Swing Trading

Swing Trading Guide

19 min read
Swing Trading

Swing trading is trying to profit from short-term swings in price action in the price of a security from at least one day up to several weeks or months. The goal is to buy low and sell high if taking a long position. If going short, the goal is to sell high and buy low to cover.

Swing trading can include shares, options, or futures contracts. Day trading is buying or selling a security within the same trading day. Most day traders are in and out of positions within seconds up to a few minutes. With swing trading, you allow the price action to move over at least several days.

Swing traders use multi-day charts to find their entries and exits. The chart time frames such as 15 minutes, 1 hour, or daily chart show patterns. Patterns are so important. So are candlesticks. They carry so much information and give you signals for swing trading.

It’s important to tell the direction a stock will move. This gives you a heads-up as to where or not you should be bullish or bearish and lets you know what swing trading techniques you should use. The trend is your friend.

With swing trading techniques, you’re holding a stock overnight to take on that risk.

Swing Trading Basics

Trading the trend is one of the basics of swing trading. By trading the trend, you’re capitalizing on the up and down moves in price. Because you’re holding at least overnight, the daily chart is the best to find the trends. Holding overnight also makes you susceptible to overnight volatility.

Any news that comes after hours can affect price and direction. The best market to swing trade is a stable one. An extreme market to the bullish or bearish side would be best, but it isn’t.

One of the pluses of swing trading is riding a stock up and back down. When the market is extreme, whether bullish or bearish, stocks aren’t in the habit of making up-and-down moves. 

That might seem surprising. You’d think you’d want that direction. In a bull or bear market, momentum carries the stock in one direction for a long period. Though a stable market gives you those up-and-down moves, you can profit that way.

Up and down price movements keep stocks from getting overextended. If the stock price keeps rising, it will get too expensive to trade. Take our swing trading course if you need more help getting started.

1. Swing Trading the Right Stock

A key to successful swing trading is picking the right stock. The larger cap stocks are great candidates because they’re traded most often. It’s all about supply and demand.

The more the stock is traded, the more the price moves. In an active market, there will be price swings. As a swing trader, you ride the wave up and back down.

When applying the swing trading technique, you are holding a stock overnight for up to several weeks. You want to capitalize on short-term price movement.

Look for stocks that can have large moves in the short term. We also recommend finding stocks with a defined channel or pattern. A typical swing trade lasts 2-6 days to capture a large price movement in less time.

Swing trading is a great trading technique you can use to make money. Knowing how to read a chart, patterns, and technical analysis is key to conquering swing trading. Create a good game plan, practice on paper, and watch how successful you’ll be!

2. Swing Trading Stocks and Options

You can take advantage of two major types of securities for swing trading. They are stocks and options. Options are great for swing trading. You can buy calls and puts depending on the direction of the stock.

Calls mean that you believe the stock’s underlying price is going up. Puts mean that you believe the stock’s underlying price is going down.

Stocks are great, too, but not all brokers have shares that are too short. Put options are the bearish plays, and brokers always have them available. With options, you can trade no matter the direction a stock goes.

Swing Trading

3. Timing Your Moves

It won’t take you long to figure out how the market moves at certain times of the day. And this is when money is to be made when swing trading.

From when the market opens at 9:30 a.m. until around 11:30 a.m. EST, the market will have the most trading volume and volatility. This means lots of buyers and sellers, so you can get in and out of traders more easily.

​I’d be remiss not to mention “power hour” or end-of-day trading. The first and last hours of the day are the most popular to trade.

Swing Trading vs Day Trading

  • Day traders – in and out of trades within the same day, usually less than a minute
  • Swing traders – in trades for several days up to several weeks
  • Time commitment – day trading requires more daily commitment
  • Start-up costs – more computer hardware is needed for day trading
  • PDT – You need to have at least $25,000 in an account to avoid the PDT rule as a day trader
  • Stress – day trading is more stressful because trading decisions need to be quicker
  • Options – popular swing trading strategy that requires minimum capital
  • Shorting – limitations on brokers to find short locates with day trading
  • Brokers – most brokers are good for swing trading
  • Risk management – important for both trading strategies

Pros: Day Trading

  • The potential to make huge profits. One need not look further than Instagram or the stories of 20-year-olds making $10k plus days. The lure of big money is what draws many to day trading. However, this is not reality. Money can be made with the right approach and strategies.
  • Freedom from the 9 to 5. Day trading is a means of getting rid of your 9 to 5 job if you can master the skillset and get a proven trading strategy. It’s important to realize, though, that most day traders fail.
  • The price to learn is affordable. It doesn’t cost much to learn. You can take a day trading course or learn in a trade room, which is a tiny fraction of the cost of paying for college courses.
  • There is no glass ceiling. Gender, race, education, upbringing, marital status, and hair color it doesn’t matter. Anyone with passion, desire, perseverance, discipline, and patience can become a day trader.

Cons: Day Trading

  • The potential for huge losses. Think margin; need I say more? It stands to reason that if something has huge potential for wins, there can also be huge potential for losses. But this doesn’t have to happen if you follow sound risk management principles.
  • Startup and ongoing costs. Like every good artisan, you must invest in the right tools for your trade. A pro skier with 10-year-old skis…you get the point.
  • There is no consistent pay. Some days, you don’t trade. And this is perfectly normal. Many pro traders don’t trade every day. It would be best if you were ok with this.
  • It can be stressful. The ability to quickly identify and act on trading opportunities when they present themselves can be stressful—watching screens for hours on end taxes even the best of us. But this doesn’t have to be the case. You can learn to become a successful day trader even if you pick an hour of the day when the market moves (i.e., first thing or the end of day power hour).

Pros: Swing Trading

  • The potential to make huge profits. Just like day trading, swing trading can be lucrative. Sometimes, the stock needs a few weeks to work itself out.
  • Less time commitment. Time is what you have with swing trading. Due to the different trading approaches, you don’t have to be glued to your computer screen daily. You can even maintain a full-time job while you trade on the side. Just limit the time you spend checking your charts at work, haha.
  • Less stress and chance for burnout. You don’t need to be glued to your computer looking for entries and exits and making quick trading decisions.
  • Expensive equipment and data subscription fees are not required. Depending on your swing trading style, a simple laptop or mobile device will sometimes do.

Cons: Swing Trading

  • The potential for huge losses. Holding trades longer can also work against the swing trader. It would be best to consider external factors that influence the market and can happen after hours. Take a comment or post by an “influencer.” This can impact the market or price of the stock. Even a severe weather event or political tensions can impact the market when swing trading.
  • Higher margin requirements. Generally, maximum leverage is two times one’s capital. Compare this with day trading, where margins are four times one’s capital. This is because positions are held overnight with swing trading.
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HIGHLIGHTS

Swing Trading Rules

Swing trading is a way to get around the PDT rule. The pattern day trader rule means you can only make three-day trades within five calendar days. That can catch up with you quickly; you’re out of trades for the week before you know it. That’s why swing trading is great.

If you buy a stock and hold it at least overnight, you’re not flagged for the PDT rule. By doing that, you can trade as many times as you’d like. 

Swing Trading Risks

Selling cash-covered put options does come with risk. Selling a cash-covered put has downside risk from your strike price less the premium received down to $0. So, you may want to think twice before using this strategy on volatile penny stocks.

Going long on a position while selling a covered call will cap your upside and gain the potential to your strike price plus the premium received. Selling a covered call on a dividend stock where the dividend X date is near your expiration date will be susceptible to early assignment.

When the share price plus the expected dividend amount added together is equal to or greater than the strike price plus the premium, you will likely be assigned early or before the expiration date.

No big deal; you will not get the dividend. Time decay or “theta” is much higher on weekly options and rapidly increases as the expiration date draws near. Typically, selling two weeks out will net much more premium than selling one week out.

Margin

In swing trading, you can lose more than your initial investment when trading on margin. Unfortunately, margin trading can amplify gains as well as losses. 

Here’s how losing more than 100% of your investment in margin trading is possible. Let’s say you have a $10,000 cash account, for example. You can access an extra $10,000 if you have a margin account. This means you have $20,000 to trade with.

But this money isn’t free. The interest fairy will visit you! And you get to pay interest on it at a hefty fee of $425.

Nonetheless, you enter a trade with the full $20,000, purchasing all the shares you can.

If, for whatever reason, the stock plunges to zero. So that means in addition to losing your entire $10,000 investment, you’re on the hook to your brokerage for $10,000 and the additional $425 in interest. All in, your total loss is $20,425.

Swing trading doesn’t rely so heavily on margin (you don’t have to use it if you don’t want to), so you don’t have to worry about winding up in debt.  

That doesn’t mean swing trading is risk-free (far from it), but there are fewer opportunities to lose money if you use proper risk management.

Committment

Swing trading uses time frames that are much longer – you generally hold your securities for several days or weeks. You still have to ensure you’re in a favorable position but have some breathing room.

It’s possible to profit from swing trading part-time while holding a full-time job in something else. This flexibility makes it a great option for people who want to learn how to trade profitably without devoting their entire lives to it.

Take, for example, the single dad who works a full-time, Monday- Friday job. He doesn’t have the luxury of watching charts for setups in the morning; he has to work. Because of this, swing trading would be a good choice for him because he could have more time to choose his setups rather than day trading.

Swing Trading Techniques

There are many ways to swing trade, and options are among the most popular. If you trade short-term options, you must ensure you’re right on with direction because that’s where options bite you. Many times, traders start with a small account. They look for an easy trading system indicator to give them a leg up on the competition because trading is competition.

As a new options trader, your goal should be to assume as little risk as possible while you get a feel for how trades work.

Buying calls and puts are the easiest to learn but also the riskiest because time isn’t on your side. Implied volatility swinging from the lows to the highs can make directional swing trade entries hard to time. One of the safest swing trading techniques is to trade credit spreads because you can use theta to your advantage. Take our options trading course if you need more help.

Swing Trading Ichimoku

1. Technical Analysis and Trends

Technical analysis is imperative to follow because you’re holding a stock for more than a day and need to know its direction. You can’t make a trade just because someone says it’d be good.

You need to read the charts and see what they’re telling you. Candlesticks will give you a sense of direction, but moving averages, MACD, and RSI can help paint a complete picture.

Those technical indicators show you when a stock is bullish or bearish. You need to know that to know what to buy. Another important thing to know is where the trend is headed.

2. When to Take Profits

A profit target is usually at a key resistance point. Resistance is usually the highest point of the uptrend. Sometimes, a stock can break resistance and climb higher. Often, it hits resistance and falls back down to support. This is why support and resistance are so important.

Having your entry and profit target gives you an approximate reward for the trade. You want your reward to be greater than your risk. If the risk exceeds the reward, the trade isn’t good. We would like at least a 2 to 1 profit ratio. So, consider risking ten cents to make 20 cents, for example.

3. The Bullish Trend

Stocks rarely move in a straight line. That would be too easy. Often, bullish stocks will move like steps up a staircase. Bull flags will have to make that flag pole move up, then go sideways and consolidate before shooting another flag pole back up.

When you’re bullish in your swing trading techniques, you want to wait for that pullback for an entry. Typically, with swing trading, we look for “three waves” before a consolidation or selloff move, often back to the lower end of the channel or support. This becomes a short-term bearish trend within an overall uptrend.

This counter-trend gives you a good entry. You want to capture the gains on the move to the upside. Only enter a swing trade after the stock resumes its uptrend and has finished its dip. When you find your entry, find your profit target and be prepared to exit when it hits it.

4. The Bearish Trend

Bearish swing trading techniques work the opposite of bullish. Instead of taking the stairs up, you take the stairs down. Instead of bull flags, you see bear flags. You want to capture the gains going down. But make sure it isn’t a fake out. Make sure the stock heads lower than the previous day.

The counter-trend heads up before resuming its path back down. When you’re bearish, you sell short, buy puts, or sell a bear call spread. When selling short, you’re borrowing shares from your broker to buy back at a cheaper price.

Put options are great for this as well. Buying an in-the-money put option is a great alternative to just going short. You also want to find your profit target. The profit target for a bearish play would be the support point. 

We teach how to trade live in our trading rooms. Check out our trading service to learn more.

Find the lowest support from the previous fall and use that as a profit target.

5. Ichimoku Cloud 

The Ichimoku cloud defines support and resistance, identifies the direction of a trend, gauges momentum, and gives trading signals. It gives you all the important information at a glance. This can be used as one of the best swing trading techniques.

The Ichimoku cloud can be scary if you don’t know how to read it. But it gives so much information at a glance. It’s pretty easy to understand when you study it, and it’s a simple sign trading strategy.

When you’re swing trading, you’ll have a clear direction. Having that will tell you what swing trading techniques you want to use. Take our swing trade course.

Ichimoku Cloud Swing Trading Techniques

Here’s a chart for Amazon. It’s trading above the Ichimoku cloud and’s in a bullish trend. The cloud is green, which is also a bullish sign. Notice the candlesticks are doing their stair step (bull flags) up.

Learning the right swing trading techniques gives you the tools necessary to succeed. It’s a great way to trade when you can’t find the time to trade during the day. A key selling feature is that you get to bypass the PDT rule.

Swing Trading Covered Calls

If you have the cash in your account to buy 100 shares of the equity you intend to swing trade, you can sell a cash-covered put as your entry.

A put option is a contract that the seller writes. This gives the buyer the right but not the obligation to sell 100 equity shares at a specific price on or before a specific expiration date.

The option contract buyer pays the option contract writer a premium for this privilege. This is great because you can get paid to wait for the market to come to you at your planned entry price while reducing your cost basis.

Covered Calls Example

Here is an example. Let’s say you plan to buy XYZ at a target of $48. It is Monday, and your analysis has you expecting the price to hit your target by Friday, but the current share price is $49.

Looking at the options chain, you find that $48.50 puts expiring on Friday are trading at $0.90. If you sold this put and you were to be assigned, your cost basis would be $47.60 less any broker fees.

This scenario can go two ways.

If it’s 3:00 pm on Friday and your shortcut looks like it will expire in the money, you can make a choice. You can let it expire, and you will likely be assigned if it is even one penny in the money at market close.

Or you can buy your option back for probably around $0.05, pocket the fruits of time decay, and buy your shares anyway. This will save you assignment fees if your broker charges any and still reduce your cost basis.

Pushing Premium

Selling cash-covered puts is like getting paid to wait for the market to come to you. Selling covered calls is like renting out prime real estate or beachfront property. I refer to selling options as pushing premiums.

Like selling any other depreciating asset, the buyer is always disadvantaged whether the buyer profits from it. Think of it as a consumable product that consumes itself.

Short-term swing trading options traders must monitor their positions closely and are easily overwhelmed when in multiple positions. It’s harder for some to do their job if they are distracted with…life!

We option swing traders have a choice to be the ones selling options rather than buying them. Because of this, we have the advantage of being in a much more passive position and can, therefore, easily be in many positions at a time.

This is extremely beneficial if you are working a job and swing trading. You can check your positions whenever you get a chance and not panic about closing them if you execute your plan and strategy correctly.

Frequently Asked Questions

Swing trading is typically a safer strategy than day trading. However, that’s not always the case. Day trading requires you to make split-second trading decisions, which could cause traders to make poor trades. On the other hand, day traders aren’t in their positions as long as swing traders, which doesn’t open them up to potential black swan events.

Scalping and swing trading can both be profitable trading strategies. If you’re a consistent scalper, you could make as much more or more than a swing trader if you stick to your daily trading plan. It’s typically easier to scalp small gains daily, though, than it is to get bigger gains as a swing trader.

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