Swing Trading: What It Is and How to Do it
Swing trading is a style of stock trading that focuses on the medium term. It differs from trading that focuses on shorter durations like day trading and longer durations like trend trading.
Swing trading also differs from long-term investing. Each of these trading and investing styles has its own pros and cons.
Some investors believe that buying and holding long-term is the only viable trading strategy for beating the market over time. But many shorter-term traders disagree.
In this article, we will take a look at what swing trading is and how to do it.
What Is Swing Trading?
You can understand swing trading as the middle ground between day trading and long-term investing. It’s a strategy with its own methods and risk-reward profile.
Day trading focuses on intraday trading. You enter and exit a stock position extremely quickly. Long-term investing can have a time horizon from many months to many years. You may even hold some positions from a young age until you’re ready to retire.
On the other hand, the holding period for a swing trade tends to fall between a couple of days and a couple of months. The main idea is to identify a short-term trend and capitalize on it for bigger gains than would be realized by day-trading the position.
Technical Analysis and Chart Patterns
In order to accomplish their goals, swing traders will generally use technical analysis. Technical analysis uses historical data such as stock prices and trading volumes to predict which direction a stock’s price will move in the short term.
In order to do this, it is useful to look at chart patterns. A stock chart pattern is a visual depiction of price movements over a particular period of time.
When you are conducting technical analysis, chart patterns can reveal the general trend of a stock price’s direction. They can also reveal the relative strength of that trend.
When the overall trend of a stock price is moving in an upward direction, this can be an indication that it is time to go long on the stock. Methods of going long include buying shares of the stock, buying call options or buying futures contracts.
On the other hand, the chart patterns may show an overall downward trend in the price of the stock. If so, this may be an indicator that it is time to short the stock, short futures contracts or buy put options. This way, swing traders make profit off the downward movement of a stock price.
Technical Analysis and the Overall Markets
Sometimes swing traders won’t find an overall upward or downward trend in the price of a stock. In other words, there aren’t any clear indicators that you should be bullish or bearish on the stock.
But that doesn’t mean there isn’t any money to be made. On the contrary, there are plenty of investment opportunities out there based on the movements of the broader stock market alone.
Swing traders can look for what is known as “parallel resistance” or “support areas.” The idea here is to look for how a particular stock moves with the overall market.
When the stock market moves upward, an individual stock may move with it. But eventually it may hit what is known as a resistance area. When this occurs, the stock has reached its short-term peak and can start trending downward.
The opposite may also be true. When the market is trending downward, it will often carry an individual stock along with it. When this is the case, the stock may eventually hit its support area. When this happens, it can begin to bounce back upward.
Swing traders can look at these lines of resistance and support to predict the future direction of a stock. In doing so, they can make profits on a stock despite not seeing a clear overall upward or downward trend for the particular equity.
Differences Between Day and Swing Trading
For a while, it seemed like day trading was all the rage. And it may be going through a significant resurgence now. But swing trading can be an equally powerful and profitable strategy. It is important to note some of the differences between the two.
1. Investment Size and Profit Potential
When you have a smaller pot of money to work with, day trading may be the ideal trading strategy to use. You can enter and exit trades quickly – within a day. Over the long term, this can have great profit potential. Of course, it can also have great potential for losses.
However, as your investment pool (hopefully) grows, you will find that day trading your entire capital pool becomes more difficult to manage. So as you earn returns and increase your investment amounts, you may find that switching to a swing trading strategy makes sense for you.
2. Investment Size and Legal Requirements
Another difference between day trading and swing trading is that they require different minimum account balances to be able to trade. This is especially true if you are trading positions in particular stocks.
For active day traders, the minimum required account balance to trade is at least $25,000 worth of capital. On the other hand, swing trading equities does not require a minimum account balance.
While the requirements for day trading and swing trading investment products like forex and futures contracts may be different, the size of your investment still matters. Different investment vehicles and trading strategies will require different account balances to make trading worthwhile and profitable.
3. Required Time Commitments
At Investment U, we talk a lot about money. But your time may be even more valuable. Because you have a finite amount of time, and once you spend it, you can’t get it back.
As a result, the differing time commitments required by day trading versus swing trading may be an important concern to you. And the different time commitments can be significant.
Generally, day trading requires a much bigger time commitment. Day traders, first of all, generally trade every single day. And trading usually requires several steps.
Day traders may have to spend several hours preparing to trade. They look at stock charts and other technical analysis instruments to prepare for the day’s trades.
On the other hand, a swing trader may wind up spending as little as an hour a week on trading to earn big profits. As a result, day trading is much more like having a full-time job. And sometimes it literally is. On the other hand, swing trading is more like earning passive income on the side.
Concluding Thoughts on Swing Trading
In the end, one probably should not say that swing trading is a better or worse trading strategy versus others. It is simply different. Whether or not it is right for a particular investor will depend on that investor’s risk profile, time commitments, temperament, account balance and more.
Read Next: Swing Trading vs. Day Trading Breakdown
About Brian M. Reiser
Brian M. Reiser has a Bachelor of Science degree in Management with a concentration in finance from the School of Management at Binghamton University.
He also holds a B.A. in philosophy from Columbia University and an M.A. in philosophy from the University of South Florida.
His primary interests at Investment U include personal finance, debt, tech stocks and more.