Two main approaches to investing in the stock market include passive and active investing. For the most part, passive investing doesn’t require investors to keep up with the day-to-day ins and outs of the market. However, active investing often does. Some active investors engage in a strategy called swing trading to generate extra income. To be successful at swing trading, investors must pay attention to swings in the market, which you’ll learn more about below.
What is Swing Trading?
Swing trading is a strategy active investors use that involves holding a position for a set period. It works by an investor looking out for market swings or upward and downward price movements and waiting for the right entry and exit points. The primary goal is to capture a robust enough price move to result in profit.
An investor may hold a position for anything from a couple of days to weeks. There are many parallels between swing trading and day trading-the primary difference is in the time an investor holds a position. Since investors hold positions for longer than a day, swing trading can be less time-consuming than day trading.
Swing traders use technical analysis to decide when to enter and exit the market and measure risk and reward. They often use daily charts to seek opportunities and 15-minute or one-hour charts to find entry and exit points.
How Swing Trading Works
Many steps are required to engage in swing trading, but one of the most important is choosing the right stock. Two characteristics of the ‘right’ stock include volatility and liquidity. Volatile stocks usually have adequate price movement, which is needed to create opportunities for traders to capitalize on a stock’s price going up in value. As it relates to liquidity, this is important so traders can quickly sell securities. Large-cap stocks usually fit into this category since they tend to be actively traded on large exchanges. Using stocks that aren’t liquid when swing trading could result in difficulty selling or giving steep discounts to sell the stock.
Once the right stock is chosen, traders need to identify where they think a stock’s price will move to, enter a position, and then wait for the right exit.
Swing trading can happen in any market be it a bear or bull market. There are unique challenges in swing trading in both markets. Because stocks are downtrend in a bear market, swing trading is more difficult. One way around that is to reduce the holding period. Bull markets, on the other hand, can be an easier market for swing trading since stocks tend to be on an upward trend. That said, because stocks are rising in value, entry points may be more expensive.
There is a middle area-when markets aren’t bull but aren’t bear-and that can create near-perfect conditions for a swing trader. Since there tends to be uncertainty in said markets, it can create the volatility often needed for successful swing trades. You may also be susceptible to lower losses since markets aren’t extremely high or low.
Swing Trading Techniques
Swing traders rely on multi-day chart patterns to help them compose a plan. More popular patterns they may utilize include strategies such as average crossovers, cup and handle patterns, head and shoulders patterns, flags, key reversal candlesticks, and triangles. The main objective is to devise a plan that helps a trader find predictable movement or patterns within an asset price, gives the trader a competitive edge, and results in profit.
Is Swing Trading Right for You?
Investors can benefit from swing trading, but it’s imperative they’re familiar with technical analysis to prove their odds of success. Market conditions also matter when swing trading is used, or it may not be as lucrative as anticipated. Traders must also know other risk factors like sudden market reversals or overnight and weekend risks.
