The Methodology of Swing Trading

The Methodology of Swing Trading
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Beginning and part-time traders have neither the time nor experience to trade with confidence or to constantly watch market movements. Swing trading, which involves repeatedly buying and selling stocks at the top of an upswing or bottom of a downswing, requires only minimal discipline and no experience to get started, while providing immediate short-term income. It's effective because "humans will always push prices too far to the upside or downside, when greed or fear are present,” according to FX Trading.


Swing trading relies on the human condition: Prices swing up because of greed, and they swing back down because of fear. A successful swing trader buys oversold stocks and sells overbought stocks. An oversold stock appears to be on a long-term upward trend and a daily downward trend; an overbought stock appears to be on a long-term downward trend and a daily upward trend. Rather than keeping stocks they love, swing traders buy whatever falls within their strategy guidelines. Depending on the overall length of the upswing or downswing, they keep it for a few days to a few weeks, and they sell it when a profit margin is reached.

General Swing Trading Strategy

Focusing on emotional price changes, rather than on fairer value prices that even out over the long term, lets any trader turn price spikes into low-risk income opportunity. Your strategy depends on four simple steps: trend identification, wait for pullbacks against the trend, risk and reward identification, and finally trade placement.

First, look at stocks to determine whether the short-term trend is upward, downward or sideways. Second, wait for a “pullback” or a movement against the trend, as this lets you buy in at a good price. Third, make sure that your profit to loss ratio is at least 2-to-1, if not 3-to-1, before you trade; that way you have to succeed in only 40 percent of your trades to make a profit. Once you know exactly what your margins are, it’s time to place your trade.

Long Swing vs. Short Swing

Swing trading breaks down into two types: long swing, based on uptrends; and short swing, based on downtrends.

Long swing relies on the “trailing buy-stop” technique: When a stock generally trends upward but has a minor decline, you can purchase it at less than standard market value. Once the stock price breaks out (rises higher than previous average levels), you stop buying and sell for a profit.

Short-swing trading identifies when a stock is on a general downtrend but is rising in the short term. It relies on the “trailing sell-stop” technique: Buy the stocks for less than market value, and then sell them at a profit when the price rallies. If the prices drop below your purchase level, stop selling and wait for the prices to rally.

Building and Maintaining a Swing Trading System

Swing trading relies on noticing trends and taking advantage of them early. Go with the trends as you see them, instead of holding out for the highest possible income. This reduces your profit potential, but it also greatly reduces the risk of waiting too long and experiencing a recoil that eliminates your profit margin entirely. Most forms of trading require discipline and long-term trend following, but in swing trading, losses and gains are immediate: Get money in the bank and move on to the next trade.