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.
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.
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.
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.
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.
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:
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.
Both day trading and swing trading are short-term strategies that require active participation and analysis. However, there are some key differences.
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.
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).
Like all investment strategies, swing trading comes with unique pros and cons.
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 Q.ai 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.
Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, 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 Q.ai's investment advisory services.