Swing trading, like all trading strategies, has its advantages and disadvantages. Swing trading consists of market participants attempting to profit from price swings of a minimum of one day and as long as several weeks. If proper risk management is implemented so losses are kept small and winning trades are allowed to grow, swing trading can be quite profitable. This article will discuss swing trading in greater detail, including the various strategies utilized, the risks involved, the best practices to follow, and how to get started.
How to Swing Trade
Understand the Basics
There are a number of different strategies swing traders use to identify and manage trading opportunities, and they will often combine strategies before deciding to move forward with a trading opportunity. Here are a few examples of some of the more popular technical charting techniques.
Breakouts: These occur when prices either move above key resistance levels or below key support levels on charts. When a market continues to run into support or resistance levels, then finally moves beyond these levels, a breakout could portend an acceleration in the direction of the breakout.
Moving averages: Swing traders will look at moving averages as possible catalysts for price to change direction near. Two of the more popular methods for using moving averages in this way are to use them as possible support and resistance levels, or as a moving average crossover system.
Chart patterns: Patterns and formations are a key component of technical analysis, and swing traders will look for certain patterns to identify potential trading levels and timing dates. Chart patterns can be as simple as trendlines, but they also include geometric patterns.
Pivot points: Taking an average of the closing price, the high, and the low is a basic pivot point calculation. Swing traders use pivot points to identify potential support and resistance points. Pivot points can be used to identify trading entry or entry points, or for determining where stop levels might be set.
Best Online Trading Platforms
|Fidelity||$0||$0 for stock/ETF trades, $0 plus $0.65/contract for options trade|
|Interactive Brokers||$0||$0 commissions for equities/ETFs available on IBKR’s TWS Light, or low costs scaled by volume for active traders that want access to advanced functionality such as order routing. $0.65 per contract for options on TWS Light; that is also the base rate for TWS Pro users, with scaled rates based on volume. $0.85 per contract for futures.|
|TD Ameritrade||$0||$0.00 for equities/ETFs.$0.65 per contract for options.Futures $2.25 per contract|
Steps Required to Open a Swing Trading Account
Swing trading is a reasonably straightforward process to engage in, but trading success requires discipline. The process entails the following:
Open an account: Opening a trading account with an online broker has become a fairly painless process. An account can usually be opened quickly by filling out an online application. Once a swing trader opens an account to trade stocks, they are also likely to sign both margin and option agreements that allow them to trade commodities, take short positions in stocks, and purchase options contracts. As part of this process, the trader will also have to provide information about their assets and net worth so the broker, under the know your customer rule, can verify that this type of trading is suitable for the customer.
Fund the account: While most stock brokerage accounts today don’t have any minimum deposit requirements to open an account, you need capital in your account to swing trade. Further, those looking to take short positions or utilize trading leverage require a margin account with at least $2,000 to meet FINRA’s minimum margin requirement for trading stocks on margin. Those looking to swing trade with futures will need capital in their accounts to meet both initial and maintenance margin requirements for positions held overnight, which are higher than the intraday margin requirements that apply to day traders.
Choose the market and trading vehicles to trade: Next, the trader will determine the market and trading vehicles to use for their swing trading. Options can include long and short positions in stocks, fixed income, futures, options, cryptocurrencies and foreign exchange.
Research and identify trading opportunities: Traders often use charts and other technical and quantitative tools to identify trading opportunities. This entails identifying the risk/reward ratio for the trader’s expectation to ensure it is a worthwhile trade to enter into. This process involves the trader determining if the trade will make enough to offset losses if it is unsuccessful. Another part of the trade identification process for the swing trader includes determining the amount of risk they are willing to endure on a particular trade. Part of the research will also include determining entry, exit, and stop loss levels, as well as the amount of time the trader should expect to be in the trade.
Enter, manage, and exit the trade: Once the research has been done, the trader needs to establish and manage their position. This is not always easy for traders, as the emotions of trading are a challenge to control. It requires discipline to stick to your level and take profits and losses without wavering from your trading plan. A consistent plan is the best approach, and the use of the sophisticated order types available at most online brokers helps make this happen.
What You Need to Open a Swing Trading Account
The personal information and documentation required to complete an online broker’s onboarding process typically includes:
- Your name
- Social Security number (or taxpayer identification number)
- Telephone number
- E-mail address
- Date of birth
- Government-issued ID, such a driver's license
Use Screeners to Find Swing Trade Ideas
The wide universe of available stocks can easily overwhelm a new swing trader, but there are helpful stock screeners now available to assist with selecting a stock. Most online brokers have their own free-to-use stock screeners built into their platforms, and there are also some excellent stand-alone stock screeners.
Stock screeners can search through thousands of stocks to identify stocks that meet the various fundamental and technical indicator criteria that the trader sets. There are also preset screens that can be used as is, or customized further by the trader.
Best Stock Screeners
|Stock Screener||Monthly Price||Best Features||Exchanges Followed|
|Trade Ideas||Starts at $118/mo.||AI-driven stock screener||U.S. and Canada|
|FINVIZ||Starts at $24.96/mo.||Vivid graphics and interactive charts||U.S. and global|
|Zacks||$249/yr.||Massive number of metrics||U.S. and global|
|Stock Rover||Starts at $7.99/mo.||Stock rating system||U.S. and Canada|
|TC2000||Starts at $9.99/mo.||Powerful screening tools||U.S. and Canada|
|TradingView||Starts at $14.95/mo.||Follows 130+ global exchanges||U.S. and global|
Factors to Consider When Opening an Online Brokerage Account
Customer service: Unlike long-term investors, who are willing to tolerate short-term market losses to maintain their long-term positions, markets move quickly for day and swing traders. While system outages and trading technology malfunctions are rare, they do occur, and that’s when having access to a comprehensive customer service offering matters most.
Fees and commissions: Fees and commissions are important for swing traders, as they can quickly cut into profits or add to losses. Traders need to weigh whether they want to use commission-free brokers or pay commissions and fees in exchange for better execution. While many day traders place a high value on execution speed, and are willing to pay a commission for control over order routing and trade execution, swing traders may not be as sensitive.
Those trading options and futures, however, should pay special attention to whether they are paying fees on one or both sides of their trades. Even brokers advertising “commission-free” option trading often charge a fee, and this could be on just one or both sides of a trade.
In addition to brokerage fees related to trade execution, margin is another important consideration for the swing trader. Swing trading stocks on margin is limited to 50% leverage for overnight positions, so you gain more exposure for profits and losses, but the margin rate of interest can easily cut into profits or add to losses. With higher interest rates come higher margin rates, so it is important for traders to include this additional cost in their risk capital calculations to avoid losing more than they planned on a trade.
Account minimums: While many brokers will let you open an account without any money, traders looking to trade on margin will need to deposit at least $2,000 to meet FINRA’s minimum margin requirements, and some brokers, especially for those looking to trade futures, require higher account balances to trade on margin.
Research and trading tools: Similar to day traders who rely on good execution and specific price points, trade execution is an important component of swing trading. This means that charting programs that offer multiple technical screeners to identify trading opportunities, as well as the ability to manage trades directly from charts, are important tools for the swing trader, not just nice-to-have features.
Because risk management is a critical part of successful trading, swing traders should look for a broker that offers a wide array of order types, such as trailing stops and conditional orders, so that they can effectively manage positions and lock in profits or take losses. Also, some swing traders prefer the ability to route their own orders in order to obtain the best trade execution possible. Similarly, tools such as options screeners and options calculators are also helpful tools for finding worthwhile trades, and for determining good trade entry and exit levels.
Educational content: It is critical for traders to understand the products they trade because mistakes are usually costly. Therefore, it is important for traders to understand the markets and trading vehicles they speculate in, and the risk to capital that they take. Also important is knowing how margin increases opportunities for profits and losses, and how to manage trades through different order types. It is incumbent on traders to do their homework and understand what they are doing before putting their capital on the line.
Portfolio margining: Portfolio margining is a feature offered by some brokers that might reduce overall margin requirements based on the overall portfolio of a trader engaged with futures and options trading. If positions have offsetting risk, this is netted out by the broker, and may result in less margin required of the trader.
Demo account: Also known as paper trading accounts, demo accounts allow traders to practice trading without having their capital at risk until they feel comfortable trading their chosen strategies. Demo accounts are fully functioning accounts, so the trader can practice using different order types and trade management tools while utilizing fictitious balances that allow you to see how trading profits and losses would impact portfolio performance.
What Is Swing Trading?
Swing trading is a market timing strategy where traders speculate on the direction of market price over short-to-medium-term time frames, ranging from one day to a few months. Swing trading can be utilized for any tradable security, including stocks, fixed income, commodities, currencies, cryptocurrencies, futures, and options.
The goal of a swing trader, like any trader, is to capitalize on price changes in the instrument being traded. Typically, swing traders use technical analysis techniques to identify trading opportunities and to determine entry and exit points for their trades.
One of the most important aspects for successful swing trading is to manage risk by identifying trades with positive risk/reward ratios, and using disciplined trade management techniques, such as stop loss orders, to preserve capital so it is available for their next trade.
What’s the Difference Between Swing Trading and Day Trading?
While swing trading and day trading share similarities, such as emphasizing the use of price charts to identify trading opportunities and determine entry and exit points, the two styles differ in practice because of the specifics of their time frames.
Holding period: Day traders trade during trading hours and do not keep positions overnight, while swing traders take overnight positions that they hold for anywhere from two trading days up to a couple of months.
Position size: Day traders often use large positions to capitalize on small price changes over very short periods of time, while swing traders take smaller positions that they hope to make larger, but still modest, profits on.
Use of margin: Day traders have access to more margin for trading stocks and futures that allow them to take larger positions, while swing traders are limited in the relative size of their positions because they can only have 50% margin for stocks and are subject to both initial and maintenance margin for futures positions they hold overnight or longer.
Trading frequency: Day traders trade in and out of the market frequently during the course of the trading day, while swing traders may only have a couple of positions on at a time, but hold them for days or possibly weeks.
Do Swing Traders Use Technical Analysis?
Yes, swing traders use technical analysis to identify trading candidates and the general trend of the market, and to choose entry, exit, and stop levels. There are many tools available to those utilizing technical analysis, among them trendlines, chart patterns, moving averages, channel lines, and Gann and wave analysis.
Is Swing Trading Risky?
There is risk associated with anything you decide to trade or invest in, and part of the question of risk is how you are using various products. With swing trading, there is risk because you are allocating capital to relatively short-term trading strategies. One risk of swing trading is that news and markets may move when the market is not open for trading, which can often lead to a large move in a market that can either benefit or hurt an open swing trading position.
Most successful swing traders look to enter trades where they have a favorable risk/reward ratio, and enter and exit trades with a specific plan for entry and exit. Swing traders are most successful when they are disciplined about taking small losses.
How Much Money Can I Make Swing Trading?
Swing trading can be very lucrative, but limiting losses and taking profits when available is the key to successful swing trading.
Can You Swing Trade With Any Stock or Option?
The short answer is yes, you can swing trade with any stock or option. However, traders should understand that less liquid stocks and options are weaker candidates because the lack of liquidity in these issues typically results in wider bid-ask spreads that can result in poor order fills and more slippage on stops.
SEC.gov. "Margin: Borrowing Money to Buy Stocks."