How to Swing Trade Stocks – A Guide

Swing trading is a trading style that aims to create opportunities on short-term market movements over a period of days or weeks. 

The key idea is to identify when a stock (or any other security) is about to make a move to the upside or downside, and setting up a corresponding trade to take advantage of the anticipated price move.

By opening a position just before the share price rises or falls, a swing trader aims to ride the bulk of the price movement – aka the swing – before closing out at an appropriate time, hopefully having taken profits. 

Each swing trade is a self-contained event; after each buy-and-sell cycle is completed, the next trade begins. Swing trading is active, short-term trading, in contrast to passive, long-term investing centred on a “buy-and-hold” strategy.

Why swing trade stocks?

Swing trading offers the potential to create opportunities from the inherent volatility in the stock market. Yes, that statement pretty much applies to all forms of investing, but swing trading is unique in how it does so. 

Consider the typical investment scenario where you buy a stock in the hopes that its price would have risen after a period of time, say one year. 

If that is indeed the case, you may decide to sell your stock for the higher price, pocketing the difference as a profit. However, if the stock ends the year at a lower price, you would have to choose between holding on to the stock, or selling it for a loss. 

However, within that same one year, a swing trader can perform multiple trades,. 

Even better, the swing trader doesn’t have to worry about whether the stock price is up or down at the end of the one-year period. 

Also, note that because swing trades can capture value from both upwards and downwards price movements, swing traders can stand to benefit no matter which way the price goes, or where it eventually ends up.

Pros and cons of swing trading

Pros	Cons
Less time-demanding than day-trading	Carries overnight and weekend risks
Allows a trader to create opportunities over a short period of time by capturing the bulk of a price movement	Abrupt market movements can inflict significant losses
Can trade with high confidence by relying on technical analysis and having a focused approach	Forgoes long-term trends in favour of short-term price actions

What types of assets might be best-suited for swing trading?

Swing trading works best as a trading style when there is a sufficient level of price volatility and liquidity. The former provides opportunities, while the latter is necessary for traders to enter and exit their positions at the appropriate timings. 

Given these requirements, the stock market is highly suited to swing trading; in particular, large-cap stocks are among the best candidates for swing trades, as they typically are the most actively traded securities on the major exchanges.

Stocks that are highly traded are said to have high liquidity, and are preferred by swing traders. This is because it is easier to find buyers for such stocks, allowing swing traders to exit their positions at favourable prices.

In contrast, if a stock has low liquidity, a swing trader may be forced to exit their position at an unfavourable price. 

Is swing trading risky?

A swing trader aims to take advantage of the difference in stock prices over a relatively short time frame, which necessitates being comfortable with volatility. In fact, the more volatility there is, the higher the potential for gains, but also for losses.

Swing trades typically lasts over several days or weeks, which exposes traders to overnight and weekend risks. This is when a security experiences a discontinuity where its price either rises or falls from the previous day’s close with no trading occurring in between.

However, in fairness, swing trading could be less risky than day trading, which has a significantly shorter investment timeframe. Also, holding a security over a few days to a few weeks lessens the chances of holding a security that grinds down to zero over a long period.

Notwithstanding the above, swing trading carries all the typical risks that come with investing in the stock market, including the risk of losing your entire investment, or even having losses exceeding your capital.

How to swing trade stocks?

An investor may swing trade stocks by buying and selling shares, either with direct or indirect exposure to the equities being traded.

Direct exposure means buying and selling the actual stocks you want to trade on an exchange or through a brokerage.

Indirect exposure means making use of financial derivatives such as Contracts-for-Difference (CFDs) to gain exposure to the price action of the targeted stocks, without having to take actual ownership.

The difference is that using CFDs to swing trade stocks allows you to take a larger position with a smaller capital via leverage. 

While this may be preferable for those who want to trade without having to put down a large capital, be aware that the outcome of the trade will be amplified – whether it be a gain or a loss. 

In contrast, directly buying and selling shares without leverage offers better control against negative trading outcomes, but winning trades are similarly muted. Additionally, buying stocks directly will likely require a larger starting capital than when using CFDs.

Core skills and characteristics required in swing trading

Traders will need to have certain core characteristics and a moderate to advanced level of investing knowledge and technical skills.

Technical analysis

In swing trading, the crux lies in knowing how to figure out the optimal time to enter and exit your trades. 

This requires analysing a stock price chart – or, in other words, knowing how to perform technical analysis. 

The good news is, you may not need to have extremely advanced or deep knowledge here, but you’ll need to know enough to be able to spot trading signals when they are flashing at you.

Knowledge of trading tools

Along with technical analysis, you should also learn how to make use of relevant trading tools to help you execute your trades properly. 

For instance, you should learn how to set a stop loss to protect against downside risk, use charting tools to find Fibonacci retracements (no, that’s got nothing to do with the Da Vinci Code), and how to find simple moving averages to plan your trades, and more. 

Yes, it’s all quite technical and bewildering to the uninitiated, which should underscore the importance of establishing a solid grounding before jumping in.  

Discipline and focus 

Because swing trading is centred around short-term price action and sticking to predefined targets, traders must not let themselves deviate from the plan. 

Being swayed by breaking news, can result in loss of control over the trade, increasing the risk of a negative outcome. 

For this reason, a swing trader needs to have a high level of discipline and focus.