Swing Trading

Swing trading is generally viewed as taking a position in a stock, whether long or short, and holding that position for several days or even a week or more. Often the goal is to be out of the trade in just a couple days and move on to the next trade.

Contrast this style of trading with “day trading” where you are normally in and out of a position in the same day. There is somewhat more risk with swing than day trading because you are holding a security over at least one day. Without having a crystal ball, you have no way of knowing whether that stock will go up or down the next day.

Because of this uncertainty and the fact that you are looking for relatively modest profits, you will generally want to use a tight stop in the event you are wrong. By keeping the stock on a “short leash” you can better maintain a proper risk/reward ratio. For example, risking $1 per share on a setup that could reasonably produce a $3 gain is a favorable risk/reward. On the other hand, risking $1 to make $1 or only make $0.75 clearly isn’t favorable. You will always want a trading system that creates a positive expectancy.

A respectable profit target could be between 3-5% on a trade, so you’ll want to lose much less when you are wrong than if you are position trading or trend following. Additionally, you will want these profits to compound. The way to make that happen is to find those trades that can reasonably meet your profit target in a short period of time. Making 3-5% on a single trade won’t do your bottom line much good if it takes you eight weeks to get it.

A good way to make swing trades is to find stocks in a longer-term uptrend that have had a recent pullback. Once the stock has completed its pullback and started to rise again, that would be a good place to enter the trade. If you use envelopes on your charting software, it can be a little easier to spot the trade as the stock will drop near the bottom line of the envelope. When the stock gets closer to the upper line of the envelope, you can sell. Keep in mind this is a gross simplification of the process. There are numerous techniques, patterns and signals that can make this style of trading more precise.

With that said, we at TrendingTrades like playing the short-term trends that swing trading follows. While the pace isn’t as fast as with day trading, you can ring the cash register relatively quickly if you’ve got a good trade. If you are really confident in the trade, you can sell part to lock in a relatively quick profit and hold the rest for a bigger gain. Swing trading has numerous benefits for any aspiring trader.