When you’re an investor, you want as many opportunities to profit as possible. Learning how to swing trade stocks gives you another tool in your toolbox.
Maybe you’ve already tried day trading strategies, but you want to expand your knowledge base. Or perhaps you’re interested in day trading and swing trading at the same time. Either way, I can help you understand what swing trading is and how to profit from it while mitigating your risk of loss.
Let’s take an in-depth look at the basics of how to swing trade stocks and how you might benefit from this strategy.
What Is Swing Trading?
Swing trading is an investment strategy in which you trade stocks over a period of one day or longer. In many cases, you’ll only hold your position for two or three days — or even just overnight — but you might hang onto some positions for as long as two weeks.
The purpose of learning how to swing trade stocks is to give you opportunities to profit quickly based on a given stock’s price action.
For instance, you might enter a trade at 1 p.m. on Monday and exit on Thursday at 11 a.m. The profits depend on the price movement. If you caught a good upswing or downswing with a large position, you could profit thousands of dollars. Even small profits, however, help work against your losses.
Why Should You Swing Trade Stocks?
The main benefit of learning how to swing trade stocks is that you don’t have to tie yourself to your trading software. Maybe you work a nine-to-five job, and you use trading to pad your salary. Since you’re planning to hold the stock over multiple days, you can set your stop losses and feel confident in your trades.
Additionally, when you swing trade stocks, you can spend more time researching each play. Day trading strategies often require split-second decisions because the play might only last a few minutes or hours. Swing traders look for consistent patterns, which I’ll describe more below, to take advantage of trends in the stock market.
What Does it Mean to Go Long or Short?
When you swing trade stocks, you can take a long position (go long) or a short position (go short). These two terms describe whether you’re bullish or bearish on the stock.
Let’s say you’re bearish. You believe the stock price will decline. You can then short the stock, which requires you to borrow shares from your brokerage firm, sell those shares, and buy them back again when the stock dips days later. You profit the difference after returning borrowed shares to your broker.
Going long is far more straightforward. A long position means you’re bullish — you expect the stock price to climb. You buy shares in the stock and hold until you’re ready to sell at a higher price point.
What Do Stock Trends Look Like on Charts?
Many people who swing trade stocks rely exclusively or primarily on stock charts. They’re looking for familiar patterns that, historically, have preceded an upswing or downswing.
Most chart patterns are named after what they look like. For example, a pennant pattern looks like an obtuse triangle, while a flag looks like a fabric flag on a pole.
You can use these patterns to predict what a stock’s movement will do next. This is because patterns tend to repeat themselves.
What Is a Countertrend?
Countertrends occur when a stock’s price moves in the opposite direction of its recent activity. The lowest point of a bullish countertrend, for instance, is often called a dip. If you can buy at the dip, you’ll ride the subsequent upswing and profit from the trade.
It’s important to notice countertrends when you swing trade stocks because they help predict your next viable entry point. It’s not an exact science — nothing in the stock market is — but it can help you mitigate your risks and increase your chances of scoring a profitable play.
What Is an Overnight Hold?
An overnight hold means that you buy or short stock on one day, then sell it the following day, often right after the market opens. There are risks associated with overnight holds, especially if news breaks after the market closes, but you can also increase your profits this way when you swing trade stocks.
How Are Swing Trading Strategies Different From Day Trading Strategies?
Day trading strategies involve shooting for short-term gains based on familiar patterns in a stock chart. You don’t care what the stock does tomorrow, next week, or next year. Instead, you’re focused on profiting in the shortest time span possible.
Some of the most sophisticated day traders enter and exit positions within seconds. They’re capitalizing on large positions in microcap stocks.
What Are the Risks With Swing Trading?
Every investment comes with risks. If you swing trade stocks, you risk exiting the trade too quickly or waiting too long to exit, which could result in losses.
The overnight risk, however, is what keeps people from swing trading stocks most often. They don’t like that empty time between market closing and market opening.
What Are Support and Resistance?
Two of the most important terms you need to know to swing trade stocks are support and resistance. It’s easy to remember them because support is at the bottom and resistance is at the top. Think of it like holding an object by the base to support it.
Support is the price point beneath which a stock’s price doesn’t fall, while resistance is the price point beyond which it won’t rise. A stock can maintain consistent support and resistance. On other occasions, you see a gentle (or steep) rise and fall, which means that the stock is more volatile.
If a stock cracks support, it falls below the trendline; similarly, if it breaks resistance, it shoots up. Taking advantage of these two events by buying or shorting can result in huge profits.
How Long Should You Hold Onto Your Shares?
Deciding how long to hold when you swing trade stocks depends on the particular situation. Let’s say you dip-buy a stock after it countertrends downward because you believe in a subsequent upswing. That happens, but you have to exit the trade before it begins another countertrend.
Never try to ride the whole wave. In other words, if you think a stock’s price will top out at $15, don’t wait to sell at $15. Exit the trade sooner to protect yourself against potential losses. If your prediction proves incorrect, you could lose money on the trade.
Can You Trade Options With Swing Trading?
Yes, you can combine options trading with swing trading. It works the same way as it would with any other options contract. In fact, many investors prefer to use options when they swing trade stocks because it limits your exposure to risk.
The reason is that you don’t have to fulfill your options contract. If the stock moves against you, simply let the options contract expire. You’ll still lose the money you paid your broker to execute the contract, but you’ve capped your losses at that amount.
Does it Matter if You’re Bullish or Bearish?
You can swing trade stocks whether you’re bullish or bearish on a security. It all depends on whether you’re willing to go short.
Some people hate short selling. It’s confusing for beginning traders because there are more players and variables involved, but it’s also a great way to keep the profits going in a bearish market.
Think back to the 2008 financial crisis. Lots of people lost thousands of dollars in the stock market because their long-term investments became worthless almost overnight. When you swing trade stocks, you insulate yourself from some of those huge losses. Plus, you find that you can trade regardless of whether we’re in a bearish or bullish market overall.
Taking what you’ve learned from day trading strategies can make it easier to swing trade stocks. Many of the same principles apply, so you’re already ahead of the game. However, remember that holding overnight or for several days can introduce additional risk.
If you want to learn how to swing trade stocks effectively and to profit more consistently from your trades, join The 10-Minute Millionaire. I’m here to steer you in the right direction through thoughtful, experienced-based plays. Hundreds of people have already profited from my expertise, so why shouldn’t you?