Swing traders use a slightly longer time horizon than do day traders, watching a stock for weeks or months before trading. They try to follow the momentum of the stock market when buying stocks. When markets are moving to the upside swing, traders will buy stocks that fit whatever criterion they are using to select stocks, selling when this swing in the market has topped or nearing what they have calculated to be the top.
This type of stock market trading relies on careful monitoring of fundamental and technical analysis. Swing traders often specialize in a certain business or industry so that they become experts in the movement within those stocks. They also have more time to study the company financial reports and industry forecasts.
Since swing trading does not require hours of daily monitoring, it is a good strategy for the trader who wants to make money from stock market trading without turning it into a full time job. Even the study of reports could be done during the daily commute or lunch hour so that the swing trader stays well informed.
The core philosophy behind swing trading
The concept is easy to understand. Stocks go through four stages:
- The Basing Stage: Stocks consolidate as buyers and sellers move into equilibrium.
- The Advancing Stage: After a breakout from stage one, stocks move into an uptrend - the second stage.
- The Top Area: The uptrend stalls and the stock tops out. This is where you likely see a head and shoulders pattern or a double top.
- The Declining Stage: The stock now falls into a downtrend as the sellers take over and drive the stock to lower prices.
This cycle is repeated over and over again for every stock in all time frames. Here is a graphical representation of the four stages:
Example: Now take a look at the following stock, Loews Corporation (NYSE: L):
After a consolidation period, this stock broke out in May, where it went through a stage two uptrend. This is the time to be a buyer: at pullbacks on the uptrend - stages within stages - Point A or Point B.
And the cycle is expected to repeat
Also, when a stock is in an uptrend, and closes over the previous swing point high on increased volume, then the trend is "confirmed" and has a higher probability of continuing higher than if the stock closed over the previous swing point high on lower volume.
When a pullback stops going down, the cycle starts over. It is in stage one.
Now, the swing trader looks for a signal (candlestick pattern) that the stock is moving into a new “mini uptrend” (stage two). This is where they buy the stock. And if it moves higher, they have a winning trade (assuming that they can get out at stage three - before stage four!)
This is the core philosophy behind swing trading: trading the stages within stages or “trading the swings.”
Advantages of swing trading
The advantages of swing trading over other forms of trading are numerous:
- The anticipated returns tend to be higher than what a buy and hold investor would expect, making swing trading an ideal way to "trade for a living." It is important to remember, however, that like all forms of trading, swing trading is susceptible to market fluctuations and cycles. One needs to be very careful to set aside funds during the good months in order to have money available to pay the bills during the lean months. And as with any form of trading or investing, there certainly will be lean months.
- When trades are executed properly, the swing trader will experience much less risk than the long-term player. Long-term investors are forced to ride out the bear market syndrome, whereas swing traders have the freedom simply to exit losing trades and step aside. Or they can short the market and make money while the investing world suffers through a drawdown.
- Swing traders are not committed to watching the market fluctuations. They can do their market research in the evening when the markets are closed, and place any new trades the next morning when the markets open. Once their trades are executed, they can input their target and stop loss orders and then turn off the computer and go about other business. While the potential returns of overnight and day trading are greater, swing trading offers a more efficient - and hence more attractive - return due to its less labor-intensive requirements.
- Finally, to swing trade well, there is no:
- Poring over financial statements as with buy-and-hold investors,
- Catching market tops and bottoms as with position traders,
- Seeing the bulk of your profits evaporate on overnight gaps that go against you as with overnight traders, or
- Learning the sophisticated trading platforms, software and devices required for day traders.
Swing trading provides the greatest amount of return for the least amount of work of any trading style! And you follow one simple rule - “Trade in the direction of the market.” In other words, if the market is trending up, trade long positions. If the market is trending down, trade short positions - a greater chance of success is ensured.Buy and Hold Traders
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