Last Updated on 14 October, 2021 by Samuelsson
With the advent of the internet and the proliferation of online discount brokers, swing trading has become a popular way of participating in the financial markets. A lot of individual traders now take to swing trading rather than long-term investing, but does swing trading work?
Yes, swing trading works very well and can work for you too if you can learn how to swing-trade the right way or make use of a reliable swing trading signal. The first thing, though, is to understand what swing trading is about and how it works.
In this post, we will explore the following:
- What swing trading is
- How it works
- The strategies for this style of trading
- How much you can make swing trading
- What you can do to become a profitable swing trader
- The fastest way to start making money swing trading
What is swing trading?
Swing trading is a style of trading that sets out to profit from medium-term price moves. These kinds of moves occur as individual price swings, especially the impulse swings, on the daily timeframe, and they tend to last from a few days to a few weeks — rarely do they last for several weeks. So, a swing trader normally leaves his/her trades open beyond the trading day but not more than a few weeks.
Swing trading lies in the middle of the spectrum between day trading, in which the trades are closed on the same trading day, and position trading or investing where trades are left for several months, years, or even decades.
Most swing traders make use of the technical analysis approach in spotting tradable opportunities in the markets. They study the price charts on the daily timeframe and may step down to the 4-hourly timeframe to pick better trade entry levels. But on rare occasions, they may also pay attention to fundamental factors.
Unlike in day trading where traders spend all day monitoring and analyzing the price charts on the lower timeframes, with swing trading, the traders only need to check the charts at the end of the trading day (or 4-hourly when a trade setup is in sight). Swing trading, therefore, is a more suitable approach for a beginner or an experienced trader who wishes to trade part-time while keeping their full-time job.
How does swing trading work?
Swing trading works on the well-known principle that, irrespective of the overall direction of the trend, the price of a security moves in waves — upswings and downswings. The essence of swing trading is to capture the individual swings one at a time, rather than ride the full trend and wait out the pullbacks that erase profits.
The main aim of swing traders is to make a lot of small wins that can add up to significant returns over the long term. For instance, while a position trader may wait for 10 months or more to earn a 25% profit, a swing trader may earn 5% gains every month and make a 50% profit in 10 months, which exceeds the position trader’s gains over the same period.
Except in a market that is moving sideways, where both the upswings and downswings may be tradable, swing traders mostly try to trade only the impulse swings, which are the swings that move in the direction of the overall trend. So, in an uptrend, they want to trade the upswings, and in a downtrend, they want to trade only downswings. In the case of stock trading, it is better for new traders to trade mostly the upswings because a stock’s price has a downward limit but no upward limit.
All in all, swing trading works because of the following reasons:
- Better market timing: With swing trading, you can better time your trade entry and exit by trying to enter at the beginning of the swing and exit before the swing ends. There are many technical analysis strategies you can use for this purpose, including mean reversion and momentum strategies.
- Flexible use of trading capital: Swing trading doesn’t tie your capital down in one stock for a long time. You hop into the market when there is an opportunity to make money and hop out when the opportunity is no longer there. At worst, you come out with a small loss, but at every point, your capital is either making you money or it’s free to be deployed somewhere else.
- Active risk management: In swing trading, you manage risk actively by controlling your trade volume and using a stop loss. This helps you to protect your capital and also ensure that your capital is always working to make you money.
- Carefully using leverage to scale up profit: Swing trade allows you to use leverage to scale up your profit potential because you are actively managing your risk. Where risk management is lax, the use of leverage can be dangerous, as it can also magnify your losses.
Strategies for swing trading
There are many strategies traders use for swing trading, but not all of them are worth your time. Here, we will briefly discuss a few of the strategies that work quite well, which include the following:
The mean-reversion strategy: This is a common strategy for swing trading. The strategy is based on the tendency of the market to make over-exaggerated moves to either side of the mean price and then tries to revert to the mean. While trying to go back to the mean, the price overshoots again and tries to revert to the mean again. The up and down swinging continues on and on and creates tradable opportunities that traders can benefit from using some reliable setups. The main thing is to identify when the price is in an oversold or overbought situation and is likely to reverse. Some of the indicators for identifying the oversold/overbought conditions include the Bollinger Bands, RSI, moving averages, and price action setups.
The momentum strategy: Also known as the trend-following strategy, the momentum strategy aims to trade in the direction of the trend after a temporary pullback in price movement. The idea is to trade the impulse wave in the direction of the trend and hop out when a pullback starts, which can erase the profits. To use this strategy, you must have a way of identifying when the impulse swing is about to start, and when it is about to end.
The breakout strategy: A breakout occurs when the price rises above a specified price level where the price had reversed in the past. When the price breaks above that level, it shows that there is a huge buying potential in the market, which might continue pushing the price higher. For example, when the price closes above a 20-day high, you can go long.
How much money can you make as a swing trader and what factors determine that?
Realistically, you can expect to make somewhere between 10-40% annually, on average, provided that you trade with a sensible risk level. Of course, your returns will vary a lot from year to year, with some years being exceptional, while others might just provide a small return or even a small loss. Many factors can affect how much you can make from swing trading, and these are some of them:
- The trading strategies you use: The number of trading strategies you use and their effectiveness will have a significant effect on how much you can make from your swing trades. If your strategies work very well, you are more likely to make more profits. Since one strategy doesn’t work in all market conditions, you are better off if you have different strategies that work in different market conditions so that whatever the market condition, you are making money.
- The number of trade setups you get and execute: How many trade setups you get from your strategies can determine how you earn from swing trading. The more the number of trade setups you get in a week, the more the opportunities to make money. But you must execute those trade setups to stand a chance of making money. So, you must have the psychological skills to effectively implement your strategies.
- Your position size: The size of your position in each trade can also determine how much you make. If you trade more shares per trade, you can potentially make more money. But this comes down to how much of your capital you want to risk per trade. If you risk 2% per trade, you may make more money than risking 1% per trade, but it’s not that straightforward. You may also lose more when you risk more than your trading emotions can bear.
What you can do to become a profitable swing trader
One of the main reasons why new traders fail at swing trading is that they don’t first get the right training before setting out to trade on their own. It does not matter whether it is the forex or stock market, it is not uncommon to find retail traders operating in the market without having any idea how it works, and what to do in different market conditions.
So, the most important thing you can do to avoid falling into the category of losing traders is to get the right trading education and also get on-hand experience trading live market under supervision. You need to understand what works in the market, the factors that move the market, and how to handle every situation that arises in your trading. Then, you need to develop the right trading psychology by retraining your mind to think like a trader. What this means is to understand that trading is a game of probability where there will be wins and losses and there is no way of knowing the sequence of the wins and losses.
Surely, you can learn how to trade on your own by reading trading books, watching free trading tutorial videos, and practicing alone, but it will take a lot of your time, and you may end up not learning the right trading strategies for you. The easier way to learn how to swing-trade stocks is to enroll in the Robust Trader’s Swing Trading Course. The course teaches you four ready-to-trade strategies that the Robust Trader, a trading team headed by a veteran trader with over 20 years of successful stock trading experience, uses in their own trading. It will also teach you how to manage risks and how to train your trading mind to develop the mindset of a successful trader.
One more thing that can help you become a profitable swing trader is to have a stable source of income that pays your bills. The stock market is not where you come to get money to pay bills. The truth about trading the financial markets is that you need to have money to be able to make money. If not, you will have the ‘Need To Make Money Syndrome’, which leads to dangerous trading mistakes like overleveraging and holding on to a losing trade for long.
The fastest way to start making money swing trading
While enrolling in the Robust Trader’s Swing Trading Course can quicken your learning curve and help you learn how to trade in a short time, you can actually start making money while you learn. You can do this by subscribing to the Robust Trader’s Swing Trading Signal Service.
The swing trading signal service delivers high-quality trading signals to your inbox every morning before the New York Stock Exchange opens. It has a 6-years record of success, with more than 74% winning trades and a profit factor of 2.2, which makes it about the best swing trading signal for stock trading.
The signals are easy to follow; on signing up, you will start receiving swing trading signals for U.S. stocks daily before the market opens. The signal tells you which stocks to trade and whether to buy, sell, or hold your position in those stocks. Interestingly, the signal service is pocket-friendly.
Swing trading works very well, but you need to learn how to swing-trade the right way. To start making money early, you can make use of the swing trading signal while you learn how to analyze the market yourself by enrolling in the swing trading course.
Here you can find our archive with all our swing trading articles.