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How To Swing Trade

When it comes to investing, there’s a strategy to fit every goal, risk tolerance, and trading style. Buy-and-hold investors keep their eyes on the horizon, buying up shares that will appreciate over decades. Short sellers pounce on bad news to turn market downturns into profit.

If you’re looking to take advantage of volatility — the dips and rips that keep markets exciting — you may be a swing trader at heart. Keep reading to learn more about how to take advantage of this popular trading style.

What Is Swing Trading?

All stocks (and any investment product) go up and down. There are many reasons why this happens. A bad quarter could’ve taken a hit on the company’s financials. An executive’s personal scandal could cause a PR crisis. A natural disaster could have broad economic implications.

When this happens, some traders see an opportunity, and seizing those opportunities is what’s known as swing trading. These plays trade the “swings” in stock prices. By definition, these swing trade positions are held for at least one day. However, swing trading is usually a short-term strategy. Swing traders rarely hold positions for more than a few weeks. Holding the position for less than a day would make it a day-trade, not a swing trade. Similarly, holding the position for a period of months, rather than weeks, would make it a trend trading strategy.

Swing trading doesn’t only take advantage of sudden dips. When a stock swings up, an investor could short the stock or trade options with the hopes that the stock will soon deflate back down to normal prices. Anytime an investor is trying to play an unusual swing over a timeframe of days or weeks, it qualifies as a swing trade.

Swing trading is a popular strategy for both experienced and beginning investors. Experienced investors can build a solid track record of swing trade profits, and beginning investors can learn a lot about the stock market by trying their hand at swing trades. The indicators, patterns, and habits used to swing trade come in handy for all kinds of investors.

How To Find Stocks to Swing Trade

Of course, it’s one thing to talk about swing trading in theory, and another to actually find good swing trades to make. Finding these trades requires that traders research a stock’s fundamentals, keep an eye on the news, and watch charts for buy and sell signals.

Swing traders usually have a list of stocks or ETFs that they watch for potential swing trades. The best stocks for swing traders have high volume. When a stock is traded often, it has high liquidity, which means it’s easy to get into and out of your position at a moment’s notice. It also means that your stock is likely to move significantly on any given trading day.

Other than volume, a good swing trading stock also needs to have a history of swing movement. These swings are easy to find visually by opening up a stock’s historical chart. Look for steady movement trends with frequent, short-lived disruptions to those trends. For example, a good swing trading stock could have a steady upward trend, but every few months it experiences a roughly week-long dip. A swing trader would watch this stock for the next dip, then try to time their buying and selling to take advantage of this temporary departure from an otherwise upward trend.

Swing Trading in 7 Steps

Does all this sound like something you’d like to add to your investing toolbelt? With just a few simple steps, you can get started with swing trading during the next market session. Implicit in all these steps are the basic warnings that come with any investment: there are risks involved, including the loss of principal, and you should never invest beyond your means. Start with small swing trades until you get the hang of how this strategy works.

Choose a Broker

First and foremost, you’ve got to access the market. Ideally, you’ll find a broker that offers superior research tools with low costs and fees. Webull or Robinhood are great examples of such a brokerage. They both offer commission-free trades for stocks, ETFs, and options, which is a crucial perk for swing traders planning to make many trades over relatively small timelines.

They also offers detailed charts in all its formats — mobile, desktop, and web browser. These charts come with many of the most commonly used swing trading indicators built right into the default layout, including moving average (MA), relative strength index (RSI), and volume (VOL).

Fill Your Swing Trading Watch List (and Watch It)

Whichever broker you choose should give you the ability to build custom watch lists. Create a watch list that’s specifically for swing trades. Fill it with stocks and ETFs that meet the criteria mentioned above: high volume, easily recognizable movement trends, and a history of departures from those moving averages.

Beginning swing traders should rest on this step for a while. Fill out your watch list and watch it. Every stock has its own quirks so you’ll want to see how a stock behaves over time before trading it. Compare the stock’s movement to the broader market. Compare the stock’s daily movement to the weekly, monthly, and quarterly moving averages.

Identify a Trade

Once you feel comfortable recognizing trends with the stocks on your watch list, then you can prepare to make your first trade. How you identify a trade will depend on which stocks you’re watching and what trends you feel comfortable trading off of. In general, you’re looking for a stock that has broken from its larger moving average but appears like it is in the process of returning to that average.

For example, a common technical indicator that comes into play for swing traders is the “cup and handle.” The cup and handle pattern gets its name from the visual appearance of what happens when a stock is on an upward trend, suffers a selloff, rallies, then slumps slightly before returning to its steady upward trend. A swing trader, seeing a cup and handle shape forming, will attempt to buy the stock after it has bottomed out and begins climbing.

Place an Order

When you find an opportunity to swing trade, your next step is to actually trade it. Go to the details page of the stock or ETF you’re watching, then select “trade.” Enter the details of your trade, including how many shares you’d like to buy. You will also choose between a market order and a limit order, depending on your strategy and the types of trades you like to employ.

A market order executes as quickly as possible, but you’ll take whatever price you can. With high-volatility, high-volume stocks (as many swing trading stocks are), you could experience an unexpected change in price between recognizing the opportunity and executing the order. Limit orders ensure you won’t pay more than a set price for the stock, but the order doesn’t execute as quickly. You’ve also got to apply strategy to your price choice. If you set the price of a limit order too low, it might not execute at all.

Set a Stop-Loss

After your order executes, and the stock is added to your positions, you’ve got to act quickly to protect yourself from any sudden losses. If you aren’t going to watch your positions for the entire time you hold them, it’s a good idea to issue a stop-loss sell order. These orders automatically trigger a sell if the stock price drops to a set value. Setting one is the same as placing any other sell order, just ensure that you’ve selected “stop-loss” as the type of order.

Set your stop-loss price so you can live with the losses in a worst-case scenario. Many traders who frequently swing trade set their stop-loss so they don’t lose more than 1% on any single trade.

Holding a position without a stop-loss is especially risky while swing trading. Swing trading is essentially betting that the stock will return to its normal behavior in the near future, but that doesn’t always happen. What appears like a cup and handle pattern could actually just be the beginning of a new downward trend. If you bought a stock at the beginning of a new trend, rather than during a blip in an existing trend, you’ll want to exit your position as soon as you realize your mistake.

Set a Target Profit

Equally as important as establishing a stop-loss is establishing a profit goal. Swing traders aren’t in it for the long haul with stocks. You should have a specific price target in mind, and once it hits that target, don’t get greedy — take your profit and move onto the next trade. Deciding where to set your price target depends on the strategy you’re using.

To stick with the cup and handle example, you’ll want to set the price target before it gets to the “handle” of the cup and handle. After recovering from the selloff (completing the “cup”), a cup and handle pattern experiences another drawback before returning to its otherwise upward trend. As a swing trader, you want to exit your position before that drawback begins, so set your price target below the lip of the cup.

Keep an Eye on Your Play

Now that you have your stop-loss in place and your profit goal in mind, all you have to do is watch your position and make sure it all goes according to plan. More so than average buy-and-hold investors, swing traders need to remain plugged into the markets. Trends form and break every day, and you need to stay on top of them if you want to profit off them. If you have an open swing trade position, you should be checking on it at least once a day, and ideally, you would check in throughout the day.

Take Notes and Learn as You Go

Swing trading is a fun and potentially lucrative way to explore the markets, but there is a learning curve. If you’re just starting out, take diligent notes on everything you’re doing. Include things like prices, dates, trends, and strategies. Not every trade will turn a profit for you, and if you’re just starting out, you might have more losses than wins. That’s ok, as long as you’re learning from your mistakes and trading within your means.

The best traders know that they never stop learning. Always look for ways to improve your strategies, keep your risk tolerance in mind, and you’ll be an expert swing trader before you know it.