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A Guide to Swing Trading Strategies

By Inyoung Hwang · June 30, 2021 · 5 minute read

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A Guide to Swing Trading Strategies

Swing trading is a type of stock market trading that attempts to capitalize on short-term price momentum in the market. The swings can be to the upside or to the downside and typically from a couple days to roughly two weeks.

The difference between swing trading and day trading is time. Whereas day traders typically stay invested for minutes or hours, swing traders invest for several days or weeks. Meanwhile, swing trading is more short-term than investors who buy and hold onto stock for many months or years.

Here’s a closer look at swing trading as an investment strategy.

What Is Swing Trading?

Generally, a swing trader uses a mix of fundamental and technical analysis to identify short- and mid-term trends in the market. They can go both long and short in market positions, and use stocks, exchange-traded funds, and other market instruments that exhibit pricing volatility.

It is possible for a swing trader to hold a position for longer than a few weeks, though a position held for a month or more may actually be classified as trend trading.

A swing trading strategy is somewhere in between a day trading strategy and trend trading strategy. They have some methods in common but may also differ in some ways—so it’s important to know exactly which you plan to utilize.

Day Trading vs. Swing Trading

Like day traders, swing traders are highly interested in the volatility of the market.

Along with day traders and trend traders, swing traders are likely to analyze volatility charts and price trends to predict what a stock’s price is most likely to do next. This is using technical analysis to research stocks–a process that can seem complicated but is essentially trying to see if price charts can give clues on future direction.

The goal, then, is to identify patterns with meaning and accurately extrapolate this information to the future.

The strategy of a day trader and a swing trader may start to diverge in the attention they pay to a stock’s underlying fundamentals—the overall health of the company behind the stock.

Day traders aren’t particularly interested in whether a company stock is a “good” or “bad” investment—they are simply looking for short-term price volatility. But because swing traders spend more time in the market, they may also consider the general trajectory of a company’s growth.

Pros and Cons of Swing Trading

Pros of Swing Trading

To understand the benefits of swing trading, it helps to understand the benefits of long-term investing—which may actually be the more suitable strategy for some investors.

The idea behind set-it-and-forget-it, buy-and-hold strategies is quite simply that stock markets tend to move up over long periods of time. Also, unlike trading, it is not zero-sum, meaning that all participants can potentially profit by simply remaining invested for the maximum amount of time possible.

Further, long-term investing may require less time and effort. Dips in the market can provide opportunity to buy in, but methodical and regular investing is generally regarded higher than any version of attempting to short-term time the market.

Swing trading exists on the other end of the time-and-effort continuum, although it generally requires much less effort and attention than day trading. (Whereas day traders must keep a minute by minute watch on the market throughout the trading days, swing trading does not require that eyes be glued to the screen.)

Income

Compared to long-term investing, swing trading may create more opportunity for an investor to actively generate income.

Most long-term investors intend to keep their money invested—including profits—for as long as possible. Swing traders are using the short-term swings in the market to generate profit that could be used as income.

Greater Profits

Next, there is the potential to generate returns beyond a passive market strategy. If an investor’s only goal is to simply return the stock market’s average, this is easy to accomplish with a passive index strategy.

Investors who are interested in generating additional profit, or want to do so on an expedited timeline, may be interested in finding additional ways to increase risk in order to generate returns. (Whether an investor is successfully able to do this is another question altogether.)

Avoidance of Dips

Last, it may be possible for swing traders to avoid some downside.

Long-term investors remain invested through all market scenarios, which includes downturns. Because swing traders are participating in the market only when they see opportunity, it may be possible to avoid the biggest dips.

Cons of Swing Trading

Though there is certainly the potential to earn a pretty penny via swing trading, there’s also a substantial risk of losing money—and even going into debt.

As with any investment strategy, risk and reward are intrinsically related. For as much potential as there is to earn a rate of return, there is potential to lose money. Therefore it is smart to be completely aware—and comfortable—with the risks, no matter which investing strategy you decide to use.

Expense

Don’t trade (or invest) money that you can’t afford to lose.

Additionally, it can be quite expensive to swing trade. Although brokerage commissions won’t be quite as high as they would be for day traders, they can be substantial.

In order to profit, traders will need to out-earn what they are spending to engage in swing trading strategies. That requires being right more often than not and doing so at a margin that outpaces any losses.

Time

Swing trading might not be as time-consuming or as stressful as day trading, but it can certainly be both. Many swing traders are researching and trading every day, if not many times a day.

What can start as a hobby can easily morph into another job, so be honest if that’s the life that you want.

Efficacy

Within the investing community, there is significant debate as to whether the stock market can be timed on any sort of regular or consistent basis.

In the short term, stock prices do not necessarily move on fundamental factors that can be researched.

Predicting future price moves is nothing more than just that: trying to predict the future. Short of having a crystal ball, this is supremely difficult to do.

Swing Trading Strategies

Each investor will want to research their own preferred swing trading strategy, as there is not one single method. It might help to designate a specific set of rules. Not every trade will work in your favor, but that does not mean the strategy is broken.

Channel Trading

One such popular strategy is channel trading. Channel traders assume that each stock is going to trade within a certain range of volatility, called a channel.

In addition to accounting for the ups and downs of short-term volatility, channels tend to move in a general trajectory. Channels can trend in flat, ascending, or descending directions, or a combination of these directions.

When picking stocks for a swing trading strategy using channels, you might buy a stock at the lower range of its price channel, called the support level. This is considered an opportune time to buy.

When a stock is trading at higher prices within the channel, called the resistance level, swing traders tend to believe that it is a good time to sell or short a stock.

MACD

Another method used by swing traders is moving average convergence/divergence.

The MACD indicator looks to identify momentum by subtracting a 26-period exponential moving average from the 12-period EMA.

Traders are seeking a shift in acceleration that may indicate that it is time to make a move.

Other Strategies

This is not a complete list of the types of technical analysis that traders may integrate into their strategies.
Additionally, traders may look at fundamental indicators such as SEC filings and special announcements, or watch industry trends, regulation, etc., that may affect the price of a stock.

Similarly, they may watch the news or reap information from online sources to get a sense of general investor sentiment.

Traders can use multiple swing trading methods simultaneously or independent from one another.

The Takeaway

Swing traders, who invest for days or weeks, use different strategies to try to reap rewards greater or faster than they might with long-term investing. There is no one surefire method, but it might be best to find a strategy and stick with it.

SoFi Invest® offers educational content as well as access to financial planners. The Active Investing platform lets investors choose from an array of stocks, ETFs or fractional shares. For a limited time, opening an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is sign up, play the claw game, and find out how much you won.

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