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What Is Swing Trading?

Swing trading is a trading technique that tries to net investment gains on short- to medium-term price swings. Swing traders may rely on technical and/or fundamental analysis to seek out potentially profitable transactions. However, it’s not a risk-free strategy – and you risk losing out on long-term investment gains. 

What is swing trading?

Swing trading is an active strategy wherein a trader buys or shorts assets on time spans ranging from days to weeks. Some seek short-term gains in highly volatile securities, while others wait for longer-term growth in slower-moving assets.  

The point of swing trading is not to catch an entire upswing or downswing. Rather, traders enter after the swing starts and exits before it ends. Successful swing traders aim to notch a series of smaller gains that add up to greater annual returns. 

How does swing trading work?

Swing traders generally rely on technical analysis to identify which securities could perform favorably. Technical analysis involves studying market data (e.g., a stock’s recent price movements) to identify buy and sell points. 

Fundamental analysis involves analyzing the performance of the underlying business. Traders may use fundamental analysis to affirm that a stock’s recent price movements have the potential to continue (or reverse) their current momentum. 

The process to actually select an asset often involves hours of research and analysis. Traders may develop preferences for entering and exiting positions based on particular chart patterns or fundamental indicators. 

Once a trader makes their selection, they can enter a long or short position at the opportune moment. They may also institute a stop-loss order to prevent major losses if a position unexpectedly craters. Then, when the price swings, the trader closes their position to (hopefully) snap up profits. 

Swing trading example

To take an example of a potential swing trade opportunity, let’s look at Microsoft’s candlestick chart between December 2 and December 14, 2022. 

Image source: MarketWatch

This chart exemplifies a small cup and handle pattern. Cup and handles occur when a stock’s price moves downward, holds steady within a confined range and recovers. This creates a u-shape, or “cup.” 

The price then slips up or moves sideways to form a “handle,” which may appear roughly triangular. Generally, the handle shouldn’t drop below the upper 50% of the cup. (In the example above, the cup forms between about $243 and $263. So, the lowest price of the handle shouldn’t drop below $253.) 

Traders may rely on cup and handle patterns to signal when a stock’s price is going to continue rising after the handle. Therefore, the ideal place to jump in is at the breakeven point. Traders may also set stop-loss orders at the bottom of the cup handle. 

In the example above, a profitable trade may look like this:

The trader purchases stock at the top of the cup, around $263 (the breakeven point). Then, they place a stop-loss order at the bottom of the handle, near $255.

If the pattern continues climbing over $263 after December 14, the trader may close out their position at a profit. 

But if the pattern stagnates or falls, the stock will not achieve its breakout and the trader’s cup may not runneth over. 

What types of stocks are best for swing trading?

Swing trading requires at least moderately active securities to make a profit, as their gains result from price swings. 

As such, most swing traders focus on large-cap stocks that see heavy trade volumes. Higher trading volumes means they generate both more data for technical analysis and the price swings needed to net a profit. Examples may include big names like Microsoft, Nike, AMD, Starbucks, Walmart or Visa. 

Outside stocks, swing traders frequently move in forex and actively traded commodities markets, too. 

Is swing trading profitable?

As with everything in investing, swing trading can be profitable – but there are no guarantees. While analyzing patterns and making smart picks may increase your odds, you can still lose if the market moves in unexpected directions. 

To mitigate these risks and enhance profit-taking potential, swing traders often develop a selection process involving a complex set of fundamental and technical indicators. Some of these tricks include: 

  • Choosing the right assets. Generally, actively-traded securities with a relatively reliable performance history present better opportunities. 
  • Identifying your preferred indicators. Different traders use different indicators in their process. Support and resistance levels, moving averages, P/E ratios, annual revenues, or others may factor into your strategy. 
  • Monitoring economic and earnings calendars. Keeping an eye out for company earnings announcements, Federal Reserve movements, inflation data and other reports makes identifying potential trading opportunities easier. (Plus, you’re less likely to be caught off-guard if a stock suddenly soars or tanks.) 
  • Watching penny stocks warily. Penny stocks are highly volatile, speculative investments that trade high growth potential for enormous risk. As a rule, you shouldn’t bet what you can’t afford to lose on penny stocks. 
  • Setting stop-loss orders. Stop-loss orders can literally stop your losses from compounding. In the world of short-term, high-risk trades, they’re highly advisable.  

How to scan stocks for swing trading

Some swing traders also use stock scanners to speed up the process. 

Essentially, stock scanners are tools that seek stocks that meet your preset technical and fundamental indicator criteria. Then, they spit out a list of potential trades.    

That said, it’s important to remember that scanners only provide assets that fit your parameters. They’re not built to identify sure things; just candidates that meet your selection process. 

In other words: you’ll still have to complete your analysis and make trading decisions on your own. 

Swing trading versus day trading

Both day trading and swing trading are short-term strategies that require active participation and analysis. However, there are some key differences. 

Swing trading in a nutshell

Swing trading involves making multiple trades per week or month, but each trade lasts days or weeks. The goal is to accumulate many smaller gains over time that add into larger long-term profits. 

As a result, trading costs tend to be lower, while more time passes between each gain or loss. 

Swing traders may also use both fundamental and technical analysis and incorporate macroeconomic news in their picks. This strategy also eats up less time in a given day. 

That said, swing trading incurs overnight and weekend risk, as prices may fluctuate dramatically between market close and open.

Day trading in a nutshell

By contrast, day trading involves making multiple trades per day and closing positions before market close. The goal is to make as many profitable trades as possible within a few hours, resulting in potentially higher transaction costs. 

Due to the sped-up time scale, trading costs and unpredictable nature of markets in the short term,gains and losses add up faster and may be more severe. Day traders often leverage positions to maximize their returns on smaller price changes. 

Day traders also rely on specialized software, such as sophisticated charting systems, to enhance their analytical and trading capacity. And because they don’t hold positions overnight, they don’t incur gap risks (though other risks abound).  

Pros and cons of swing trading

Like all investment strategies, swing trading comes with unique pros and cons. 

Pros of swing trading

  • Requires less time than day trading
  • Medium-term trades can maximize short-term profit potential 
  • Longer time horizons give assets a chance to rebound from losses
  • Technical and/or fundamental analysis can inform trades, allowing for a more holistic strategy
  • Many smaller profits can accumulate into larger profits within a year

Cons of swing trading

  • Swing trading incurs gap risks (overnight and weekend risks) 
  • Sudden market fluctuations can produce substantial losses in minutes
  • Medium-term trades reduce potential to capture long-term upsides
  • Requires substantial technical and fundamental market knowledge
  • Short-term capital gains incur higher tax bills than long-term capital gains

Skip the swing trading with

Swing trading is sometimes a relatively easy route for traders to familiarize themselves with the market. It requires less time, energy, and active attention than day trading, allowing you to build your trading portfolio over time. 

However, the strategy still incurs substantial risks, and it’s inadvisable to trade with more than you can afford to lose. Plus, you’ll need to develop a thorough understanding of technical and fundamental analysis to seek profits on more than just beginner’s luck.  

And while you can mitigate some of the downsides with stop-loss orders, higher trading costs and tax bills will gobble up your profits. 

That’s exactly why recommends a long-term, buy-and-hold investment strategy instead, leaving the short term trades to the pros (or even better, to AI). Building a portfolio for the long haul increases your profit potential and sets you firmly on the path to generating lifetime wealth. 

Disclosures is the trade name of Quantalytics Holdings, LLC., LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of's investment advisory services.

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