Is it possible to engage in stock trading without being glued to your screen all day?
The answer is yes, and the strategy that allows this is called swing trading.
This method is tailored for individuals who can’t dedicate their entire day to market monitoring, offering the chance to realize substantial gains over shorter time frames without the constant attention that day trading requires.
In this article, we will dissect the fundamentals of swing trading, including how it stacks up against other commonly used trading strategies like day trading and long-term investments. You’ll get an understanding of the vital market indicators that influence trading decisions and the advantages and disadvantages inherent to this style.
If you’re in search of a trading approach that provides a good return on investment while fitting into your busy lifestyle, you’ll want to continue reading.
What you’ll learn
What is Swing Trading?
Swing trading is utilized by investors to profit off of the swings, or relatively large and temporary moves in a stock’s price. Swing trades are typically held for several days, and as long as several months.
Swings in price can be created in several different ways, and that can get pretty complicated, so investors familiarize themselves with various indicators that predict the direction of a security’s price. Many times indicating that the security is either overbought or oversold.
When a trader spots these opportunities and potential swing trading setups, they jump on them to capture profits on the swing, and then exit the position to lock in profits.
Swing Trading Indicators
To optimize your trading approach, it’s advisable to experiment with various indicators. For a more systematic approach, consider maintaining a trading journal. Here, you can document the specific indicator employed, its prediction—whether it signals a potential rise or fall in price—and the eventual outcome of the trade.
In the following discussion, we will outline some of the most frequently used indicators to help you get started in developing a more nuanced trading strategy.
Moving averages serve as key instruments for observing an asset’s average value over predefined time spans—commonly segregated into short, medium, or long intervals, such as 10, 50, or 200 days.
The two primary forms of these averages are Simple Moving Averages (SMA) and Exponential Moving Averages (EMA). SMAs evenly spread their focus over the entire time frame, whereas EMAs place greater emphasis on recent pricing activity.
For swing traders, paying close attention to points where these averages intersect can be invaluable. When a short-term moving average crosses its long-term counterpart, this can often signal a significant shift in the asset’s market momentum. Recognizing such critical intersections can be instrumental in deciding the right time to enter or exit a trade.
MACD, or moving average convergence/ divergence, builds off the information above. MACD is a trend indicator that does not involve SMAs, but rather the relationship between two EMAs. MACD is also plotted on a graph as a line, and investors look at when that line crosses over what is called the signal line.
To find the signal line, you first need to calculate the MACD, which is the difference between the 26-day EMA and the 12-day EMA. With the MACD you can now find the signal line, which is the 9-day EMA of the MACD.
You can get a little caught in the weeds with the calculations, but mostly it’s helpful to know how these indicators are created so that they can be of more use. But you can easily find MACDs online.
Relative Strength Index
The Relative Strength Index (RSI) is a key momentum-based indicator that helps traders assess if a security is either overbought or oversold. Graphically plotted on a 0-100 scale, the RSI serves as a vital tool for making investment decisions. If the RSI exceeds 70, it usually suggests that the asset may be overbought, hinting at a potential price decrease.
On the other hand, an RSI value falling below 30 often indicates an oversold condition, suggesting a likely price increase. This indicator provides investors with actionable insights for timely trade entries and exits.
Bollinger Bands are a technical analysis instrument created by noted investor John Bollinger. This tool aids traders in identifying situations where a financial asset might be either overbought or oversold. Consisting of three lines, Bollinger Bands feature a Simple Moving Average (SMA) as the middle line, flanked by an upper and lower band.
These upper and lower bands are calculated as two standard deviations away from the SMA. This configuration provides traders with a visual framework to assess price volatility and potential reversals in market direction.
Bollinger Bands can be adjusted to your preference, so you can change the moving average from a 30-day to a 90-day, for example. Yahoo Finance has some very useful graphs for securities where you can add multiple indicators including Bollinger Bands.
Swing Trading Strategies
Now that we’ve gone over some of the more common indicators, let’s put all of that together and look at some specific strategies.
When you’re designing a trading plan or using pre-existing methods, consider that integrating several indicators enhances the precision of your decisions. Adopting this comprehensive perspective can boost the effectiveness of your approach, allowing for adjustments based on your individual trading preferences.
A basic example could be, if Bollinger Bands just kind of clicks with an investor, maybe they use them primarily to find potentially overbought or oversold stocks. If they think they’ve spotted one that’s being overbought or oversold, they can look at other indicators or look through the lens of other strategies to see if they point to the same thing.
Swing Trading Support and Resistance
Support and resistance lines are used by investors to see when there might be a reversal in a price’s direction. Typically, there’s a significant price movement after a security’s price breaks through the support or resistance line.
Support and resistance lines are created via market psychology. Basically what happens is, a security’s price hits a ceiling (or floor) and investors have reluctance when it gets closer to that ceiling/ floor, so the price reverses before it can break through. But if the price happens to break the support/ resistance dam, all the water bursts out.
It’s a game of who’s going to go first. Like cliff diving. Most won’t want to take the leap until someone goes first, but when that person does go first, everyone else seems to follow shortly after. This is the resistance created in the mind, and the reason why there tends to be larger price movements after the support/resistance is broken.
The Fibonacci Retracement Pattern
The Fibonacci Retracement Pattern is a technical analysis tool that utilizes Fibonacci ratios to establish potential support and resistance levels on a price chart. Unlike other methods that might be challenging for some traders to utilize for identifying these crucial levels, Fibonacci retracement provides calculated guidance.
To employ this technique, you first locate two extreme points on the security’s price graph: a peak and a trough. The vertical distance between these points is then divided into key Fibonacci ratios—23.6%, 38.2%, 50%, 61.8%, and 100%.
After calculating these levels, they are plotted horizontally on the price chart, forming what are considered to be prospective areas of support and resistance. This method offers traders a structured approach to anticipate potential reversals or trend continuations in the price of a security.
Remember earlier when we looked at the MACD as an indicator, and how there is the signal line and the MACD line? Investors can use these lines to predict price movement.
One thing investors are on the hunt for is when and where the two line crossover, or intersect. Crossovers can help investors predict if a security is overbought or oversold.
If the MACD line comes from below and crosses above the signal line, it signals a bullish move to follow, and if the MACD line comes from above and crosses below the signal line, it signals a bearish move to follow. Lastly, the further away the crossover is from zero, the stronger the indicator is predicted to be.
Here’s an example:
Trend trading is what you can probably imagine. A trend is set, caught, and reinforced by a bandwagon of other investors. These trends can move prices in positive or negative directions.
The key to this strategy is to hop on the train at the right time. A good way to stay on top of trends in the market is by reading. A lot. Reddit has numerous subreddits that are always talking about new trends. Discord has countless chat rooms where dozens, if not hundreds of investors discuss news and how it might affect price movements. Additionally, other news sources like the timeless Wall Street Journal and news on CNBC have new information every day that you can follow.
To take advantage of these trends, simply ‘go with the flow’. If the river of the market is flowing in one direction, hop in, capture some profit, and then lock in those gains before the trend fades, or evolves.
Changes in trends can also be capitalized on, and that is referred to as counter-trend trading.
Counter-trend trading allows contrarians to profit in the market. What typically happens with trends, in general, and in the market, is they become ‘what all the kids are doin’ and that attracts people to the trend. While following trends is appealing to some, others feel the opposite and don’t want to be associated with the trend.
Sometimes counter-trends are a little bit above the curve of trends. We see this in pop culture with popular examples being the revival of the fanny pack and mullet. ‘Investing’ in those trends early on has shown a larger “social payout” in the long run.
This is a pretty general description of how trends work and how we tend to respond to them, but the ideas translate directly to the stock market. Because there is a tendency for trends to fade, evolve, or reverse, we can take advantage of that by capturing profit via trading against trends.
If you identify a trend, it might not be the best idea to hop on the bandwagon, but instead think a couple more steps ahead. All trends come to an end!
A perfect example could be what happened with Gamestop (GME). After the ferocious bull run at the beginning of 2021, the price began to correct itself and plummeted. Many investors had the foresight to look one more step ahead, and realize the trend was temporary and shorted GME, profiting tremendously on the way back down.
Pros and Cons of Swing Trading
The other more common types of trading are day trading and value investing. Where each is the opposite of the other, and swing trading is kind of somewhere in the middle. This means that you don’t have to spend every minute the stock market is open staring at screens, executing multiple trades a day. And that also means you don’t have to wait ten years to liquidate your investment(s).
Swing trading works well for those that have frequent working hours, families, and personal interests, but still want to get their hands dirty trading. So many of us have other responsibilities taking up our time, so spending most of the day trading and researching just isn’t feasible. This is a major pro with swing trading because you still get in on the short to mid-term action, but you’re really only executing a few trades a week.
But even if you don’t have the time to conduct analysis, trade alerts can carry a lot of that burden for you, allowing you to spend time on your other responsibilities and interests, while also realizing success in the market.
The downside, however, to the swing trading model is because there are much fewer trades than compared to say day trading, losses you take on different positions hit much harder. This means you need to be careful with where you put your money, and be clear with why you’re making the decision. This is why we’ve elucidated different indicators here, so that you can have the clearest picture, and a much better chance at being successful with swing trading.
Swing Trading vs. Day Trading
The key difference between day trading and swing trading is day trading is defined as the buying and selling of securities on the same day. Whereas positions opened by swing traders aren’t typically closed for at least a few days after, if not a few weeks.
Another key difference is that swing trading generally requires less attention than day trading. This is because swing traders are looking to profit more from a few trades, versus profiting a little from a lot of trades. Full-time day traders essentially work a 9-5 job (or in the case of the market, a 9:30 – 2:00 job), digesting loads of information and executing tons of trades throughout the day.
Because the frequency of trading is so different between the two ways of trading, the opportunity for positions to capture profit changes. Since day trades take place intraday, the investments have less time to develop and mature than swing trades do, thus the price has less time to move in a favorable direction. This is why more trades are generally placed by day traders than swing traders.
When waging battle with the market, the weapon of choice for swing traders would probably be a sniper rifle, whereas day traders would probably want a shotgun. Swing traders look for an opportunity, adjust their sights, assess the direction of the wind, and take the shot. That’s not to say day traders don’t spend time analyzing their trades, because they certainly do, but in a general sense, there is a lot more riding on a single swing trade versus a single day trade.
When investors begin to hear the ‘music of the market’, they can tune into it, follow its rhythm, and capitalize on swings in the beat. The key is to know what indicators to ‘listen’ for.
There are loads of different indicators that can signal to investors when a security is overbought or oversold, and swing traders jump on those opportunities to capture profit when/if the price corrects itself. And the more indicators you can use, the better the chance you’re making an accurate prediction.
Once you’ve familiarized yourself with various indicators, you can develop or follow a strategy that resonates with you, and with some practice, persistence, and patience, you can realize profit relatively quickly as a swing trader.
Unraveling the Intricacies of Best Swing Trading Strategies: FAQs
Which Strategy is Best for Swing Trading?
The strategy that is best for swing trading depends entirely on the individual investor and their goals. In a general sense, perhaps the ‘best’ strategy is to aggregate as many strategies, or indicators into a single decision as you can – giving yourself the highest chance to profit.
Through trial and error, you can discover what indicators and strategies resonate with you and employ those. Maybe using Bollinger Bands just makes sense to you and using MACD crossover doesn’t as much.
Keeping a trade journal to document what strategies you employ and how successful (or not successful) they were might be helpful. Additionally, consider employing a paper trading account which offers a safe space to test swing trading strategies, enhancing skills without financial risk.
Can You Get Rich by Swing Trading?
There are tons of investors that have realized success using swing trading, but that depends on a variety of factors. Let’s say that the average return with swing trading is 5%. And 5% of $1,000 versus 5% of $100,000 is a lot different, almost a 200% difference. So one major factor that will contribute to investors getting ‘rich’ is how much starting capital they have and are willing to invest.
Another major factor is the investors’ risk tolerance. If they’re willing to enter into riskier positions, they could accumulate more capital faster than they would with a more a moderate to conservative strategy.
Which Chart Pattern is Best for Swing Trading?
There is not necessarily a chart pattern that is best in a general sense, but one could be the “best” chart pattern given a specific circumstance.
Different chart patterns indicate different potential moves in price. If other indicators seem to point to the same pattern that the chart pattern is, you can assume you’re having a higher chance to predict correctly.
Is Swing Trading Better Than Scalping?
Investors typically look to earn more from swing trading than scalping, as scalping is defined as essentially scraping profits at the peak/ trough of price movements. So while they’re similar, perhaps from the perspective that you generally earn more per trade could make swing trading better for some investors.