[00:00] Swing trading is a short-term investing tactic&nbsp; that tries to profit from fluctuations in the&nbsp;&nbsp; price of an investment. Unlike a day trade, where&nbsp; you enter and exit an asset in the same trading&nbsp;&nbsp; session, a swing trade can last anywhere from a&nbsp; couple of days to a couple of weeks. Those who&nbsp;&nbsp;
[00:17] try to swing trade hope to compound returns and&nbsp; increase their portfolio’s overall performance.&nbsp;&nbsp; Let’s take a look at how some swing traders&nbsp; approach stocks and some ways they manage risk.&nbsp; Swing traders tend to use technical analysis to&nbsp; determine when to enter and exit a trade, studying&nbsp;&nbsp;
[00:34] price charts rather than relying on fundamental&nbsp; analysis, or studying financial statements,&nbsp;&nbsp; which is often used in other investing strategies. When analyzing a price chart, you’ll notice the&nbsp;&nbsp; price rarely shoots straight up or drops straight&nbsp; down. Instead, it’ll tend to move gradually toward&nbsp;&nbsp;
[00:51] peaks and troughs. Swing traders want&nbsp; to buy at a trough, ride the upswing,&nbsp;&nbsp; and sell at the peak. Alternatively,&nbsp; they’ll sell (or short) at the peak,&nbsp;&nbsp;
[01:03] ride the downswing, and then close at the trough. Strictly speaking, swing trading refers to trading&nbsp;&nbsp; the short-term trends between the peaks and&nbsp; troughs, but the definition has broadened&nbsp;&nbsp; over time to include most short-term trading. Despite focusing on the short-term swings,&nbsp;&nbsp;
[01:19] swing traders usually trade with the&nbsp; broader trend, which means taking the&nbsp;&nbsp; upswing during uptrends and downswings during&nbsp; downtrends. During a sideways trend, they can&nbsp;&nbsp; try to trade both the up and the down movements. There are three components to a swing trade that&nbsp;&nbsp;
[01:35] should be determined before placing a trade:&nbsp; when to enter, when to exit, and how much to&nbsp;&nbsp; trade. Let’s start with entries and exits. There are hundreds of ways for swing traders&nbsp;&nbsp; to pick entries and exits. Many traders use basic&nbsp; charting techniques, like support and resistance,&nbsp;&nbsp;
[01:52] or price patterns, like flags and triangles.&nbsp; Others use charting indicators like moving&nbsp;&nbsp; averages and oscillators, which can&nbsp; help provide more objective signals.&nbsp; Because many swing traders start with support and&nbsp; resistance levels, let’s use those for an example.
[02:07] It may help to think of support and&nbsp; resistance like floors and ceilings&nbsp;&nbsp; where the price of a security tends to&nbsp; change direction within the larger trend.&nbsp; There are two common entry signals&nbsp; when trading on support and resistance:&nbsp;&nbsp;
[02:21] a bounce and a breakout. A bounce occurs&nbsp; when the price moves to a support or&nbsp;&nbsp; resistance level and then heads back in&nbsp; the other direction. Someone looking to&nbsp;&nbsp; trade off it would set a target exit at the&nbsp; previous level of support or resistance.
[02:35] For example, when Honeywell dropped near&nbsp; $170, which was its previous low, it turned&nbsp;&nbsp; higher again, creating a bounce. A swing trader&nbsp; could use that bounce to enter a bullish trade&nbsp;&nbsp;
[02:47] and set a target price at the previous high of&nbsp; around $200. If the trade worked in their favor,&nbsp;&nbsp; they could capture as much as $30 per share,&nbsp; not accounting for any commissions or fees.&nbsp;
[02:59] Another signal is a breakout, which occurs when&nbsp; the price moves past a support or resistance&nbsp;&nbsp; line. A trader would set a target by measuring&nbsp; the previous distance between the support and&nbsp;&nbsp; resistance lines, then adding that range to&nbsp; resistance for bullish trades or subtracting&nbsp;&nbsp;
[03:15] it from support for bearish ones. Let’s&nbsp; look at another example. Schlumberger&nbsp;&nbsp; was trading between $38 and $44 when the&nbsp; stock broke above resistance—a breakout&nbsp;&nbsp;
[03:27] signaling a potential entry. The range between&nbsp; support and resistance was about $6, which, if&nbsp;&nbsp; added to resistance, would show a target at $50. However, a trader determines entries and exits,&nbsp;&nbsp;
[03:40] it’s important to have a plan in&nbsp; case the unexpected happens. In fact,&nbsp;&nbsp; it’s common to have two exits planned: for&nbsp; if things go right or if things go wrong. Many swing traders use a proverbial&nbsp; line in the sand known as a stop,&nbsp;&nbsp;
[03:55] which helps them determine when to abandon a&nbsp; trade that’s going the wrong way. For example,&nbsp;&nbsp; a trader might decide to close this example trade&nbsp; if the stock dropped to $43. Some traders use an&nbsp;&nbsp;
[04:07] actual stop order, while others monitor&nbsp; the price closely or by setting an alert&nbsp;&nbsp; and then placing the order themselves. It’s important to know that stop orders&nbsp;&nbsp; often don’t fill at the stop order trigger&nbsp; price. When a stop order triggers it creates&nbsp;&nbsp;
[04:22] a market order. When the stock next trades it&nbsp; could be much different from the desired price.&nbsp; Before actually placing a trade, traders should&nbsp; determine how many shares to buy. A few factors&nbsp;&nbsp;
[04:35] can help calculate how much to invest in a trade,&nbsp; including the stop price and the portfolio risk. Let’s say we have $50,000 in a trading&nbsp; portfolio and we’re willing to risk no&nbsp;&nbsp; more than 1% of the portfolio on a trade,&nbsp; or $500. This is the portfolio risk.&nbsp;
[04:53] Next, we’ll divide the portfolio risk by&nbsp; the trade risk, which is the difference&nbsp;&nbsp; between entry price and stop price. For our&nbsp; example, let’s say the trade risk was $2.
[05:05] If we divide the portfolio risk of $500 by&nbsp; the trade risk of $2, we could buy 250 shares.&nbsp; Of course, this is only one way swing traders&nbsp; calculate their position size. You’ll want&nbsp;&nbsp;
[05:17] to find a method most appropriate for you&nbsp; and adjust it to fit your risk tolerance.&nbsp; Comparing the trade risk to the potential reward&nbsp; can also help determine if a trade is worthwhile.&nbsp; Let’s say a trader bought a stock at $55 per&nbsp; share with a target price of $60. They decide&nbsp;&nbsp;
[05:34] to close the trade for a loss if the stock&nbsp; falls $2. That means they’re risking $2 to&nbsp;&nbsp; potentially make $5 (not accounting for any fees&nbsp; or slippage). But if the target was $56, with the&nbsp;&nbsp;
[05:47] potential to make $1 while risking $2, it could&nbsp; mean that the reward may not be worth the risk.&nbsp; There are other risks to swing trading, such as&nbsp; the stock shooting past its target or failing to&nbsp;&nbsp;
[05:59] make it to the target. In our first example, it&nbsp; continued to climb past its target price and, if&nbsp;&nbsp; the trader sold, they’d have missed out on those&nbsp; gains. That’s a risk a swing trader must accept.&nbsp;
[06:12] Then, in our second example, the stock came really&nbsp; close to the target but didn’t quite make it,&nbsp;&nbsp; before starting to fall. If the trader&nbsp; was waiting to close at the target,&nbsp;&nbsp; they would have missed out on the gain. One way&nbsp; traders try to address this risk is by moving up&nbsp;&nbsp;
[06:27] their stop orders as the stock increases to&nbsp; attempt to lock in gains. Just remember that&nbsp;&nbsp; relying completely on stop orders could result&nbsp; in missing some potential gains and carries&nbsp;&nbsp; the risk of orders not filling as expected. There are many ways to approach swing trading,&nbsp;&nbsp;
[06:44] so get started by determining which techniques&nbsp; and indicators best fit your trading style. Then&nbsp;&nbsp; explore money management strategies that&nbsp; work for your risk tolerance. Finally,&nbsp;&nbsp; practice by paper trading your strategy before&nbsp; putting your hard-earned dollars at risk.