What Is Swing Trading?

When people mention the word “swing,” it brings a sense of happiness to our subconscious. Swing Dancing for those baby-boomers who love to “cut a rug.” Swing as in swinging on the playground or in the backyard as a child on a warm summer day (unless you got smacked in the head with one). Swinging the lifestyle for those adults who engage in it that are purely seeking pleasure. But when you mention the word swing to investors, many ask the question: What is Swing Trading?

To really profit in the stock market, whether its penny stocks or blue chips, it’s essential to adopt a strict, disciplined approach to stock trading. It is also just as important to keep things simple. Well, while trying to keep things simple, stock trading rules may, at first, seem a bit complicated. Once you learn and adopt the rules and trade with discipline, you will profit higher than before in the stock market.

Swing trading permits you to profit in stocks whether the market is bullish, or bearish, or even just going lateral. This is why swing trading in stocks has a noticeable advantage over other approaches to investing. When the end goal is to make profits, do not rest your hopes on the future of a stock, sector, or the economy as a whole.


Swing Trading Defined

Whether you have been to the beach or not, everyone is familiar with waves. A wave alternates from positive to negative, then back to positive and negative, continually repeating the pattern. Sound is also transmitted in waves. Most important for this topic, when stock prices change, they also follow a wave pattern. The wave is very seldom as orderly a sine wave, yet they are still waves nonetheless, and investors these waves in Swing Trading.

Swing Trading Uptrends
You will notice on any stock that you are checking that after the price moves up, it seems to take a rest, or pull back. When you swing trade an uptrend, you buy on the pull-back. An uptrend can be recognized by a series of higher highs and higher lows (the bottom of each pull-back). Basically, an uptrend is a series of successive rallies with each individual rally within the series going higher than the previous one and each pull-back stopping above the previous one. The stock price movement looks most similar to the zig-zag of a saw blade. Once an uptrend is established, the pattern tends to repeat itself.

In swing trading, investors capitalize on the predictability of this pattern. You buy during the pull-back to enhance your chances of making a profit.

Swing Trading Downtrends
Again, you can notice on any stock that you are checking that after the price moves down, it seems to takes a rest, or pulls up. The price movement follows a zig-zag pattern again. A downtrend can be recognized by the reverse of an uptrend; a series of lower lows and lower highs (the peak of each pull-up). When you swing trade a downtrend, you sell short during a pull-up. If you are not familiar with short selling, follow along as we will cover that later.

The Steps of Swing Trading

First things first. Restrict the selection of stocks that justify the required criteria. Choose from stocks that have an price of at least $1 and have an average daily volume of at least 500,000 shares. Then identify stocks that are in either an uptrend or a downtrend. For stocks in an uptrend, identify the ones that are undergoing a pull-back. For stocks in a downtrend, identify those that are undergoing a pull-up.

Once a suitable candidate stock is detected, place a limit order to purchase (uptrend) or sell short (downtrend) the stock based on you master plan which is to profit. Once you have traded a stock, place a stop-loss order to limit your downside risk and place a limit order to pinpoint the price at which you will sell and take your profits. These two orders should be placed together as what is known as an OCO (One Cancels Other) order. It sometimes is also called an OCA (One Cancels All) order.

At the end of each trading day, adjust the stop loss prices based on the anticipated profit.

what is swing trading?

What to expect from Swing Trading

Understand that not all of your trade orders will be executed. Your plan to profit from swing trading is intended to only trade stocks that initially move in the projected direction. Should the price of a stock move in the opposite direction (continues pulling back or pulling up), the trade will not be placed. What you will wind up holding are positions for a limited amount of time. Not to be confused with day trading, in swing trading, you are only holding positions until target prices are met. It’s a system that works but some of your trades will still result in losses. However, losses are minimized by raising the stops as the stock price rises, better known as trailing stops.

Being disciplined, and following the ordering process will assure that profits surpass losses which means: you will make profits.

Identifying Suitable Stocks to Swing Trade
All of the various methods used to detect suitable stocks that are appropriate for swing trading are mainly based on technical analysis. Technical analysis uses historical price and volume patterns to predict future performance of a stock. It is not necessary to have an MBA in technical analysis so you can swing trade. There are adequate tools available that can aid investors, from expert to novice. Once you comprehend the philosophies, you can explore stocks for swing trading more easily.

Recognizing Patterns
When scanning a stock chart, you can often tell whether or not a stock is suitable for swing trading.  It can seem to be very time consuming to look at stock charts all day, particularly if you look for opportunities every day. One section we provide – How to read a Stock Chart – will make the time spent reviewing stock charts more efficient.

Another good way to pinpoint stocks for swing trading is to spend some money and purchase software that scans all of the listed stocks based on a series of algebraic equations. These equations represent the characteristics of a good chart pattern. SwingTracker is a pretty good piece of software to use to accomplish this task. Some of the measures of the algebraic equations are simple descriptive variables (the high price from the previous day or the average volume over the past 20 days).

Technical analysis has many different indicators, from a simple moving average to a complex oscillator. It is not necessary to have such an in-depth understanding of technical analysis to be a successful swing trader. It is however helpful to have a rudimentary awareness of how to approach swing trading pattern recognition

Technical Analysis Measures used to Recognize Swing Trading Patterns

Typically we confine our choices to stocks that are at least $1 in price, having an average (20 day) daily volume of at least 500,000 shares. Market makers can more easily manipulate low price, low volume stocks so we stay away from them. For long swings, you should be interested in recognizing stocks that are in an uptrend. One of the indicators you should use is a simple moving average (SMA). Simply put, a moving average is the average closing price for a set number of days. The term moving average fits because on each new trading day, the current day’s closing stock price is added to the average while the oldest closing stock price is dropped. Typically, you should focus on three moving averages,10 days, 20 days and 50 days. All of these moving averages smooth the price movement and make it simpler to recognize trends.

It is also very important to acknowledge where today’s stock price is in relation to the moving averages and whether or not the shortest timeframe moving average is above or below the longer timeframe moving average.

Two markers that a stock is in an uptrend are:

• Today’s closing price is above both the 10 and 20 day moving averages, and

• The 10 day moving average is above the 20 day moving average

When searching for a long swing, recognize stocks that are experiencing a short, brief decline (pullback).

 We can identify a 3 day pullback like so:

• Today’s high price is lower than yesterday’s high price, and

• Yesterday’s high is lower than the high from the day before

Dr. Alexander Elder developed a technical indicator called the Force Index. The Force Index combines the degree of the price change together with the direction of the price change coupled with the trading volume. In order to validate the relative force behind an uptrend and a pullback, use a 3 day moving average and a 13 day moving average of the Force Index.

When a bear trend hits a bullish market, you will notice the following: 

• The 3 day moving average of the Force Index is less than 0, and

• The 13 day moving average of the Force Index is greater than 0

J. Welles Wilder Jr. developed another technical indicator used is the Directional Movement Index (DMI) to determine whether or not a stock is trending (moving sideways).

Entry and exit trading laws that assure successful swing trading
If you are going to be swing trading, you need a plan of attack – a Profit Plan. A Profit Plan is a set of rules you adopt to determine when to enter and exit a trade. In the beginning, it might seem a little complex, but once you have placed a couple of trades using the swing trading system, you will soon see it really is quite simple. The greatest part of the Profit Plan is that you don’t need to use your own judgment. The rules are mechanical. Two unavoidable obstacles to successful swing trading are fear and greed created by human emotions. By following the Profit Plan, you will not be influenced by these emotions, nor will they restrict your success.

swing trade stocks

The secret to swing trading success:

  • Confidence
  • Discipline
  • Focus
  • Patience

Swing Trading Profits and Protecting Assets

Setting a profit target and protecting assets is the most important part of your profit plan with swing trading. The method is quite conservative: the profit target is approximately 10% with a potential loss capped at 3%. The actual profit is likely to be more than 7% while a loss is likely to be smaller than 2%. This is how it works:

• Once the target stock price triggers (10% above the entry price), half of the shares are sold, locking in a 10% profit. The remaining shares stay invested to take advantage of any further increase in stock price.

• Should the stock price move against the trade, the maximum loss tolerated is 3%. This protects your assets for future trades.

• Normally, more trading will produce more profits than losses. The net result is profit.

• The momentum of the entire stock market is extremely powerful. When the markets are moving with your stock trades, an extremely high percentage of your trades will be profitable.

• When the entire market is moving against your trade, a more than expected percentage of your trades will lose. The stop loss protects you from excessive losses.

Point #1: Using a “sell limit” order once the stock price is reached, the specified number of shares are sold. The net result: profit. 

Point #2: Assets are preserved using a “stop loss” order when the stop price is reached, all the shares are sold.

When to Swing Trade

Swing trading prospects are identified after the market closes. Thus, this is something you can do in the evening or early morning hours depending on your schedule. Swing trades are entered in the morning, usually within the first half hour of market trading. When you enter a trade (and the decision rule you use) solely depends on whether your prospect stock has gapped up or down from the previous day’s closing price. A stock is measured to have gapped up when it opens 5% or higher than the previous day’s close. A stock is measured to have gapped down when it opens 5% or lower than the previous day’s close. Usually, the stock price will open within 5% of the previous day’s close, neither gapping up nor gapping down.

Most commonly, your prospect stock opens within 5% of the previous day’s close so the order can be placed a few minutes after the market opens. Although, should a prospect stock gap up 5% or more compared to the previous day’s close, the order should be placed at least 30 minutes after the market opens. Once in a while, your prospect stock gaps down 5% or more compared to the previous day’s close. If so, the order is placed around 5 minutes after the market opens.

In Summary:

If the stock gaps in the same direction as the trade, wait 30 minutes

If the stock gaps in the opposite direction of the trade, wait 5 minutes

swing trade results

How to move into a swing trade
Just like when to swing trade, how to move into a swing trade depends on if the prospect stock gaps up or down or neither. Normally, the prospect stock price doesn’t gap up or down and the entry price is based on the previous day’s stock price. If the prospect stock gaps up or down, the entry price is not based on the previous day’s prices, but rather on the current day’s prices. If based on the previous day’s prices or the current day’s prices, the entry rules are still the same.

Now What to Do?
The exit orders are placed once the trade is executed. The profit order, a “sell limit” order, is placed at a price that is 10% above the entry price. The asset protection order, a “sell stop” or “stop limit” order, is placed at 3% below the entry price or 6% below the low of the day that was used for the trade, whichever is higher. For a stock that opened without any gap, the previous day high and low sets the prices; for a stock that opened with a gap, the price action before the day, high and low, sets the prices.

The following day’s activity depends on whether the prospect stock gaps up, down or not. If the stock price doesn’t gap up or down, the “stop loss” is changed based on the previous day’s prices. If the stock gaps up or down, the “stop loss” is changed based on the current day’s prices. Whether based on the previous day’s prices or the current day’s prices, the stop loss rule is the same.

When the stock opens within 5% of the previous day’s close and if 6% below the previous day’s low is higher than yesterday’s stop loss, raise the stop loss to this new price. This is known as raising the trailing stop which further limits the downside risk.

When the stock gaps up or down 5% or more , wait 30 minutes for a gap down or 5 minutes for a gap up and if 6% below the today’s low is higher than yesterday’s stop loss, raise the stop loss to this new price

If a Trade is Not Executed
If your trade is not executed on the day the order is placed, you can repeat the process for up to 5 trading days. If the stock gaps up or down, wait the recommended amount of time, 30 minutes for a gap up and 5 minutes for a gap down,  and determine the entry and exit prices based on the current day’s prices. If the stock opens within 5% of yesterday’s close, the entry and exit prices are based on the previous day’s prices.

Once half the shares close at a 10% profit, the other half remains open to “ride the wave”.

Closing the second half of the trade
A trailing stop is placed to close the 2nd half of the trade. A trailing stop is used to raise the sell stop (stop loss) during the trade. The remaining shares are sold when the price drops 6% below the low of previous day if there is no gap on the open or the current day if there is a gap on the open.

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