Swing Trading: What It Is and How It Works

Swing trading is a form of investing in the stock market where investors look to maximize short-term gains by using technical analysis to identify a stock’s short or medium-term direction. Swing trading shares some similarities to day trading, but there are key differences as well.

Swing traders may also sometimes incorporate fundamental analysis of the stock itself as part of their trading strategy. And swing traders will usually hold their positions longer than day traders, who usually look to liquidate their positions within the same trading day. It is common in swing trading to hold positions for a few days to a few weeks.

What Is Swing Trading?

Swing trading is a way to invest in the stock market using both technical analysis as well as fundamental analysis of individual stocks. A swing trader will look both at how a stock’s price has moved recently as well as the underlying business of the company whose stock it is. Using both, a swing trader will determine what stock to trade, and when.

Swing trading may involve holding a position for several days to weeks. Unlike day trading, where an investor usually looks to buy and sell multiple times within one trading day, swing traders have a slightly longer time horizon.

How Swing Trading Works

If you’re looking to start swing trading, you’ll want to first do some fundamental analysis of different companies, and find one where you have a bullish (or bearish) outlook. You might look at stochastic indicators, moving averages, or just wait for a down day in the market for a buy signal.

Example of Swing Trading

Here’s one look at an example of swing trading.

Suppose that a stock with ticker symbol XYZ has regularly oscillated in price between 40 and 50 over the course of the past few months. If you are generally bullish on XYZ, when the price drops back down to 40, that might be an indicator to buy. Then you can put a stop loss order near the resistance level of 50.

Benefits and Risks of Swing Trading

As with any trading or investment strategy, there are benefits and risks.

Benefits

•   Incorporates both technical and fundamental analysis in determining your investing.
Less of a daily time commitment may be required to monitor stock movements and trade as compared to

•   day trading.

•   Potential for higher returns on any given trade.

Risks

•   Compared to day trading, holding a trade for a longer period of time exposes you to overnight market risk

•   Actively trading stocks can subject you to volatile swings in the market

•   When focusing on short-term swings, you may miss out on larger market trends

Swing Trading Comparisons

Swing trading is also similar – but different – from different types of trading, such as day trading, scalping, and trend trading.

Day Trading vs Swing Trading

Day trading and swing trading share many similarities, but there are some key differences that you’ll want to be aware of. Both day trading and swing trading look for commodities that have high liquidity and high volatility.

The main difference between day trading and swing trading is the length of time that you hold any one investment. Day traders usually look to close their positions before the end of a trading day, while swing traders might hold positions for several days or weeks.

Scalping vs Swing Trading

One particular day trading strategy is scalp trading. In scalp trading, traders look to make many small trades throughout the day.

With each trade, the trader would look at the risk to reward ratio with the goal of being profitable on at least 50% of trades. Again, there are a lot of similarities between swing trading and scalping, but one big difference is that swing traders usually hold on to their position for several days or weeks.

Trend Trading vs Swing Trading

Trend trading is another way to invest in the stock market – you can review stock market basics to get a better idea of how the two may differ. But for now, trend traders look for overarching market trends, and tend to have a longer-term focus than swing traders. A good rule of thumb is that trend traders trade less often and hold their positions longer, while swing traders trade more frequently and hold their positions for a shorter period of time.

Swing Trading Tactics

If you’re interested in swing trading, there are several different swing trading strategies you can take advantage of. One popular way to swing trade is by trading stocks within the channel between a stock’s support price and resistance price, based on its historical movement. You can also use the MACD (Moving Average Convergence / Divergence) indicator as another way to find opportunities for swing trading.

The Takeaway

Swing trading is similar to day trading, in that you trade stocks based on technical indicators and hold your investments for a short period of time. Unlike day trading, swing traders will often hold their investments for longer than a day, and many swing traders will also use fundamental analysis in addition to looking at a stock’s chart information.

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FAQ

Is swing trading good for beginners?

Swing trading is considered more of an advanced concept, so beginners may want to take caution before trying swing trading. One option to consider would be doing “paper trading.” This is where you make simulated trades on paper without risking actual money. This may give you an idea of the risks, rewards, and volatility of swing trading.

Can you get rich swing trading?

It’s possible to get rich through swing trading, but the odds are against you. If you have the skill to identify good trading opportunities, the capital to back it up, and the stomach to handle volatile swings up and down, you can potentially make money with swing trading. If that combination doesn’t sound like you, you might want to consider other forms of investing.

How are swing traders taxed?

Unless you hold your investments for longer than one year, swing trading is taxed as ordinary income. So any net income from swing trading is taxed depending on your ordinary income tax rate, which goes from 10% to as high as 37%. You’ll want to make sure that you account for the taxes you’ll need to pay when you’re deciding if swing trading is right for you.

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Photo credit: iStock/izusek

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