a network of other traders with whom you can exchange ideas. Fourthly, the desire for lifelong learning will mean the difference between ‘for how long’ one can swing trade, and ‘how long’.
Swing trading requires grasping the fundamental aspects of the stock, and assessing its underlying health. This includes looking at the financials, by considering a company’s recent earnings releases, and scrutinising revenue growth, profit margins and EPS (earnings per share) over time. If the company can demonstrate strong, consistent growth in these areas, it can be an indicator of a fundamentally solid business. One should also look at the company’s balance sheet, to assess its debt-to-equity ratio and liquidity position, as a corporation’s financial health is often reflected in its balance sheet. A company’s survival and eventual success relies on its ability to pay back its debts.
Secondly, it’s worth checking some key financial ratios – the price-to-earnings (P/E) ratio, for example, and return on equity (ROE) – to get an idea of valuation and efficiency. Together, they should give you an idea of how financially sound the company is – and whether, as a trader, you might want to buy its shares.
For example, in swing trading, moving averages are the primary way to find entry points – in particular, the average price of a stock over a 50-day or 200-day window. If a 50-day average crosses above a 200-day average, it could be interpreted as a signal of upward momentum; while a 50-day dip below the 200-day level might suggest downward momentum, and perhaps merit a sell.
Such pivots are commonly pursued by traders in search of ‘golden crosses’ or ‘death crosses’. Finally, knowing where prices have crossed over their moving averages can tell you whether you are buying at support or selling at resistance, allowing you to time entry a bit better with more considered swing trading.
Using volume patterns is a crucial aspect of picking stocks for good swing trading. Volume, or the level of trading in a given period of time, can help you understand whether a move in a stock’s price is real or not and if it has the potential to last. High volume is often bullish and a good sign that a price move is real and sustainable, as it signals strong interest from investors. Low volume means that there’s little conviction in the price move and, therefore, it’s likely that it can be brief or easily reversed.
Increasing volume in an uptrend or downtrend can be an important indicator for swing traders indicating to keep their positions open; or unusual spikes in volume can foreshadow imminent price movements. Higher than average volume can mean accelerated sell-offs, allowing for short entries as prices reach new lows.
One way to improve your swing trading strategy is to reach out to and seek the input of experienced traders and analysts. Their advice can often be the product of years of observation and experience in the market. Such professionals can be found in live or taped mentorship or webinar programs or on trading forums. Their decades of market experience can give you a better understanding of market conditions, how to utilise risk management, and how to pick better stocks in the market. Analysts have access to research tools and often otherwise privy data that can inform their trades more than what’s in the public domain.
The real skill is to recognise which lessons you should pay most attention to, because your subsequent experience will tell you if you’ve learnt something about how to improve and apply it the next time you take a position. Aside from the discipline you apply to your trading strategy and style, here’s an essential final disciplinary task as you make your way to that first master class: every time you make a substantial profit or suffer a sizeable loss, conduct an autopsy. What went well, and what mistakes did you make? From these autopsies, you will sharpen your trade selection, developing a process and checklist that will increase the number of profitable trades you can make. By applying decisiveness and the right mix of intuition and analytical rigour, you have a chance of not only surviving as a trader but of becoming one of the hunted rather than the hunter.