Probably the biggest trend in investing today is passive investing. That’s where you invest in indexes of underlying markets, without choosing any individual stocks.
The process involves the use of low cost, index-based exchange traded funds (ETFs), that when blended in the proper allocation, provides a relatively low risk way to take advantage of major upward moves in the general markets.
But passive investing has limitations. First, you’ll never outperform the underlying markets. And second, when the underlying markets decline, they’ll take your portfolio value down with them.
After all, there’s no absolutely risk-free way to invest in the financial markets, even when a given strategy seems to have broad personal appeal.
But what if you’re not content to simply ride the market up and down? What if your ultimate investing goal is to outperform the market, and even to make money when the market isn’t cooperating?
There are various investing strategies less well known to the public that make that possible. One of them is swing trading. It’s a strategy that focuses on short-term movements in the price of individual securities, rather than on long-term trends.
But it’s a very specialized form of investing, and requires a knowledgeable investor. To make it work in your favor, you’ll need to learn swing trading strategies to crush the market.
And the only way to do that is by learning it from those who are already doing it – successful swing traders. That’s what we’re going to cover in this swing trading strategies guide. But since swing trading is unknown to the general investing public, let’s start with the basics.
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What is Swing Trading?
Swing trading is a type of trading in which the object is to generate gains in stocks and other securities in a matter of days or weeks.
It uses both technical analysis – to look for trading opportunities – and often fundamental analysis, to determine the strength of the underlying companies.
It isn’t quite day trading, because you’re usually holding your position for more than one trading session. But it’s not long-term investing, like buy-and-hold, because you’ll typically exit the trade position in no more than a few weeks.
It’s an attempt to profit by taking advantage of short-term price swings, and it can be done either by purchasing a security or by short-selling (profiting when the value of the security falls).
That gives the swing trader an opportunity to make money both on the upside and in declines. Because of its short-term nature, swing trading is very different than buy-and-hold investing.
The trader isn’t concerned with the long-term prospects of the company, but only with the potential for movement over a short space of time.
Put another way, swing trading is one of the most active forms of active investing.
But the process is anything but random. A swing trader will analyze the price chart of the security, then determine when to buy and when to sell.
Selling may even be accomplished by a stop-loss order, setting a price at which the security will automatically be sold to prevent unexpected losses.
Fundamental analysis may be used to identify a bullish trend in the security that will help to support technical analysis on potential price swings.
Because the swing trader is looking to make small profits on each trade, he or she will engage in multiple trades. The idea is to capture large gains through a series of constant small profits.
Swing trading risk factor. The most obvious is the potential for one or more stock positions to go into a complete reversal. It can be a major decline in the case of a long position, or a sudden price spike on a short sale.
But the trader can minimize those losses to some degree by using stop-loss orders and other techniques.
Swing Trading vs. Day Trading
The main difference between swing trading and day trading is in the timeframe. Where swing trading involves short-term trading, holding positions for anywhere from a few days to a few weeks, day trading literally takes place in one day.
A day trader may buy a stock in the morning, and sell it by early afternoon. Because of the more rapid nature of day-trading, the day trader may target smaller profits, but with many more trades than a swing trader will make.
Leverage is another major difference. Margin for day traders is usually limited to 25%. That means a day trader with an account with a cash value $75,000 has the ability to trade up to $100,000 in securities, of which $25,000 will be margin.
Swing trading risk factor. Swing trading enables the practitioner to margin up to 50% of the securities purchased. A swing trader with an account with a cash value $75,000 can trade up to $150,000 in securities, with half coming from margin.
Since margin loans are interest-bearing, the interest paid will reduce profits on trades. Margin investing also has the possibility of generating what’s known as a margin call.
In most cases, if the cash value of your portfolio falls below 30% of your total position, the broker will require you to either sell stocks held in your portfolio, or add additional cash to increase your investment.
On a more practical level, one of the main differences between swing trading and day trading is the amount of time invested.
While a day trader may need to be in front of the computer, actively monitoring positions and making trades on a daily basis, swing trading stocks is less hands-on.
The swing trader will certainly need to spend more time monitoring investments and making trades than a buy-and-hold investor, but substantially less than a day trader will.
17 Popular Swing Trading Strategies to Beat The Market
Swing trading is one of the more common types of investing activities, and there are only a few who claim expert status. We’re certainly not experts here, so we’ve turned to strategies provided by people who appear to be.
If you’ve never engaged in swing trading in the past, or you have only light experience, we strongly recommend you purchase a course in the strategy.
It’s highly specialized, and like all new endeavors, it will take a combination of education and experience to master it.
Disclaimer: Virtually all investing activity involves the risk of losing money. But the potential for loss may be greater with short term trading strategies, like swing trading. Be sure you understand the fundamentals of swing trading, and the risks involved. Never invest more money than you can afford to lose on this type of investing, keeping the portion of your portfolio dedicated to swing trading to a minority position, such as no more than 10% or 20%. The balance should be held in other asset classes that will reduce your overall risk.
With that said, below are 17 recommended swing trading strategies from some experts in this investment method. Remember, these are high-altitude strategies, and do not encompass all you need to know to be a successful swing trader.
Jason Bond's Swing Trading Tips
Jason Bond is one of the best-known figures in the stock trading sector, and is the host of JasonBondPicks.com as well as cofounder of Raging Bull Trading.
He worked his way out of a quarter million dollars in student debt to becoming a millionaire. His work has been featured in Forbes, The Street, MSN, HuffPost and Seeking Alpha.
Jason recommends seven different swing trading strategies. Take a look at each swing trading strategy in more detail:
Swim with the Current
Jason usually completes his trades in one-to-four days. He tracks the Russell 2000 index, which measures the performance of small-cap stocks. He also follows the US Economic Calendar to search for potential stock market moving events.
He recommends going long in uptrends, and short or in cash in downtrends. Jason moves in heavily when the Russell 2000 is in an uptrend.
Like all swing traders, Bond relies heavily on technical analysis. He uses three chart patterns, which he refers to as oversold, continuation, and breakout patterns.
The first three lessons on his website cover all three patterns, as well as stop-loss limits.
His website even gives a full rundown on how to use those to scanning sites.
The Hunt for Catalysts
Jason’s swing trading course can help you to find those catalysts. He maintains you can get bigger profits faster the better the catalyst is.
He looks for catalysts that offer improved guidance, earnings winners and deal news with name brand companies.
Place the Trade
Once you determine bullish market conditions, identified an oversold stock from scanning, and say, the company just announced improved guidance, it’s time to pull the trigger and place the trade.
In making trades, he advocates setting realistic goals. He looks for a 5% to 10% profit, and uses a conditional one cancels other (OCO) order to make the sale automatic once the profit target has been met.
But he also places a stop loss order with it, in case the trade goes in the opposite direction. In this way, you’re minimizing your losses with the stop loss, and setting automatic profits with the OCO.
An OCO is also an excellent tactic in case you can’t watch the market continuously. The trade is set up to automatically trigger one order, while simultaneously canceling the other once target price levels are reached.
It essentially puts your trades on automatic pilot.
Rinse & Repeat
Obviously, as you begin executing successful trades, you’ll want to keep doing more of the same. But he advocates keeping a trade journal to help you identify what works and what doesn’t.
For what it’s worth, Bond has about 50 videos on his website including some on popular swing trading indicators. When he does something outstanding, he makes a video about it.
But when he makes mistakes, he makes videos about those as well. This will help you to avoid what doesn’t work, while favoring what does.
Live Your Life
Basically, Bond recommends making your trades, then doing other things with your life. The purpose of swing trading, as well as the use of the OCO order, is to free you from being chained to your computer, as you would be with day trading.
Once you’ve made your trade, he states you need to have confidence in your decision and move on. Bond claims a 70% success rate using this strategy.
If you’re earning 10% profits on $10,000 trades, that’s $1,000 in four days or less. If you’re successful trades are outnumbering your losses, you’ll be earning a very healthy income.
Timothy Sykes Swing Trading Tips
The force behind TimothySykes.com, Tim Sykes may be the name and face most closely associated with swing trading.
His website has been around for nearly 15 years, and he uses it as a platform to educate others in various alternative investment methods.
One of the practices Sykes makes to minimize risk is his never risk more than 1% per trade rule. That will minimize the potential loss on any single position.
We have to respect that kind of investment advice, since it’s consistent with another time honored rule: The first rule in making money is not to lose it.
Sykes offers three of what he considers to be the best swing trade trading strategies:
The strategy involves monitoring a security price to determine whether it has a desired level of movement and volatility.
You enter the trade when it breaks a key point of support or resistance. In using this method, you’re attempting to take a position early in a potential uptrend.
When a security moves below a defined support level, you take a position. Presumably, this would either represent an opportunity to short sell the security, to profit from the decline, or to move out of a long position you hold in the company.
Sykes recommends using options for swing trading, since it adds leverage to your positions. Options give you the right to buy or sell a security at a certain price, within a specific period of time.
You can use either a put or call option to gain the right to either buy or sell the security. With an option, you’re only putting up a small percentage of the security price.
That enables you to take a large position without putting up a lot of capital. And naturally that means you can get proportionally greater returns on a smaller amount of money.
But an option is only the right to buy or sell a security – it doesn’t represent ownership in the security. If the security never reaches the target price within the specified timeframe, the option will expire, and you will lose the money you invested in the option.
Sykes has many more swing trading strategies and recommendations than we have space for here. We strongly recommend visiting his website to get the complete picture, or even to order his training course.
Rayner Teo Swing Trading Tips
On the blog, he not only offers valuable trading advice, but also provides tools and an online Academy. One of the reasons why we’ve included him on this list is that he categorically states that he cannot help you get rich quick.
He also warns readers that any successful swing trading system is going to involve hard work, and plenty of it. There’s a lot of hype and empty promise surrounding most alternative trading strategies, so such statements command respect.
Here are swing trading strategies Rayner Teo recommends:
Stuck in a Box
Teo’s strategy involves trading in a range bound market, which is stuck between support and resistance, which is the box he’s referring to.
Despite the name, the strategy isn’t negative in any sense. He breaks it down in five parts:
- Identify a range of market.
- Wait for the price to fall below the support level.
- If the price breaks below the support level, wait for a close above that level, which he refers to as a strong price rejection.
- If there’s a strong price rejection, then go long on the next candle open.
- Set your stop-loss one average true range (ATR) below the candle low, and take profits before resistance.
You’ll want to take profits before the resistance level is reached, increasing the probability of a successful trade. Once selling pressure kicks in, profit can be quickly lost.
(As you can see, the terminology itself involves a number of technical terms and descriptions. That’s because technical analysis is intimately connected with swing trading. And that’s why we don’t recommend you get involved in the strategy without getting training.)
Catch the Wave
The name of this strategy isn’t accidental – Teo likens it to a surfer trying to catch a wave. The basic concept is to enter the position after a pullback has ended, and when the trend is likely to continue.
He claims there’s greater upside potential on deeper pullbacks. But he does warn that it doesn’t work for all types of trends. He recommends a pullback at least towards the 50-period moving average or greater.
The strategy works in four steps:
- Identify a trend that respects the 50-day moving average.
- If the market approaches the moving average, wait for a bullish price rejection.
- If there’s a bullish price rejection, then go long on the next candle.
- Set your stop loss at one ATR below the low and take profits just before the swing high.
You can use any moving average you like, but Teo recommends they 50 because it’s the most watched by traders around the world.
Fade the Move
The name of the strategy means to go against, as in against the momentum.
It works like this:
- Identify a strong momentum move into resistance indicates that the previous high.
- Look for a strong price rejection as the candle forms a strong bearish close.
- Go short on the next candle and set your stop loss one ATR above the highs.
- Take profits before the nearest swing low.
Once again, there’s a lot more to Raynor Teo’s swing trading technique that we don’t have time or space to cover here. Refer to his website for complete information, as well as any training courses available on his site
Phillip Konchar Swing Trading Tips
We love that the mission statement starts out with “82% of private traders lose money”. Their goal is to change that outcome. Phillip Konchar is a private trader who has been managing a personal investment and trading fund since 2004.
He has been providing trading education for major brokerages, and the website offers both resources and courses to help private investors.
He recommends the following four strategies:
Buy Low, Sell High
This is the most fundamental advice in the entire investment universe. But the specific strategy application with swing trading is to execute advice during an uptrend.
But it can also be used on a short sale, except that you would sell high and buy low. The strategy centers on uptrends and downtrends (as opposed to range bound markets).
These are determined by either higher highs and higher lows, or on the short side, by consecutive lower lows and lower highs. It also emphasizes higher lows during uptrends and lower highs during downtrends.
In an uptrend, you’ll be looking for higher lows, while in downtrends, you’ll be looking for lower highs. There’s a substantial amount of technical detail involved in the strategy, and only to refer to the website to learn the details.
Trade the Range
This is somewhat similar to Rayner Teo’s “Stuck in a Box” strategy, as well as Tim Sykes “Breakouts” and “Breakdowns”. You should pay close attention when there are similarities in recommendations between three experts.
In Konchar’s strategy, we’re looking at how to trade in a range bound market. The security will trade between its support zone (low end of the range) and its resistance zone (the high end of the range).
As a swing trader, you’ll look buy when the market reaches the support zone, then sell at the resistance zone. The strategy is often supported by the fact that other traders are working within the same parameters, creating more predictable patterns.
The strategy isn’t quite as simple as all that, since it can be enhanced by what Konchar refers to as fake breakouts, both above the resistance zone or below the support zone.
Pros & Cons
- Opportunity to make profits from short-term swings in security prices – there’s no need to wait months or years to get returns.
- Though it’s more hands-on than traditional buy-and-hold investing, it’s much less so than day trading.
- It’s a good strategy for investors who wants to be more actively involved in the investing process.
- You can use leverage to increase your gains (and potentially your losses as well).
- With most investment brokers eliminating commissions on stocks and options, trading fees aren’t an issue.
- You can use options to swing trade, substantially increasing your leverage, while limiting your losses.
- The market or security price can go against you, causing you to lose money on any trade.
- Using leverage, in the form of margin trading can magnify losses.
- Not a strategy for those who prefer passive investing.
- Not suitable for inexperience traders.
Can You be a Successful Swing Trader?
The swing trading style is best suited to those who prefer direct involvement in investing activities. You’ll need not only the knowledge of the trading process itself, but also a willingness and desire to trade on a frequent basis.
It’s also best for investors who have at least fairly large portfolios, and can diversify. You should have only a minority percentage of your portfolio reserved for swing trading, with the rest in unrelated asset positions.
These can include a portion in fixed income investments, and a larger allocation in more traditional stock market investing, such as long-term investing in individual stocks or index funds.
It’s not suited to passive investors, or those who know little about investing in general. And you absolutely should not start swing trading stocks if you have zero understanding of the practice.
It’s also not suited for small investors, since it does require a certain amount of capital. That may also make it difficult to diversify into other more conservative investments that will somewhat insulate you from potential losses from your swing trading activities.
That said, if you’re interested in learning how to swing trade, visit any of the three websites listed above and enroll in a training course.
When you complete at least one course, you’ll also need to become a regular reader of swing trading blogs and websites, as well as a regular participant in forums dedicated to the practice.
Swing trading strategy is much more complicated than buy-and-hold investing. You will need to put in the effort, both to learn the process and to gain experience.
You’ll also need to embrace a healthy trading psychology - namely eliminating any get-rich-quick notions you may have. Like any other venture, swing trading is a process, not an event.
And, like any other kind of investing, it will take you several years to build a small nest egg into a large one. And as the old investing adage goes – never invest more than you can afford to lose.
If you follow those tactics, swing trading with a small portion of your portfolio can both increase your investment returns and give you more control over your portfolio.
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Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He and his wife are “empty nesters” living in New Hampshire.