The Goldilocks Way to Trade… and Why You Need to Try It
Swing trading is a trading method perfectly accessible to new traders, so it’s a great skillset to have in your repertoire.
The strategies are fairly easy to grasp, and this style of trading doesn’t require the same urgency and split-second decision making required in day trading.
For many traders, this is the perfect way to ease into trading, and can help build good trading habits that will serve you no matter how your methods evolve.
Here’s an introduction to swing trading — what it is, how to look for stocks to trade, and some of the best setups for generating profits.
What is Swing Trading?
First things first: What, exactly, is swing trading?
Swing trading is a method of trading where you only hold the stocks for a short period of time.
However, unlike day trading, where you will move in and out of a trade within the same day, swing trading positions can last anywhere from two days to a couple of weeks.
The idea is that you’re holding on to the stock to profit from price changes or ‘swings.’ These swings in the price change are where this style of trading gets its name.
Why Swing Trading?
What’s so great about swing trading? Well, several things…
For one, it’s an accessible method for even new traders. While the pace is fast, it’s not as fast as day trading. This means that swing trading allows a little more time to think out your process and make educated decisions with your trades.
For many, the quick pace of day trading can prove overwhelming at first. Swing trading can be a great entry to day trading, and it’s a strong trading practice in and of itself.
This doesn’t mean that swing trading is as relaxed as the years-long investing I have discussed before. But you’re only holding on to the stock for a few days or weeks, so swing trading offers potential profits that exceed taking longer positions on a trade.
And since you’re only holding onto the stock for a short period of time, you can take advantage of the market volatility and potentially gain assertive profits from trades in a relatively short window.
Another benefit of the short term involved with swing trading is that it allows traders to zero in on the work involved in coordinating entry and exit of the trade. Many traders find it easier to really focus on the trade at hand for the full duration of the time they hold onto the stock, since it’s relatively short-lived.
Often, when you take longer positions, you can forget about the stock or it can be easy to stop being diligent, making you lose track of what’s going on in the market and miss your opportune moment to exit the trade.
Put more bluntly, it’s easy to get lazy with longer positions. The short time period involved in swing trading helps guarantee that you’ll stay on the ball.
What is the Goal of Swing Trading?
Obviously, the primary goal of swing trading is to earn profits. But how is that achieved?
The goal of swing trading is for you to find stocks that are poised to make a movement over the course of several days, weeks or months — not just minutes or hours — and then capture gains by trading within the trend.
To find these stocks, it’s your responsibility to employ technical analysis and research to identify trends and catalysts that will ideally improve your chances of making profitable trades.
How to Profit With Swing Trading
To profit with swing trading, you must choose stocks with movement that will gain you profits as they fluctuate or swing in value.
The traditional model of investing is ‘buy low, sell high.’ Simple as that is, ultimately this is the most traditional way to profit with swing trading… or any sort of trading, really.
You begin by identifying a stock that is gaining. Then you get really obsessed about it. You research the stock, pore over its chart, survey its history, and research potential catalysts that could be affecting the stock’s movement.
If, through your research, you determine that you’ve found a stock that still has room to continue gaining, you can invest, hold onto the stock for a short period of time, and determine when to sell so that you can profit.
Of course, to do this you must have a lot of discipline and think about your entry and exit before you even trade. You’ve got to aim for the ‘Goldilocks zone’ — where you don’t hold on too long, but not too short a period of time, either… you want it to be just right.
Yes, it’s easier said than done, particularly when your emotions get in the way.
Traders can also profit by combining short selling with swing trading. In this scenario, you’re basically going for the opposite phenomenon of the ‘buy low, sell high’ approach. You’re looking for stocks that you can try to predict losing big so that you can profit as they go down.
To learn more about short selling, make sure you keep an eye out for another issue later this week… “The 10 Things You Need to Know About Short Selling.”
Whether you’re seeking gainers or losers, the most important aspect of profiting from swing trading is choosing the right stocks.
Some of the best companies for swing trading are those with high trade volume. By volume, that means the amount of stocks that are being bought or sold each day. For swing traders, these constant price fluctuations — even if by small amounts — can be beneficial.
The market also matters when it comes to swing trading. When the market is operating in an extreme, be it bullish or bearish, swing trading can prove difficult. During extreme times, stocks aren’t as easy to track; the stability isn’t there to help you plot out a clear course of action.
In an extreme market, momentum can make stocks do things that are out of the ordinary. This makes it hard to determine patterns. Since I’m all about patterns, I don’t think those are ideal conditions for swing trading.
Times of market stability are the best times for profiting from swing trading. It’s when you can do solid research and determine a stock’s history, which can predict its potential future. This allows you to catch short-term movements with more of a sense of security.
Determining the market sentiment can prove challenging, particularly to new traders. However, with time, practice, tons of studying, and experience, it will begin to become more clear.
Tomorrow, I’ll be back with more details delineating the difference between swing trading and day trading with concrete examples of when to take either approach, how to plan for each set up, and the steps you should take in differing circumstances…
Editor, Penny Stock Millionaires