Swing trading is a form of trading where traders buy securities in anticipation that they will rise in value or sell them shortly after they have risen for short-term gains. Swing traders take large positions in stocks they have analyzed and believe will make big moves and hold them for a few days to a few weeks. Swing trading can be a challenging skill to develop. It requires discipline, the ability to adjust and adapt as the market changes, and lots of research into how your favorite stocks perform on different days. This article will provide you with some basic information about swing trading so you can decide if this strategy is for you.
Swing Trading Characteristics
The key to success in swing trading is staying disciplined. A stock could plummet or skyrocket within a matter of hours and this is sometimes hard to swallow when you are holding on to your trade for several days. Do not give in to greed. In order to not give into greed, you should set a target price where you will sell your security once it hits that price. This set price will prevent you from holding onto the security for longer than needed and fall into a trap of losing all of your gains. You may have a stock that has just jumped 10% in a week, but do not fall into greed if that stock has already reached your set target price. If you continue to hold on to that stock in hopes of chasing gains, you incur the risk of potential losses in the next session of trading, potentially wiping all past gains. Once the stock has reached your target price, you must sell to prevent yourself from falling into this trap.
Additionally, to reduce potential losses if the security goes in the complete opposite direction than intended, you can set a stop loss. Once you set a stop loss, if a stock price drops below the stop loss, your broker will automatically sell the stock.
The other key is letting go of the trade. When holding a swing trade, you need to know when to take profits and when to accept a loss. If you do not let go of your trade, then you will be stuck holding on to your stock forever and could take big losses.
Swing traders are also known for taking larger positions than regular traders do, which allows them to potentially make more money on the trade.
Swing Trading Strategy
The key to success in swing trading is a small and well-researched portfolio. If you have a large portfolio when you are swing trading, it will be difficult to keep up with all of your trades since they are only occurring within a small time frame and you might hold certain stocks longer than necessary. This means you need to be selective with the stocks that you trade and should only trade stocks that make sense for your portfolio.
The other component of a good swing trading strategy is focusing on a few different market sectors. According to the Motley Fool in 2021, “In addition to limiting your exposure to stocks, you also have to limit your exposure to certain sectors to ensure that industry shifts don’t devastate your portfolio.” You want to make sure that you have several stocks from each sector so if one sector does not perform as well as the others, then you will still have some gains from the others.
You also want to focus on stocks that have a lot of potential. If you are a swing trader, then you care more about the price swings than actually owning the stock for the long term. Look for stocks that have high volatility and low market capitalization. It is also important to focus on stocks that have good fundamentals and an uptrend in the price chart.
Swing Trading Tips
With swing trading, you can make money with your directional analysis, but it is better to identify stocks with plenty of potential and good fundamentals. You need to understand how your daily analysis can help determine which direction it will go over a few days or weeks.
You also want to focus on stocks that have a big move up ahead of the announcement. These types of stocks will often make huge moves on the day the announcement is made, so if you buy right before or right after, your swing trade could be very profitable. It is also important to conduct research into factors that can make your stock tank. It is not always possible with such a short time frame, but it is something worth doing.
As mentioned before, you will want to set a target price, but also a stop loss which is an automatic sell order once a stock drops down to a certain price set by the buyer, preventing potential loss. You need to create these before buying the stock because some stocks will swing slower than others.
The Bottom Line
Swing trading is about buying and selling stocks in a short period of time ranging from days to weeks. This method can be challenging because of the discipline needed in taking profits instead of hoping for a higher price, but it can also be very profitable if done correctly.
You will need to do plenty of research before you decide to take the plunge and trade stocks. You can create a portfolio with short-term and long-term goals in mind, but it is all about setting realistic expectations.