What is Swing Trading?

Swing trading is a form of short-term trading which seeks to maximize trading profits and minimize risk by entering and exiting strategic trades that are held from 3 to 30 trading days. It is called "swing" trading because it seeks to enter already established trends (for the most part) and ride them as they swing up or down to new highs or lows. But before we further define what swing trading is, let's first separate the idea from what it is not.

What Swing Trading is Not

Swing trading is not buy and hold investing.

Buy and hold investing involves the fundamental or economic analysis of market cycles, business sectors and individual companies with the intent of buying solid companies, or funds of such companies, when valuations are attractive or when growth prospects are strong. The aim of this strategy is to realize long-term capital gains with a minimum of portfolio turnover. Buy and hold investors are not traders. They normally pay little attention to even the basics of technical analysis. The holding time of a buy and hold position is usually six months, and in many cases it can be much longer.

Swing trading is not position trading.

Position traders are indeed traders inasmuch as they normally rely on the technical analysis of chart trends rather than the fundamental analysis of companies. But their aim is to get in on the beginning of more sizeable moves, which may last several weeks to several months. The primary chart of the position trader is the weekly chart, with the daily chart being used to time entries and exits. Position traders like to buy bottoms and sell tops, but if they enter the position too soon, they are forced to sit through sometimes lengthy drawdowns.

Swing trading is not overnight trading.

The overnight trader is someone who relies on technical analysis and tape reading skills, along with (sometimes) intraday news breaks, to take a two day position in a stock. The overnight trader normally enters the position in the afternoon of the first day, and sells before the close of the second day. The overnight trader's aim is to capture three phases of movement: the afternoon run, the overnight gap, and the morning continuation. This is a very profitable form of trading for someone with sound trading strategies, but it can be very time-consuming, and trading the exit requires as much focused attention as daytrading.

Swing trading is not day trading.

The day trader is someone who, like the overnight trader, relies on technical analysis and tape reading skills, but uses these to pinpoint only intraday moves in stocks. The day trader's aim is to capture intraday breakout or reversal moves, and to do this repeatedly throughout the day. Day traders never hold positions overnight and losses are usually cut short very quickly. Sometimes a day trader will trade in and out of the same stock, or market derivative (like an index futures contract), over and over again throughout the day.

What Swing Trading Is

Swing trading occupies the niche between the "position trader" and the "overnight trader". The primary aim of the swing trader is to capture the bulk of major moves in trending stocks, entering after the trend has begun and often exiting before the trend concludes. Swing traders rely mostly on daily charts, but will make reference to both weekly and hourly charts to better time their entries and exits. The typical holding time for a swing trade is from 3 to 15 trading days. Profit expectations from a swing trade depend on the kind of stock that is traded (less volatile stocks pose less risk but also less potential profit), but are normally in the 5% to 15% range per trade. Portfolio turnover for the swing trader is much less than that of the daytrader, but is greater than that for the position trader. Typically a swing trader will close 3 to 5 trades per week.

Further clarification of the different types of trading styles can be found below:

Buy-and-Hold Investing

• AIM: long-term capital gains
• STYLE: fundamental analysis of sectors and companies
• HOLDING TIME: 6 months or longer
• TIME INVESTMENT: a few hours each month
• TURNOVER RATE: 1 to 5 trades per year
• COMMISSION COSTS: minimal
• EXPECTED ANNUAL RETURN: +15% or more

Position Trading

• AIM: quarterly income
• STYLE: technical analysis of weekly/daily charts
• HOLDING TIME: 30 to 90 trading days
• TIME INVESTMENT: a few hours each week
• TURNOVER RATE: 1 to 5 trades per month
• COMMISSION COSTS: moderately low
• EXPECTED ANNUAL RETURN: +25% or more

** Swing Trading **

• AIM: monthly income
• STYLE: technical analysis of daily/hourly charts
• HOLDING TIME: 3 to 30 trading days
• TIME INVESTMENT: 1 to 3 hours each day
• TURNOVER RATE: 3 to 5 trades per week
• COMMISSION COSTS: moderately high
• EXPECTED ANNUAL RETURN: +50% or more

Overnight Trading

• AIM: weekly income
• STYLE: technical analysis of daily/hourly charts
• HOLDING TIME: 2 days maximum
• TIME INVESTMENT: 6 to 8 hours each day
• TURNOVER RATE: 2 to 5 trades per day
• COMMISSION COSTS: moderately high
• EXPECTED ANNUAL RETURN: +60% or more

Day Trading

• AIM: daily income
• STYLE: technical analysis of intraday charts
• HOLDING TIME: minutes to hours, 1 day maximum
• TIME INVESTMENT: 8 to 12 hours each day
• TURNOVER RATE: 10 or more trades per day
• COMMISSION COSTS: very high
• EXPECTED ANNUAL RETURN: +70% or more

Advantages of Swing Trading

The advantages of swing trading over other forms of trading are numerous. Obviously the anticipated returns tend to be higher than what a buy-and-hold investor would expect, making swing trading an ideal way to "trade for a living". This is especially true when one considers that income from swing trading is available on a monthly basis due to the relatively high turnover rate. One can, for example, trade two weeks for income to pay the monthly bills, and then two more weeks to compound the trading account. It needs to be said, however, that like all forms of trading, swing trading is susceptible to market fluctuations and cycles. While one can swing trade for a living, one needs to be very careful to set aside funds during the good months in order to have money available to pay the bills during the lean months. And like any form of trading or investing, there certainly will be lean months.

Moreover, when executed properly the swing trader will experience much less risk than the long term player. Investors are forced to ride bear markets into the ground, anxiously watching their net worth slip away as the indices grind down day after day. But swing traders have the freedom to simply exit losing trades and step aside. Or they can short the market and make money while the investing world suffers through a drawdown.

Nor are swing traders as tied to their computer screens as overnight and daytraders are. Swing traders can do their market research in the evening when the markets are closed, and place any new trades the next morning when the markets open. Once their trades are executed, they can input their target and stop loss orders and then turn off the computer and go about other business. Overnight traders, on the other hand, must spend an hour or two in the afternoon searching for ew trades, and then three or more hours the next trading day looking for a profitable exit for their trades. Daytraders are even worse off. They are forced to watch every turn of the tape once a position is open. Many are glued to their screens from the premarket to the postmarket, 10 to 12 hours a day. While the potential returns of overnight and daytrading are greater, swing trading offers a more efficient, and hence more attractive, return due to its less labor-intensive requirements.

Finally, to swing trade well, you needn't worry about...

• pouring over financial statements like buy-and-hold investors
• catching market tops and bottoms like position traders
• seeing the bulk of your profits evaporate on overnight gaps that go against you like overnight traders
• or learning the sophisticated reads of Level II and other tape-reading devices like daytraders

Swing trading provides the greatest amount of return for the least amount of work of any trading style! So...let's get started on the great adventure of swng trading!

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