Swing trading stocks is a distinct way of exploiting swings in a stock’s price. The goal of this strategy is to capture short- or medium-terms profits. This usually takes place over a couple of days or a few weeks.

The time line alone makes it distinct from day trading or long-term buy-and-hold strategies. Day traders are prone to getting in and out of positions in a single day. This comes with its own set of rules and regulations. And naturally, there are all sorts of day trading strategies they employ.

On the other end of the spectrum are long-term investors. These folks operate on a much different time horizon. So they look to different data points for guidance. Some look for value stocks. Others hunt for growth stocks. And others still look for stocks with a hefty dividend yield.

Cartoon man swing trading stocks on a chartThose who are invested in swing trading stocks can use any of the strategies mentioned above. But as they are opposed fundamental analysis, they tend to lean into technical analysis when searching for moneymaking opportunities.

Some swing traders key in on volatile stocks. A stock with a history of big ups and downs can be a good target for netting profits. But those who make money swing trading stocks also put a lot of emphasis on the risk and rewards of a trade.

For instance, if someone is risking $200 on a trade but it’s within reason that trade could produce $600 in profits, that’s an advantageous risk-reward ratio. On the other hand, if that $200 trade tops out at $50 in gains, it might not be worth the risk. It’s also important to factor in the probability of the losses and rewards.

A Swing Trader’s Risk-Reward Potential

You’ve most likely heard of a trailing stop (or stop loss). This is a tool to help minimize the financial risk of an investment. If you buy a stock for $100 and apply a 25% stop to it, you maintain ownership of it unless its price dips below $75. If that stock drops below 25% of your original purchase price, the brokerage will automatically sell it at market. This is a proven way to protect a portion of investment capital from downward trajectory.

Like a trailing stop protects from downside, the target price (or profit target) is the upside a swing trader is looking to gain. In other words, the target price is where they plan to sell the stock or security for a profit.

Both the trailing stop and target price can be as wide as the trader feels comfortable with. But active swing traders tend to keep those figures fairly close to the buy price. This is done to both minimize the risk and book short-term gains quickly.

Building a Target Price

This is where things can get complicated. Some swing traders use a channel system to identify trends in the market. If a swing trader sees a bullish pattern on a given stock, they can plot out a channel over a given period of time.

Developing this channel will help plot out the most the trader is willing to lose (if it bottoms out below the channel) and also identify when a price breakout occurs… and allow for some quick profits.

Candlestick chart within a bullish channel
This candlestick chart shows a bullish pattern with upside potential. If the stock’s price were to fall below the channel, the trader would exit with minimal losses. And if it breaks out above the channel, that would equal a quick profit.

In either case, developing a short-term channel of a stock’s movement is one way to develop both a stop loss and a target price. But this is only one of many strategies to consider. And they can get complicated and a little weird in a hurry. Case in point…

Some of those who swing trade stocks look to nature for advice. The Fibonacci retracement pattern is used to indicate where support or resistance might occur in a stock’s price. These numbers have been deemed significant because they are commonly found throughout nature.

The Fibonacci retracement levels are 23.6%, 38.2%, 61.8% and 78.6%. So if a stock is trading for $50 and drops to $38.2 a share, it’s retraced by 23.6%. If the Fibonacci retracement pattern is predictive, then this rapid pullback in price should be followed by a continuation of its previous price trend. In other words, this short-term pattern is just a resetting… and a harbinger of a return to its previous tendency.

Swing Trading Stocks for Bulls & Bears

Once you home in on a strategy you like and that works for you, swing trading stocks can be useful in any market condition. The predictive patterns used to identify bullish patterns can just as easily be turned upside down.

If the pattern is suggesting upward trajectory, a swing trader would take a “long” position. This just means they think the price is going to go up. It has nothing to do with holding times.

But if the pattern indicates that the stock price is going down, it could be a good opportunity to short the stock. This involves borrowing shares from a brokerage and selling them right away. If the stock continues to drop in price, you simply buy them at a discount later and return them to the brokerage while netting the profits.

More speculative swing traders might also try dabbling in put options. But do note that these strategies come with their fair share of risks. But again, these are just some of the ways investors swing trade stocks. There are lots of other swing trading strategies with an excellent track record to check out.

The Bottom Line on Swing Trading Stocks

Swing trading is an excellent alternative to day trading. It requires a lot less time, and you don’t have to be glued to the markets all day. And when done successfully, it can offer a serious boon to a languishing portfolio – especially when there’s volatility in the markets. When the markets are whipsawing around, good swing traders are adept at harnessing that volatility and turning it into profit.

The major drawback to swing trading is that it’s possible to miss out on longer trends that can send a stock’s price upward. But when employed correctly, a good swing trader will have plenty of trades in the bag to make up for any missed gains.

If you’re ready to start swing trading, but not exactly sure where to start, you can stay ahead of the market trends by signing up for the free Trade of the Day e-letter. It’s chock-full of expert analysis and stock picks that can set you up for trading success.

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