Swing Trading Strategies for Beginners

Fri May 20, 2022, 04:01 pm | by Dan Schmidt | No comments

Day trading is often thought of as a way to quit the rat race and escape the cubicle, but the reality is far from that. On very good days, you might be able to reach your profit goals early, shut down your computers, and hit the golf course. But most days require lots of time staring at charts and searching for opportunities across thousands of different securities. You might be your own boss, but day trading is still a job.

The less-glamorized cousin of day trading is swing trading. Swing traders utilize many of the same techniques and strategies as day traders, but they break the one cardinal rule of day trading – they hold positions overnight.

Overview of Swing Trading 

If day trading is a full-time job, then swing trading is a part-time one. Swing traders don’t have as many hard and fast rules and can stretch timeframes since they don’t need to liquidate positions before the markets close.

A swing trader can hold a position overnight, or even a matter of days or weeks. Swing trading is less about a 9:30am to 4pm grind and more about taking your shots when profitable trade opportunities present themselves.

For lack of a better term, swing traders look for opportunities to ‘swing for the fences.’ If day traders grind out profits through singles and doubles, swing traders look for triples and home runs.

Majority of the gains and losses occur outside the normal market hours, therefore, holding stocks overnight opens up new traders to different levels of volatility and risk they may not be accustomed to.

Pros and Cons 

Like any type of investment strategy, swing trading has its pros and cons. If you want to give swing trading a shot, there are a few things you might want to be wary of:

Pro: Less Time Consuming

Day traders need to keep glued to their screens during open market hours. Since profit margins are thinner, day traders must be precise with entry/exit points and quickly dump any stock that doesn’t move as anticipated. Swing traders don’t need to screen the market each morning or pour over pages of charting data. Since fewer trades are being made, swing traders can devote more time to other things.

Con: Higher Potential Losses

Holding overnight comes with increased risk. Stocks make volatile moves after the closing bell rings and if a trade turns against you, you won’t have a chance to sell quickly and move on. When a stock drops 10% overnight, you can’t dump it at midnight – you’ll need to wait until your broker’s premarket trading session begins. And if the dip keeps dipping, you can’t do much to stop it.

Pro: No Pattern Day Trader Rules

Pattern Day Trader (PDT) rules prevent less-capitalized investors from engaging in more than 3 day trades in a 5 day span. If you have less than $25,000 in a margin account, you’ll be blocked from making a 4th day trade in a week. Cash accounts don’t have PDT rules, but swing traders using margin don’t have to worry about PDT regulation.

Con: Less Control Over Trades

Some traders turn to day trading because it provides a level of control over your capital. If a trade turns ugly, the position can be immediately closed. Swing traders give up this level of control in exchange for higher potential profits. Volatility is a double-edged sword and swing traders are willing to stomach more of it.

Pro: Can Make More Profits From Fewer Trades

Day traders grind out small profits that build up over time. Swing traders, by accepting the volatility that comes from overnight holding, open themselves up to much larger winners. A successful swing trader might only need to make 1 or 2 winning trades per week in order to reach their profit goals.

Con: More Exposure To Negative Catalysts

One of the benefits of day trading is you aren’t beholden to news drops like earnings misses, drug trial failures, or guidance pullbacks. Swing traders have to ride the wave of catalysts, which could result in some heavy losses if the stock you buy has a lousy conference call.

Bull Flag – Trend Pullback 

Flags or pennants are some of the most commonly used technical patterns. A flag or pennant is a continuation pattern, meaning the trend is taking a breather to consolidate in this pattern before taking the next leg up or down.

Here’s an example with EOG Resources (NYSE: EOG):

The stock was already in an upward trend before stalling and trading in a tight range for about a month. The choppy trading form the flat pattern seen above, which created clear lines of support and resistance. Once the resistance level on the flag was broken, the stock raced out to new highs.

Fibonacci Retracement 

Fibonacci was a 13th century Italian mathematician who created a sequence of numbers to plot out the growth of a rabbit population. The sequence is formulated by adding the previous two numbers of the string together. Starting at 0 and 1: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, …

The Fibonacci sequence can be found in many disciplines and stock trading is one of them. Traders using fibonacci numbers will set different levels between two price points using certain set percentages: 23.6%, 38.2%, 50%, and 61.8% with the two price points being 0% and 100%. (If these numbers look familiar, you were probably a LOST fan).

Fibonacci retracement levels are drawn on the stock chart in horizontal lines, which can then be used to look for support and resistance levels during periods of volatile trading. For example, if a stock in an uptrend pulls back to the 38.2% before bouncing higher, that level can be gauged as support and an entry point can be marked.

Support/Resistance Lines 

Many of the trading techniques and strategies we hold dear come back to basic concepts like support and resistance. If you want to understand technical analysis, start with a deep understanding of support and resistance levels since you’ll find them everywhere once you start looking.

Support is a level where the stock price consolidates on the low end. Support signals a buying opportunity since the support level is often the price where the trend reverts back upward (or downward if you’re shorting). Resistance is the selling signal – when a stock encounters resistance, it acts like a ceiling where the price ‘bumps it’s head’ before tumbling down toward the previous support level.

Support and resistance can be found in many trading strategies and it’s important to understand how they operate together. When swing trading, have a few basic parameters in place, such as an existing trend that appears to be in consolidation or volume levels indicating increased volatility.

Final Thoughts

Swing trading is the preferred trading style by most retail investors since it doesn’t require pinpoint daily focus and high tech computer setups. A successful swing trader can be a trend follower or contrarian, can trade stocks, commodities, or cryptocurrencies, and work 2 hours per work or 10 on their investments. Unlike day traders, swing traders are less burdened by routine and can enter and exit stocks based on completely different criteria.

But just because swing trading doesn’t require a daily grind doesn’t mean it’s easy. Swing traders can easily fall into a trap of overconfidence after a few early wins and become too aggressive. Yes, swing traders can bet big when the odds are in their favor, but swing trading still requires a plan with rules and guidelines on when to enter and exit the security.

If you’re just chasing the hot stocks on WallStreetBets or Twitter, swing trading might be a haphazard process that costs you lots of capital. Traders don’t use technical analysis and charts because it’s fun, they use these tools because they help them follow their own trading rules. Be sure to stick to your trading plan so you compound only the winners, not the losers.