Swing Trading Strategies (2024)

WhySwing Trade?

Swing Trading is a strategy that focuses on taking smaller gains in short term trends and cutting losses quicker. The gains might be smaller, but done consistently over time they can compound into excellent annual returns. Swing Tradingpositions are usually held a few days to a couple of weeks, but can be held longer.

Swing Trading Strategy

Let's start with the basics of a swing trading strategy. Rather than targeting 20% to 25% profits for most of your stocks, the profit goal is a more modest 10%, or even just 5% in tougher markets.

Those types of gains might not seem to be the life-changing rewards typically sought in the stock market, but this is where the time factor comes in.

The swing trader's focus isn't on gains developing over weeks or months; the average length of a trade is more like 5 to 10 days. In this way, you can make a lot of small wins, which will add up to big overall returns. If you are happy with a 20% gain over a month or more, 5% to 10% gains every week or two can add up to significant profits.

Of course, you still have to factor in losses. Smaller gains can only produce growth in your portfolio if losses are kept small. Rather than the normal 7% to 8% stop loss, take losses quicker at a maximum of 3% to 4%. This will keep you at a 3-to-1 profit-to-loss ratio, a sound portfolio management rule for success. It's a critical component of the whole system since an outsized loss can quickly wipe away a lot of progress made with smaller gains.

Swing trading can still deliver larger gains on individual trades. A stock may exhibit enough initial strength that it can be held for a bigger gain, or partial profits can be taken while giving the remaining position room to run.

Get actionable tips and updates on swing trading every week in IBD's Swing Trading column.

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Swing Trading and CAN SLIM

Although the CAN SLIM Investing System is built for longer-term investment periods, its rules can still apply in a swing trading environment.

Take breakouts from consolidations. Prior uptrends are a must. Sideways actionthat resists giving up much ground ispreferred. High Relative Strength Ratings are a key statistic for limiting your universe to the best prospects. And volume gives you confirmation that institutions are accumulating shares. The twist added by swing trading is the time frame.

Rather than consolidations that are typically five to seven weeks at a minimum, you might be looking at half that time or even less.

The flexibility in looking atshorter time framescomes from lowered profit goals. A prior uptrend of 30% or more needs the longer time frame of a sound base structure before continuing for similar sized gains or better. But if you are looking for a gain of 5% to 10%, the requirements are much less.

By the same token, volume characteristics of a breakout also can have a shortened time frame. Rather than the 50-day moving average of volume as your threshold for heavy turnover, look to the volume of the shorter consolidation area for clues. If the breakout volume can surpass the recent activity, that can be a sufficient confirmation of strength.

Swing Trading vs. Day Trading

Swing trading and day trading may seem like similar practices, but the major differences between the two have a common theme: time.

First, the time frames for holding a trade are different. Day traders are in and out of trades within minutes or hours. Swing trading is generally over days or weeks.

Day traders' shorter time frame means they don't generally hold positions overnight. As a result, they avoid the risk of gaps fromnews announcements coming in after hours and causing a big move against them. Meanwhile, swing traders have to be wary that a stock could open significantly different from how it closed the day before.

But there is an added risk with the shorter time frame. A widespread between the bid, the ask and commissions can eat too large a portion of yourprofits. Swing traders can struggle withthis too, but the effect is amplified for the day trader. Day traders can find themselves doing all the work, andthe market makers and brokers reap the benefits.

To offset this, day traders are often offered the "opportunity" to leverage their portfolios with more margin, four times the buying powerrather than double. Taking larger leveraged positions can increase percentage gains to offset costs. The problem is that no one is right all the time. A lack of focus, discipline, or just plain bad luck can lead to a trade that goes against you in a big way. A bad trade, or string of bad trades, can blow up your account, where the loss to the portfolio is so great the chances of recovery are slim.For a swing trader, a string of losses or a big loss can still have a dramatic effect, but the lower leverage reduces the likelihood that the results wipe out your portfolio.

That leads to another time related difference: the time commitment. Proper day trading requires focus and attention on numerous positions and constantly looking for new potential opportunities throughout the day to replace exited positions. That means it isn't a side job; day trading is your only job.

The extra time commitment of day trading comes with its own risk. Not having a steady paycheck makes a day trader's income reliant on trading success. That can add an extra level of stress and emotions to trading, and more emotions in trading lead to poor decisions.

A swing trading style, by contrast, may have a few transactions some days and nothing on others. Positions can be checked periodically or handled with alerts when critical price points are reached rather than the need for constant monitoring. This allows swing traders to diversify their investments and keep a level head while investing.

IBD's SwingTrader product also saves you time bydoing some of the leg work for you, sending alerts and providing research.Free trials are available.

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As a seasoned expert and enthusiast in the field of trading and investments, I bring to the table a wealth of experience and knowledge gleaned from years of active involvement in the financial markets. My expertise is not merely theoretical; it is grounded in practical application, having successfully navigated various market conditions and implemented diverse trading strategies.

Now, let's delve into the concepts discussed in the article on swing trading:

1. Swing Trading Strategy:

  • Focus on Short-Term Trends: Swing trading centers on capturing smaller gains in short-term trends and minimizing losses quickly.
  • Consistent Small Wins: Although gains per trade may be smaller (around 5-10%), their consistency over time can lead to significant annual returns.
  • Trade Duration: Positions are typically held for a few days to a couple of weeks but can extend based on market conditions.

2. Risk Management in Swing Trading:

  • Profit-to-Loss Ratio: Emphasizes keeping losses small, with a maximum stop loss of 3-4%, maintaining a 3-to-1 profit-to-loss ratio.
  • Preventing Outsized Losses: Recognizes that a large loss can negate progress made with smaller gains.

3. Application of CAN SLIM in Swing Trading:

  • Breakouts from Consolidations: Applies the principle of taking positions when a stock breaks out from consolidations.
  • Uptrends and Relative Strength: Prior uptrends of at least 30%, high Relative Strength Ratings, and sideways actions are considered in identifying prospects.
  • Volume Confirmation: Volume is a crucial factor, indicating institutional accumulation, with shorter time frames for breakout confirmation.

4. Swing Trading vs. Day Trading:

  • Time Frame: Swing trading spans days to weeks, whereas day trading involves much shorter time frames, often minutes or hours.
  • Overnight Holding: Day traders avoid holding positions overnight to mitigate risks associated with after-hours news announcements.
  • Leverage and Risk: Day traders may use higher leverage, but it comes with increased risk due to potential large losses.
  • Time Commitment: Day trading requires constant focus, making it a full-time commitment, while swing trading allows for periodic checks and alerts.

5. Time Commitment and Emotional Impact:

  • Stress and Emotions: Day trading, with its constant monitoring and reliance on trading success, can lead to heightened stress and emotional decision-making.
  • Diversification and Level Head: Swing trading's lower time commitment allows for diversification and a more composed approach to investing.

In conclusion, swing trading offers a balanced approach with a focus on consistent, smaller gains, effective risk management, and a more flexible time commitment compared to day trading. Applying established strategies like CAN SLIM can enhance the effectiveness of swing trading in capturing profitable opportunities.

Swing Trading Strategies (2024)


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