Swing trading is trying to profit from short-term swings in the price action 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 charts 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 know the direction a stock will move. This gives you a heads-up as to whether 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.
Key Takeaways
- Swing trades usually last several days to several weeks.
- Swing traders commonly use daily and intraday charts to identify trends, support/resistance, entries, and exits.
- Swing trading generally requires less screen time than day trading.
- Holding positions overnight creates gap and event risk.
- Risk management and position sizing matter because no setup guarantees a profitable trade.
What Is Swing Trading?
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.
How Does Swing Trading Work?
When it comes to swing trading, there is a flow you want to learn. Because you’re going to be holding this trade for more than a day, you want to establish the larger trend and market conditions. That way, you have a sense of what direction you want your trade to go.
Next, you want to find a stock that’s liquid with your potential setup. Then you identify the entry you want as well as the stop-loss you want to put in place. Since you won’t be watching this every second, you want to make sure it won’t fall past what you’re willing to lose.
Then you have to determine what your position size is. And what your profit target is. How many shares do you want to buy, and what price do you want the stock to rise to for you to close out the trade?
Now you’re ready to monitor your position until one of three things happens. The stock reaches your price goal, you were stopped out, or your trading viewpoint changed.
How to Find Stocks for Swing Trading
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.
Liquidity in trading is king. 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 it comes to how to find stocks for swing trading, you need good trading volume that pairs with liquidity. You’re 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. Knowing how to read a chart, patterns, and technical analysis is key to conquering swing trading. Create a good game plan and practice on paper before using real money.
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.
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
| Factor | Swing Trading | Day Trading |
|---|---|---|
| Holding period | Days to weeks | Positions generally closed the same trading day |
| Overnight exposure | Yes | Typically no |
| Screen time | Usually lower | Usually higher |
| Common analysis | Technical + market/catalyst context | Technical + intraday price/volume |
| Trade frequency | Lower | Higher |
| Key risk | Overnight/weekend gaps | Rapid intraday losses/execution risk |
Swing Trading Pros & Cons
Pros:
- Less continuous screen time
- Potentially compatible with a job
- More time to analyze setups
- No need to react to every intraday fluctuation
Cons:
- Overnight gap risk
- Weekend risk
- Earnings/news/event risk
- Capital can remain tied up for days/weeks
- Stops can’t guarantee the intended exit price after a gap
- Opportunity cost because capital is already committed
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.
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.
Commitment
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 you have some breathing room.
It’s possible to profit from swing trading part-time while holding a full-time job in something else.
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.
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.
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.
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.
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.
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Find the lowest support from the previous fall and use that as a profit target.
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.
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.
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.
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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.
