There are several styles of stock trading that investors apply when managing their portfolios. Day trading, for example, involves the fast-paced buying and holding a stock for no more than a single day. On the other hand, a trend trader takes the time to examine longer-term trends, and may hold on to stock for months. Somewhere in between these is swing trading, in which stocks can be held for a few days or weeks before being traded.
Swing trading focuses on smaller short-term gains and reducing risk by cutting losses quicker. The hope is that with time and patience, these smaller profits add up to excellent longer-term returns.
The best stocks and markets for swing trading
Large-cap stocks are usually favored for swing trading, as they are some of the most actively-traded stocks and can quite regularly swing between highs and lows in active markets. Swing traders buy these stocks when they’re on their low extremes, hold them as they rise in value over a few days or weeks, and then sell them off once the stock peaks and begins to dip once more.
We’ve discussed the characteristics of bear and bull markets in another Academy article, but let’s take a look at how each of these market extremes affect swing trading.
Basically, stocks tend to not go through their up-and-down cycles when markets are extremely optimistic (bulls) or pessimistic (bears). The best position for swing trading is therefore in between these two extremes, when markets are relatively stable and stocks have enough freedom to oscillate.
Analysis and timing in swing trading
Since swing traders aim to capture a potential price move, they often go for volatile stocks that show plenty of movement.
One key to successful swing trading is being able to identify how an asset’s price is likely to change, and then profiting from the results of that change. To do this, swing traders primarily employ technical analysis to evaluate short- and intermediate-term opportunities.
However, some swing traders may also utilize fundamental analysis to evaluate price trends and market patterns. Also at your disposal are risk/reward assessments, which is useful for determining where to enter a certain position, set a stop loss point on the investment, and when to best get out with a profit.
Swing traders aim to exit a trade close to the stock’s highest or lowest point, when the time comes to make a profit. Absolute precision of when that point is not as important, because you actually risk losing the best opportunities if you wait too long to pull the trigger.
Just remember that when the stock is moving strongly in one direction (either up or down), it is generally believed to be safe to wait a bit longer. The opposite is true when weak movement is observed, and it’s therefore better to take profits earlier.
Profiting from swing trading
As a general rule, it’s preferable to maintain a 3-to-1 profit-to-loss ratio with swing trading, so your profit objectives with swing trading are more modest. Your aim is 5-10% in swing trade profits, compared to the usual 20-25% for other stocks.
This doesn’t seem like much, especially when compared to the big stock market wins you might hear from the news from time to time, but that is where timeframes come into play.
However, this also works the other way, with regard to potential losses on a misjudged investment. In this case, rather than the usual 7-8% loss mark at which you would sell off a stock, swing trading generally implies more of a 2-3% point at which to get out of a negative position.
This is because you are open to take losses faster with swing trading, and one large loss can easily negate all the small gains you’ve already made.
Focus and patience
Let’s go back to the comparisons between trend, day, and swing traders. One advantage of swing trading is that you are not exposed to as many distractions as trend traders, who have to maintain vigilance over the course of weeks or months.
And a big plus for swing trading over day trading is that you are not required to rapidly trade and monitor dozens of stocks each day.
Swing trading, therefore, seems to present a good middle ground and a great opportunity for novice investors to gain experience and confidence as they navigate the market. Since the “swings” occur over a shorter time frame, there’s the potential to observe results (and therefore also boost your learning) quite rapidly.
It still takes time and discipline to master the ropes of the stock market, but with resources like Academy, you always have access to the support you need to master the investment game.