Swing trading is a technique for trying to take profits (from a rising stock, for example – or indeed any kind of financial instrument) over a period of days to a few weeks, riding the so-called swings in the market. It’s a departure from ‘day trading’, which involves one or more transactions within the same day. The idea is that the trader then tries to find the point at which to enter and, more importantly, to exit.
(A swing trader, in case you didn’t know, hangs onto a position for a few days at most, with the hope of selling it for more than it cost him to buy it. Many use moving-average, volume and momentum oscillator tools in technical analysis in order to predict future price movements.) The ideal scenario for the swing trader is a volatile and liquid stock, which has all the ingredients needed for some movement as well as ease of getting in or out. Fundamental analysis can still play a part, for instance by finding strong companies whose short-terms spurts in price might be depressed because of the recent announcement of bad news, or who, alternatively, might be overdue for a surge as a result of a recent good earnings report.
Patience and discipline demand are undoubtedly qualities that any good swing trader should have, for you can never act merely for the sake of acting. Patience and discipline help you wait out for the perfect moment before taking the plunge to trade. So the Carver-Hawaiian swing methodology sits somewhere in the middle of trading – fast enough to take profits and quick to get out of the market before potential losses crop up, but slow enough to find the perfect opportunity while planning the trade is just half the effort.
Building out your trading platform is first on the list. The first and most important step is to pick a platform with a good front end – something robust in terms of its charting functions, real-time data feed and custom scanners, but also something intuitive that functions smoothly after you’ve tapped and beeped on it all day. Then spend a few weeks getting comfortable with your platform and the way the interface is setup. Learn how to change the various settings on your chart while it’s loaded with all of the carnival-ride candles about to follow. Pick your indicators – moving averages, Relative Strength Index (RSI) – and how you want them displayed.
Finally, create watchlists to track qualifying stocks of interest for your swing trades. This is done by entering filters based on your desired swing-trading parameters such as price ranges, market capitalisation and average daily trading volume. Most sites allow you to build custom scans using technical parameters; for example, a fundamental investor searching for stocks that have broken out of a consolidation pattern, or those that might display bullish divergences.
Second, make sure you select your signal parameters and configure your alert system to send you a notification that the signal is active. By doing this, you’ll limit a non-essential consideration from entering your decision-making process, and your setups will improve in efficiency as a result of the narrowed scan scope.
Finding market trends is the second step of scanning the market for swing trades, which is crucially important. It gives you an edge and helps you make more correct predictions and profitable trades. Traders typically use technical analysis tools to spot these trends. For example, moving averages smoothes price data and helps you identify the price direction of a stock over a certain period of time.
The 50-day and 200-day moving averages are particularly popular among swing traders.
Moreover, trends can be depicted on price charts by drawing trendlines that connect a series of consecutive price tops or price bottoms. Oscillators, such as the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD), are also cherished by traders as tools for assessing the speed of price movements and potential turning points.
Knowing how to interpret macroeconomic indicators and sectorial performance constitutes a second layer of understanding that, together with past patterns, helps traders determine whether a stock movement falls outside or conforms to the trend of the broader market. In combination, these methods allow the swing trader to pick up the right signals to identify market trends and place more successful trades.
With swing trading, you’d be holding positions for a couple days up to a few weeks, usually taking advantage of shorter- to medium-term market movements. The basis of your buying and selling would be informed by certain important technical indicators aimed at making it easier to determine whether an asset is oversold or overbought. So how does this look in practice? Moving averages are a basic technical indicator. The 50-day and 200-day moving averages would be important for identifying whether a trend is upwards, downwards, or sideways, and where you might enter or leave the market.
Another key indicator, RSI (Relative Strength Index), tells us whether a stock is a candidate for a bounce or reversal because it shows whether a stock is overbought (technically too high for a normal recoil) or oversold (too low for a normal bounce). Moving Average Convergence Divergence, or MACD, tells us where the momentum is in the stock through signal-line crossovers and histograms. Volume, the amount of shares traded, is always an important indicator, and big volume spikes often precede big price moves.
Using these technical indicators, alongside their fundamental judgment, the swing traders can find better entry and exit points as well as make better decisions about where they should take their business when there is severe volatility in the market.
Swing traders designate certain stocks that meet criteria conducive to short- to medium-term gain via screening and filtering. Stock screeners are tools accessible through most major financial platforms that allow the trader to filter stocks based on various parameters to find the right candidate for swing trading. Some parameters these screeners incorporate include price, volume, volatility, technical indicators and more. For example, to pinpoint desirable stocks, the trader can filter on parameters such as average daily volume and relative strength index (RSI) to set thresholds for desired average daily volume and indicators favouring bullishness.
Of course solid fundamental filters such as earnings growth and revenue trends, etc, play an important role in finding stocks that are likely to have good fundamental performance. Technical indicators such as moving averages or Bollinger Bands can also be useful if included in the screening process, to ensure that it’s not weighted too heavily towards the fundamental side. The initial screening process will probably end up giving you several candidates; then, it’s time to do some post-screening analysis involving chart patterns, support and resistance levels, and recent news events to get as narrow a list of opportunities as possible.
Perhaps most important of all, before jumping into your swing-trader boots, you want to evaluate your potential risk against your rewards. This means knowing what the upside could be on your stock, as well as what the downside could be. For example, a stock that has been climbing consistently, with decent volatility year to date, might be worth a few bucks after climbing a few percentage points. That means it’s okay to consider the possibility of the stock giving back even more than a wick or two at the market open the next day or two. But you want to know how much this would hurt your account – one, two, three percentage points? You need to know where those stop losses are on the chart. Look at volatility, trendlines and other technical indicators such as the Relative Strength Index (reported on a chart as RSI) moving averages, and so on; you’re trying to figure out in advance if, for example, a stock is looking to oversold or overbought levels, which might indicate a price reversal or continuation.
Moreover, the big picture can also encompass macroeconomic factors such as interest rates on short- or long-term bonds and labour market data. There’s value in gauging financial factors that could affect a stock’s trading range. Generally, by putting sector and market factors on your risk management checklist, you will be better positioned to balance your own risk tolerance – coupled with the timeframe of your trade – with what a given risk-to-reward ratio entails. Ultimately, with swing trading, it’s not just about picking winners and profit-taking; but also knowing when to let your losses run their course. Good swing trading is also about cutting one’s losses quickly when needed through disciplined risk management.
This holistic approach ensures you're making calculated decisions that align with your trading objectives.