What is Swing Trading?
Swing Trading is loosely defined as a trade that lasts more than one day, but not more than 3 weeks, with the goal of capturing the momentum price movement of an asset. Swing trading is often lumped together with day trading because of the potential duration, but a swing trader is willing to hold the position overnight to capture the larger move.
Just like the old swing you used to play on as a kid, maybe an old tire, knotted rope or rusty chain in the playground, they all have a pendulum movement back and forth. The swing trade attempts to capture the pendulum movement from bullish to bearish (or bearish to bullish) as an asset moves back and forth on news or in correlation with the market. There are many forces at work that go into moving a stock and there are many opinions based on varied research that gives us a market. There will always be buyers and sellers based off of when people entered the trade, the research they are using to make their decisions and their opinions of what the asset price may do.
Buyers and Sellers meet in the market place to place their trade based on their own research. Every buyer and every seller has their own unique opinion. Those opinions can be derived from fundamental, charting, news sources, rumors, trade order flows, sector analysis, market analysis, volatility analysis and the list could go on. What makes the swing trader unique is that there are small areas of momentum where an asset price tends to move in one direction for a small period of time. Every stock, ETF, index, future is different…and no two moves are the same. There are always new external factors that may come into play that may affect the price.
With all of the research discussed, the added complexity of time frames must be added. Retail traders, often referred to as the public are usually long term oriented. So when they step in to buy or sell, their opinions are based on several years of holding a stock. Hedge Fund Traders, Prop Desk traders, day traders and swing traders all have their own time frame signals that they use. Some traders may use a 5 minute bar chart, while others may wait for daily chart signals. The perception is critical to the time frame you want to trade on. A 5 minute bar movement gets lost when looking at a daily or weekly chart.
Support and Resistance Areas
These areas are comprised of recent highs and lows where the market has either supported or resisted recent movement. These areas are made up from technical chart patterns referred to as swing highs and swing lows where a top or bottom is clear. Combining several swing highs or lows together can show a support/resistance area where traders/investors have historically stepped in and may step in again. Often times moving averages tend to act as support/resistance. Day/swing traders tend to use it as a catalyst as it is deemed that the perception of the stock may start to adjust. Popular moving averages are the 20, 50, 100, 200 day simple moving averages.
Swing traders tend to fall into a reversal or continuation category. A reversal trader picks an area where they feel the stock will rebound and get in as early as possible on the first signs of movement in the expected direction. Continuation traders tend to wait for momentum by waiting for some confirmation signal that the stock will continue to move in their direction and have a good target that they feel the stock will reach without much resistance in the way.
Every stock is affected by the overall market. A bullish stock will have a larger bullish move if the overall market is moving higher, but may not move as strong as expected if the market has bearish undertones. Always keep this in mind when entering/exiting a potential swing trade and its correlated potential move.
The best thing all investors can do is utilize leverage in their swing trading. Derivatives of the asset you are trading allow you to control that asset at a fraction of the cost. An option on a stock can significantly reduce your capital outlay and overall risk of the swing trade. There are several option strategies to use to best capture momentum and further reduce your risk depending on your outlook and analysis.
If you want to learn how we use options to swing trade in a live market then take a trial of our Lighthouse Point Options Swing Trading Service. Ron Ianieri shows how he uses stock charts to dissect how the market, sector and stocks are doing to find a risk/reward scenario that looks interesting.
Trial link below!