Unless there is a significant event, such as an earnings report, the price of a stock does not sell for $30, then $50, then $20, $70 and so forth. The price trends lower or higher between these price levels over a number of days to months or more.
Swing traders try to capture a significant portion of these price moves, either long or short. Generally, they use technical analysis to identify a point that the short-term trend is changing to match the same direction as the long-term trend. Often a breakout out of a consolidation or rebounding off of a support or resistance.
Trying to capture a significant percentage move between certain price points or “swing points”.
For instance, with our strategy we find stocks in a long-term uptrend. A stock is in a long-term uptrend when its making higher highs and higher lows for at least several weeks. For us, the stock must also have key fundamental characteristics.
We then look for a shorter-term downtrend back to a support level. How it does this is one of the keys to successful swing trading. If the stock reaches the support (usually a long-term uptrend support, horizontal support or moving average) and then shows significant signs of starting to move higher again, we buy the stock and sell it after it has swung higher for a profit just below (or above if buying put options) a technical resistance level.
This profit can be substantial in a short period of time.
Nowadays, swing trading is often described as entering a trade and holding it for a day to several weeks or more. The strategy being to catch the stock early as it “swings” from a lower price to a higher price. The price could also just be going back and forth between 2 price points for many months or years (classic channeling stock).
Swing trading can even mean buying on a breakout to new highs or “swing point” and selling at a higher price.
Swing trading can also be an effective strategy to buy put options or short. Where you short as the stock is swinging between a higher price (after a rebound within the downtrend) back down to a lower price point or support. Again, its important to wait for technical signs that the price is about to turn over again.
To better understand if swing trading is the better trading strategy for you, check out our free videos on swing trading vs day trading.
During a market correction or longer-term downtrend, most stocks fall out of a longer-term uptrend and begin trending lower for several months to a year or more. During this downtrend phase is when swing trading put options or shorting starts to become an effective strategy. And it becomes more difficult to find “pockets of strength” in the market where stocks in certain industries are trending higher.
We have a great example of an ideal swing trading setup here. Some traders think that when swing trading you only hold the stock for 1 to 4 days. This is not true. You can hold a swing trade from a day to several months.
Generally, swing trading shorter time-frames is more effective during a market downtrend or correction phase in the overall market. We normally hold a swing trade from a few days to a few weeks in our newsletter.
Other traders feel like fundamentals are not important at all when swing trading. Again, we believe this is incorrect as well. We have more success swing trading stocks with rising estimates (that tend to beat those estimates) and stocks that have been growing sales and earnings quickly for a number of years (along with other key factors). Two fundamental factors proven to beat the market in the short-term – over the average time horizon of our trades.
You can learn more about our swing trading strategy we have used successfully for more than 10 years in our swing trading book that combines best-of-breed technical AND fundamental analysis.