Day trading might sound like a fun way to make a living, but it’s a hard game for new traders to break into. Not only do day traders need high-tech stock scanners to locate stocks with potential, but the Financial Industry Regulatory Authority (FINRA) has strict rules in place limiting who can day trade.
Unless you have an account balance of $25,000, you’ll be limited to 3 day trades in a rolling 5-day period. That means if you complete 3 day trades on Monday and open a new position on Tuesday, you’ll need to hold that position overnight to avoid getting flagged with a pattern day trader (PDT) violation. But most brokers won’t even let a 4th day trade execute — and you could be stuck holding the bag.
To avoid these FINRA restrictions, many investors use swing trading. Swing trading is still a short-term trading strategy but stocks are held overnight to avoid the PDT rules. Swing traders hold stocks for 24 hours to 2 days hoping to profit off high volume swings like short squeezes or earnings beats (misses).
Overview: Swing Trade Stocks
Swing traders expose themselves to the most volatile moves by holding overnight, however the profits can be exponentially higher, especially if using options. The best stocks for swing trading are ones with known catalysts, high volume and enough volatility to make short-term trading profitable.
Sectors matter little when swing trading, nor do fundamentals. This is not investing for the long-term, so technical signals matter more than price ratios and debt loads. A company with a mountain of long-term debt and dry cash flow can still be a perfectly profitable swing trade.
Successful swing traders have to be nimble with their convictions — a stock with accumulating volume ahead of earnings might be one to sell short instead of buy. Swing traders use a variety of different strategies to enhance profits, but the stocks they look for all share a few common characteristics.
Best Online Brokers for Swing Trade Stocks
Swing trading and long-term investing are completely different animals, so you’ll need a broker that fits your needs. Swing traders should look for brokers with $0 commission or discounts on high-volume trading.
You don’t need a $25,000 account balance to swing trade, but you’ll likely need a margin account if you want to sell short or swing trade with options. And since the best swing trading stocks are often thinly-traded small caps with only a handful of shares available, make sure your broker has a wide assortment of stocks to trade.
Features to Look for in Swing Trade Stocks
When searching for swing trading stocks, don’t look at debt levels or price-earnings ratios. Those stats might matter for a company’s long-term prospects, but swing traders care about where a stock will be a couple of days, not a couple of years or decades.
Here’s what to look for if you want to get into swing trading.
- Catalyst: Most swing trades begin by locating a catalyst that could trigger a powerful move in a stock. This could be a clinical trial in a pharmaceutical company, an unexpected earnings miss or beat, or even the removal of an executive or CEO.
- Volume: Big moves in short time frames are impossible without significant volume in the stock. Sure, lightly-traded stocks can be coerced into big moves without much volume. But in the majority of your swing trades look for stocks with more volume than usual.
- Volatility: With great volume comes great volatility. Volatile stocks are good swing trading stocks because swing traders profit from large, short-term moves. A stock trading in a tight weekly range likely won’t produce a ton of opportunities for profit. But if 5% moves are occurring daily, you’ll find plenty of chances for swing trades.
Swing Trading for Short-Term Profits
Swing trading is not a long-term investing strategy. In fact, it’s not even really investing at all. The stock market is an accounting system for long-term financial prospects and investors use it to get a piece of those (eventual) profits. But swing traders look at the market differently. By using technical trading signals in volatile markets, swing traders can make great profits in short time periods. Swing trading requires precision and quickness, but you also need a short memory. You will have a trade blow up when swing trading; how you react determines how successful you can be as a swing trader in the long run.