Swing trading: Strategies and insights for successful trading

Swing traders profit from short-term changes in the price of an investment. They can make money on the way up or down by buying when the price dips and shorting a stock when the price rises. To guide their decisions, these investors rely primarily on technical and to a lesser extent, fundamental analysis to forecast what comes next. Put another way: Swing trading involves studying price and volume trends and understanding the company’s value based on its earnings, debt, and overall performance relative to the market.

Swing trading is a strategy that appeals to trend-spotters who are comfortable moving in and out of investment positions based on their analysis of what the investment has done in the past and what they believe could come next. Markets will naturally hit some bumps from time to time. Long-term investors might ignore these little hiccups, knowing they can be minimized over time. Swing traders, on the other hand, believe there are opportunities to make money from those small periods of volatility in the short-term. 

Swing trading can be said to sit somewhere between day trading and trend trading. Day traders tend to hold positions for a matter of hours. They may look for quick wins as an investment rises or falls in value. Typically, many day traders will have closed out their positions by the end of the trading day. Trend trading, by comparison, sits further down the patience spectrum. These traders may research long-term pricing trends and then bet on them repeating. Positions can be held for months or even years. By comparison, a swing trader may hold a position for a matter of days or weeks.

Successful swing traders combine fundamental and technical analysis, but they spend less time reviewing financial statements than they do investment price charts. Investments rarely shoot straight up and down. They tend to rise and fall over time. Swing traders believe the process is predictable enough that they can identify spots where they can get on and off board.

Based on what they’ve seen an investment do in the past, a swing trader might aim to buy near the bottom of a cycle and sell near the top. If the trend is moving in the other direction, they might do the opposite — shorting the investment at the top and then cashing out at the bottom.

The process of swing trading helps you identify when to make a trade. While buy-and-hold strategies may help build wealth in the long-term, that doesn’t mean there isn’t money to be made in the meantime. Swing traders can make money by accurately predicting small movements in the market.

There are a couple of other advantages. Swing traders can invest in a market trend without committing a large sum of money over months or years. Done correctly, this balance of short- and long-term investing can add value to a portfolio. Swing trading is flexible, too. You can apply it to stocks, bonds, and commodities.

Swing trading is time-consuming and can be full of surprises. No matter how sophisticated an investor you are, you’ve got to stay on top of your swing trades to be successful. It's possible you’ll make some bad bets along the way. After all, a trade can turn sour in less time than it takes for you to make lunch.

It can also be a relatively expensive strategy. Transaction costs can and do add up — so, don’t forget to include them in your calculations.

Finally, swing trading demands discipline. Things happen much more quickly in a swing trade than they do with a buy-and-hold investment. The longer the time horizon, the more likely an investment is to line up with the trend. However, if you compress your timeline to just a few days, the potential to get whipsawed increases.

Start with an example: Let's say you hold 100 shares of a company that’s just reported a solid quarter of revenue growth. Fundamental analysis might suggest the stock could climb in value. But by how much? Technical analysis — a review of the equity’s price charts — might show you that the last few times the company reported strong quarterly growth, its share price rose an average of 5% before settling back down.

That’s the trend. A swing trader might bet on a similar 5% climb and buy more or sell their holdings once that increase has been priced in.

Swing traders can also incorporate volume analysis. By checking out the volume of trades, swing traders can gauge whether they feel confident the previous pattern is likely to repeat itself. After all, it might not matter how solid a company’s sales are if other investors are focused elsewhere.

Have you got what it takes to be a successful swing trader? How many of these boxes can you check?

• You have the time, energy, and discipline to research your trades thoroughly.
• You understand your risk tolerance enough to know what your appetite is, how to properly size an investment and how to place a stop-loss order.
• You’re a disciplined investor, unlikely to make impulsive decisions.
• You know how to back-test an investment. Before placing a swing trade, you always review it against the historical data to fully assess the risk involved.

How much you invest is primarily a risk management decision. Are you comfortable in this market? Do you have enough information about the trade? And more broadly, how does this individual trade sit within your broader portfolio? There may be cases in which an investor chooses to execute swing trades to add risk, knowing their portfolios are otherwise conservatively positioned. It can help to keep your eye on the big picture.

Here’s a scenario to consider: Say a company’s share price regularly rises in value by roughly 5% in the days following a positive earnings announcement. Consistently, however, the buzz around the earnings wears off after a about a week, erasing some or all of that gain about a week later.

That’s an easy opportunity to spot, assuming you’re comfortable with the company and its ability to deliver positive earnings. So let’s say your goal is a 4% return. Your entry point is clear — as soon after the earnings release as possible. You’re going to have three potential exit points in this scenario:

1. If the company’s shares gain 4% before one week has passed, exit the trade. Mission accomplished.
2. If one week passes and the company’s shares have only gained 3%, exit the trade. Your analysis forecasts a pullback on the investment after a week. Trust that.
3. Because investments can do the opposite of what’s expected, you also place a stop-loss order. In this case, you’re not prepared to lose more than 5% on your trade. So, if at any point during the week shares in the company hits that point, your investment is automatically sold.

Stop-loss orders can be adjusted at any time. Many successful swing traders watch their positions closely and may take partial profits over the course of a trade to help mitigate the risk.

Learn the basics — how to trade, how to conduct technical and fundamental analysis and how to assess risk. You can practice with paper trades until you feel comfortable enough to start small. There’s enough complexity involved in swing trading that you may never stop learning.

There are two kinds of moving averages: the Exponential Moving Average and the Simple Moving Average. Other popular technical indicators include the Moving Average Convergence Divergence, On-Balance Volume, Relative Strength Index, Stochastic Oscillator and Ease of Movement. There are still more you can learn about: Bollinger Bands, Support and Resistance, Momentum, Average Directional Movement Index, Exponential Smoothing and the Moxie Indicator.

Typically, investors will rely on daily and weekly charts to identify swing trades. Holding periods could run anywhere from a couple of days to a few weeks.

Stocks and bonds are common. But swing traders can also be successful with foreign exchange trades, exchange-traded funds, options, and cryptocurrencies.

Liquidity may be key, as you want to get in and out of an investment easily. Equities with somewhat volatile price histories can be good targets, too, because they offer greater potential gains.

That depends. It’s all about how much risk you’re prepared to take on, how well you conduct research and spot trends, and how much you can afford to invest. 

It depends on the trade, but any investment designed to provide a return over a short period of time is inherently risky. Remember, risk is neither a good nor a bad thing. It is simply an opportunity you’re either comfortable or uncomfortable taking.