Intro to Swing Trading Stocks: Strategies and Indicators

[00:00] Swing trading is a short-term investing tactic  that tries to profit from fluctuations in the   price of an investment. Unlike a day trade, where  you enter and exit an asset in the same trading   session, a swing trade can last anywhere from a  couple of days to a couple of weeks. Those who  

[00:17] try to swing trade hope to compound returns and  increase their portfolio’s overall performance.   Let’s take a look at how some swing traders  approach stocks and some ways they manage risk.  Swing traders tend to use technical analysis to  determine when to enter and exit a trade, studying  

[00:34] price charts rather than relying on fundamental  analysis, or studying financial statements,   which is often used in other investing strategies. When analyzing a price chart, you’ll notice the   price rarely shoots straight up or drops straight  down. Instead, it’ll tend to move gradually toward  

[00:51] peaks and troughs. Swing traders want  to buy at a trough, ride the upswing,   and sell at the peak. Alternatively,  they’ll sell (or short) at the peak,  

[01:03] ride the downswing, and then close at the trough. Strictly speaking, swing trading refers to trading   the short-term trends between the peaks and  troughs, but the definition has broadened   over time to include most short-term trading. Despite focusing on the short-term swings,  

[01:19] swing traders usually trade with the  broader trend, which means taking the   upswing during uptrends and downswings during  downtrends. During a sideways trend, they can   try to trade both the up and the down movements. There are three components to a swing trade that  

[01:35] should be determined before placing a trade:  when to enter, when to exit, and how much to   trade. Let’s start with entries and exits. There are hundreds of ways for swing traders   to pick entries and exits. Many traders use basic  charting techniques, like support and resistance,  

[01:52] or price patterns, like flags and triangles.  Others use charting indicators like moving   averages and oscillators, which can  help provide more objective signals.  Because many swing traders start with support and  resistance levels, let’s use those for an example.

[02:07] It may help to think of support and  resistance like floors and ceilings   where the price of a security tends to  change direction within the larger trend.  There are two common entry signals  when trading on support and resistance:  

[02:21] a bounce and a breakout. A bounce occurs  when the price moves to a support or   resistance level and then heads back in  the other direction. Someone looking to   trade off it would set a target exit at the  previous level of support or resistance.

[02:35] For example, when Honeywell dropped near  $170, which was its previous low, it turned   higher again, creating a bounce. A swing trader  could use that bounce to enter a bullish trade  

[02:47] and set a target price at the previous high of  around $200. If the trade worked in their favor,   they could capture as much as $30 per share,  not accounting for any commissions or fees. 

[02:59] Another signal is a breakout, which occurs when  the price moves past a support or resistance   line. A trader would set a target by measuring  the previous distance between the support and   resistance lines, then adding that range to  resistance for bullish trades or subtracting  

[03:15] it from support for bearish ones. Let’s  look at another example. Schlumberger   was trading between $38 and $44 when the  stock broke above resistance—a breakout  

[03:27] signaling a potential entry. The range between  support and resistance was about $6, which, if   added to resistance, would show a target at $50. However, a trader determines entries and exits,  

[03:40] it’s important to have a plan in  case the unexpected happens. In fact,   it’s common to have two exits planned: for  if things go right or if things go wrong. Many swing traders use a proverbial  line in the sand known as a stop,  

[03:55] which helps them determine when to abandon a  trade that’s going the wrong way. For example,   a trader might decide to close this example trade  if the stock dropped to $43. Some traders use an  

[04:07] actual stop order, while others monitor  the price closely or by setting an alert   and then placing the order themselves. It’s important to know that stop orders   often don’t fill at the stop order trigger  price. When a stop order triggers it creates  

[04:22] a market order. When the stock next trades it  could be much different from the desired price.  Before actually placing a trade, traders should  determine how many shares to buy. A few factors  

[04:35] can help calculate how much to invest in a trade,  including the stop price and the portfolio risk. Let’s say we have $50,000 in a trading  portfolio and we’re willing to risk no   more than 1% of the portfolio on a trade,  or $500. This is the portfolio risk. 

[04:53] Next, we’ll divide the portfolio risk by  the trade risk, which is the difference   between entry price and stop price. For our  example, let’s say the trade risk was $2.

[05:05] If we divide the portfolio risk of $500 by  the trade risk of $2, we could buy 250 shares.  Of course, this is only one way swing traders  calculate their position size. You’ll want  

[05:17] to find a method most appropriate for you  and adjust it to fit your risk tolerance.  Comparing the trade risk to the potential reward  can also help determine if a trade is worthwhile.  Let’s say a trader bought a stock at $55 per  share with a target price of $60. They decide  

[05:34] to close the trade for a loss if the stock  falls $2. That means they’re risking $2 to   potentially make $5 (not accounting for any fees  or slippage). But if the target was $56, with the  

[05:47] potential to make $1 while risking $2, it could  mean that the reward may not be worth the risk.  There are other risks to swing trading, such as  the stock shooting past its target or failing to  

[05:59] make it to the target. In our first example, it  continued to climb past its target price and, if   the trader sold, they’d have missed out on those  gains. That’s a risk a swing trader must accept. 

[06:12] Then, in our second example, the stock came really  close to the target but didn’t quite make it,   before starting to fall. If the trader  was waiting to close at the target,   they would have missed out on the gain. One way  traders try to address this risk is by moving up  

[06:27] their stop orders as the stock increases to  attempt to lock in gains. Just remember that   relying completely on stop orders could result  in missing some potential gains and carries   the risk of orders not filling as expected. There are many ways to approach swing trading,  

[06:44] so get started by determining which techniques  and indicators best fit your trading style. Then   explore money management strategies that  work for your risk tolerance. Finally,   practice by paper trading your strategy before  putting your hard-earned dollars at risk.