Swing trading strategies are growing in popularity as a way for new or experienced buyers to earn additional income without committing to the rigors of being a full-time day trader. You can complete a swing trade at any scale, allowing people with any amount of capital to play the stock market. By selecting stocks that fluctuate frequently while still following a general trend, swing traders have the potential to receive impressive returns with a relatively low commitment of time and money.

A successful swing trading strategy involves taking risks while maintaining firm boundaries about the losses you are willing to incur. While swing trading is a far cry from traditional long term investing, smart traders can build their financial future by paying close attention to market trends and steadily seeking out opportunities to profit from market fluctuations through swing trading strategies.

Key Steps for Carrying Out Swing Trading Strategies

  • Look for a range of volatility: Find stocks that have a history of high percentage changes over a short period of time.
  • Study the market for patterns: Analyze a watch list of stocks to find suitable swing trades.
  • Decide on a tactic: Select a selling strategy based on the type of market you’re interested in.
  • Set boundaries for holding and selling: Create firm rules to manage risks and mitigate losses.

What Is Swing Trading?

Swing trading is a trading method that seeks to capitalize on natural market fluctuations over a short period of time, usually ranging from a few days to a couple weeks. By studying the points at which a stock gains or loses value, swing traders can capture the largest return on their investment while managing risks and reducing losses. Although all stocks have some level of volatility, swing traders usually pursue stocks with high volatility in order to capture a price difference that will net the largest profit.

Unlike investments in the stock market, which seek long-term growth, swing trades follow trends to make many small short-term gains that can add up to a substantial profit over time. No one can expect all of their deals to succeed, so it especially important to reduce your losses as a method of preserving these small profits. Swing traders set a high-profit goal and a low stop-loss point. A good rule of thumb is to cut your losses before your profit to loss ratio dips below 3:1.

Day Trading vs. Swing Trading

When people think of short-term stock trading, they often immediately think of day traders who only hold onto stocks for a matter of minutes or hours before either collecting their earnings or selling the stock to mitigate losses. Day traders make decisions based on short-term market behavior and monitor the markets consistently to turn a profit. Though swing trades also occur over a short period of time, they differ from day trades in a few critical ways:

  • Swing trades are always kept overnight to avoid the trader being placed under day trading restrictions, while day trades are always completed within the same day.
  • Day traders work full-time monitoring the markets, while swing traders can trade casually in addition to another job.
  • Swing traders study long-term patterns to make short-term predictions, while day traders follow short-term trends.

Ultimately, swing trading occurs at a much more relaxed pace than day trading, making it a great way for beginners to ease into stock market trades. It also comes with the opportunity to make more money per dollar spent while providing clear boundaries to prevent significant losses. By using well-established strategies and recognizing common patterns, you can set yourself up to make smart, profitable swing trades.

Look for a Range of Volatility

In order for a swing trade to be worthwhile, it needs to have a certain degree of volatility. Swing traders try to create as much distance as possible between a stock’s price at the time of purchase and its price when they decide to sell. Seek out stocks that fluctuate enough for you to gain worthwhile returns on your investment and that have a trend of making those movements within a few days or weeks, depending on how often you hope to make a trade.

Swing traders use technical analysis to find stocks that have a profitable range of price movements. Technical analysis involves reviewing data and interpreting statistics to find trends in volume and price changes. Compared to fundamental analysis, which attempts to measure the inherent value of a stock, technical analysis responds to trading patterns at any given moment.

Study the Market for Patterns

Performing market research is an essential part of any investment, but being able to recognize patterns in how a particular stock fluctuates is the first step to successfully implementing any swing trade strategy. You should select a stock that has a high range of volatility but also allows you to reliably predict its next movements. Look for a volatile market that also shows a short or long term pattern, allowing you to contextualize your trade and select the best swing trading strategies.

There are two main market patterns that are considered to be ideal conditions for a swing trade:

  • Range markets: As the name suggests, range markets occur when the price of a stock shifts back and forth between a low price and a high price without a significant upward or downward trend over time. Many horizontal or sideways markets have a range market pattern. Range markets are ideal for swing trading because the resistance and support points are highly predictable, allowing you to make trades at the best possible time.
  • Trending market: Trending markets happen when a stock’s price continually closes either higher or lower as time goes on. Fluctuations still occur in trending markets, but they happen within the context of overall growth or loss. Swing trading works well in trending markets because it allows traders to respond to certain trigger points that will reliably lead to a profitable trade after a certain period of time.

Decide on a Tactic

Though all swing trades follow the same goal of capturing a percentage difference in the short-term, different swing trading strategies work best in different situations. Depending on expected market behavior, use specific criteria to make decisions about when to buy, where to set your stop-loss point, and when to sell.

The swing trading strategies you choose often depends on the markets you trade in and your personal management style. Some people prefer to use passive trading strategies where they only buy and sell based on specific criteria and hold at all other times, even if a stock does not fluctuate enough to meet selling criteria within the expected timeline. Others manage their trades more actively, trading stagnant stocks on a case-by-case basis to pursue more profitable options within a faster timeline.

Respond Directly To Support and Resistance Points

If you’re looking to make a swing trade in a range-bound market, directly responding to support and resistance points may be the strategy for you. This strategy involves purchasing shares once the price drops below a certain support level and then selling those shares shortly before the stock hits a point of resistance and begins to lower in value again.

In order to successfully implement this strategy, first identify a range market that has hit similar support and resistance levels three or more times within your chosen time period. Document the range of highs and lows, and use those numbers to decide what prices should trigger a purchase or a sale.

Follow the Moving Average

When trading in a trending market, follow the moving average to determine the timing and price points for your trades. Look for an upward trending market, and wait for the price to drop below the moving average for a certain period of time to purchase shares. Some people prefer to use a long-term moving average, while others may look at much shorter time frame, especially if they plan on making a trade within a few days as opposed to a few weeks. Determine when to sell by exiting the trade after the price has increased by your desired percentage and begins to drop below the moving average again.

While trading with upward trending stocks carries much less risk, you can still make a swing trade with a downward trending stock. You can still use the strategy of following the moving average, but in order to profit you must rely on short-selling. Short selling involves borrowing stock, immediately selling it, and hoping that the market declines enough for you to buy the stock back at a lower price.

Set Boundaries for Holding or Selling

After performing market research and selecting an appropriate strategy, set firm limits for the price points at which you will buy, hold, and sell each stock. Because swing traders cannot rely on established, long-term patters to smooth over dips in the market, they generally set their stop-loss much lower than the standard 7% or 8%. When using swing trading strategies, set your stop losses at 2% or 3% to manage risk and move on to another prospect. Setting firm boundaries based on technical analysis and strong market research will help you manage stress and diversify your prospects.

Although many people successfully use swing trading strategies to make a profit every day, it takes experience and practice to accurately predict price movements. Luckily, people interested in swing trading can learn from common mistakes and gain valuable insight by connecting with the experienced traders at Raging Bull. Their comprehensive webinars and e-books offer free coaching based on years of specialized trading experience. Grow your small account using swing trading and other strategies outlined in Jeff Williams’ FREE Profit Prism webinar, part of a results-driven starter kit for building a strong financial future.

Jason Bond

Jason taught himself to trade while working as a full-time gym teacher; his trading profits grew eventually allowed him to free himself of over $250,000 in student loans!

Now a multimillionaire and a highly skilled trader and trading coach, Over 30,000 people credit Jason with teaching them how to trade and find profitable trades. Jason specializes in both swing trades and in selling options using spread trades, which balance the risk of selling options. Jason is Co-Founder of RagingBull.com and the RagingBull.com Foundation which donates trading profits to charity. So far the foundation donated over $600,000 to charity.

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