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What is swing trading?

The main difference between swing trading and day trading is the time horizon. Swing trading is generally assumed to be holding onto a position for a few days to a few weeks to catch short to medium-term moves in the market. Holding periods longer than a few weeks to a few months is usually considered position trading.

Swing traders tend to combine technical analysis with fundamental analysis to form an image and build a thesis about the likelihood of future moves. Many swing traders however focus mostly on technicals as it represents most of the information available in the market.

Why do I need a trading setup and a trading strategy in the market?

All successful traders have a setup with an expected outcome. When you are placing a trade, you place a bet on an outcome. A setup lets you define a set of conditions that will give you a positive outcome in the market over a series of trades. Placing random trades will NOT make you money over the long run and it will cost you money because you are gambling.

Then you need a strategy to capture the expected move from the setup. When you have a setup combined with a strategy that produces a positive expectancy, you have an edge, and you will be profitable over a series of trades.

What are the best swing trading strategies?

There are three main types of swing trading strategies:

  • The Breakout strategy

  • The Pullback strategy

  • The Mean Reversion strategy

People have different names for their trading strategies, but none are better than the others. It comes down to the skill level and the experience of the trader. Great traders can make all swing trading strategies work, but which trading strategy suits me? Well, it depends, breakout strategies work very well during certain kinds of market conditions and the same is true for the other two.

There are seasons and periods when the setups and trading strategies work well. Some prefer breakout strategies as they tend to be easier to spot and time, while others want to see a solid breakout and a pullback before they get convinced to get in.

A very typical way to swing trade is by focusing on already established trends in the market as the trends are more likely to continue in the direction they came from than break down compared to swing trade ranges or other peculiar methods. Swing trading trends offer opportunities for bigger moves as they can continue forever (although that never happens, trends can go on for a long time). Buying a stock when it is coming out of a base in a trending market has one of the highest success ratios as it is easier to spot, has an edge, and has the ability to make enormous moves.

Does swing trading really work?

There are misconceptions about all sorts of trading styles, but does swing trading really work? Swing trading is no different from day or position trading – it is just the holding period. You can make all types of trading styles work, but whether you are going to be profitable using a swing trading approach solely depends on your trading skills.

When you are selecting a timeframe to specialize in, focus on the timeframe that suits your lifestyle and personality. Usually, the longer the timeframe, the less time you have to spend in front of the screens during market hours. No styles are superior to others, but one style may be superior to you. Is Swing trading gambling?

A common question on the internet is whether swing trading is gambling or not. Swing trading, like all other forms of trading, differs from gambling because a trader has an established edge in the market. That means over a series of many trades, a trader will make money when following a profitable system as there is an edge component built into it. If there is no edge component built into the system, the trader is no more than a gambler.

A common illustration is a gambler and the casino, the casino has a long-term edge and will make money over time, but the individual outcome of every bet played in the casino gives a random outcome. A gambler however without an edge will only experience random results, even over a long period. The gambler may get lucky from time to time, but the casino will make consistent money as there is an edge built into the system. How do you learn swing trading?

There are many ways to make money from swing trading. There are different instruments, different markets, and different swing trading systems. If you want to learn how to swing trade, education is important.

Discovering exploitable edges in the market is difficult for novice traders and learning from someone will help you speed up the process of becoming a profitable trader. Trying to develop and research your own swing trading setup and system may set you back years before becoming profitable.

The suggested route for beginners is to mimic a profitable trading system, then make it your own and once you have reached success, you can branch out. It is hard to go the opposite way. The best way is to get some sort of mentor and/or comprehensive guidance. Why should you swing trade over day trade?

Day trading is not suitable for everyone. It comes down to personality and lifestyle. Some people do not want to spend the entire day in front of the screens scouring the markets for opportunities.

Day trading requires fast thinking, no hesitation, and a lot of focus during an entire trading session. Is day trading better for some people? Yes, but swing trading is also better than day trading for a lot of people. Swing trading does not require the same amounts of concentration during the day, many swing traders scan and make plans before the market opens and then execute their orders in the first 30 minutes and then just monitor the positions throughout the day. Swing trading requires a lot less effort so for many, swing trading is better than day trading. Best swing trading platform?

There are no best trading platforms for swing trading. It is all personal preference. Some platforms are fast, and others are very customizable. You should pick the platform that suits you, your budget, and your needs. A common platform throughout the swing trading communities is TC2000.

TC2000 is a paid alternative, so Thinkorswim by TD Ameritrade is also frequently used as it is free. Where do you start as a beginning trader?

An aspiring swing trader should start by getting some form of education. There are plenty of books written on the subject, but having professional guidance is certainly the best way to go and the fastest way to learn. In this era, however, compared to two decades ago there is information overload, and fishing out the valuable sources from the deceiving ones can be tricky.

There are many fraudulent gurus on social media platforms driving luxury cars and living luxurious lifestyles, but the hugely successful traders tend to be in the shadows focused on their craft. So, one tip when selecting education is to steer away from the services promoting obscene results and lavish lifestyles. Is swing trading good for beginners?

Swing trading is a slower form of trading that can be suitable for newer traders. Day trading can be a very fast-paced endeavor and require fast decision-making. Until you have learned to trade on a longer timeframe where you have time to reflect on decisions, swing trading will typically be the way to go. So, is swing trading good for beginners? It is probably the best way to start as it is not super-fast pace, but not as painfully boring as position trading can be.

Once you master the swing trading timeframe, migrating to a faster timeframe can be the way to go. It comes down to your personality, try it for a while and see if it suits you. When should you take profits as a swing trader?

Taking profits when trading any style is hard and probably the most difficult part of any system, but you have to develop sound sell rules anchored in real-life data. This means that the sell rules you develop should have some sort of positive expectancy based on backtesting/studies you have done. The rules can be quite simple, sell 50% at 10% gain and 50% at 20% gain, or sell when it is up 3ATR.

The options are endless, but the important takeaway is that the sell rules are grounded in reality and the overall system has a positive expectancy. For instance, you can’t have a system with a 25% win rate and then always take profits at 1R because it will produce a negative expectancy, hence there is no edge. There are many ways to get creative but keep the rules simple. Can you swing trade all markets?

Yes, you can swing trade all markets. You can day trade, swing trade, and position trade in all markets. One benefit when swing trading is that it does not require as much leverage and capital as you are, in most cases, looking for bigger moves than when you are day trading.

When you are day trading you have to make up for the lack of % moves by taking a lot of smaller trades with massive size, and not all markets are suitable for that kind of trading. So yes, you can swing trade all markets although some markets are more suitable than others.

Risk management and overnight risk when swing trading?

A common misconception regarding swing trading is the exaggerated risk of overnight gap ups and downs. If you study thousands of charts from the past 10 years you will find a lot of gap ups and gap downs, but how often do they occur, and can we as swing traders do anything about it? A lot of the gaps in most of the charts tend to happen during the earnings season, so one way to mitigate the gap risk is to either get rid of or sell most of the position before the earnings release. Holding through earnings is gambling unless you have a massive profit padding as a buffer to absorb the potential blow.

Another way to save yourself from gap risk is to be aware of any upcoming news releases. For instance, if you are holding a lot of stock in a biotechnology company, you want to be aware of potential FDA news releases. Unless you have a very specialized competence regarding biotechnology stocks and you know what you are doing, you do not want to hold through FDA trial releases as the stock can easily gap down 50% in the pre-market.

By taking these precautionary actions, you minimize the probability of getting caught in an unfavorable gap down by a huge %. Bear in mind that not all news releases can be anticipated and if you decide to swing trade a lot in the future or select swing trading as a profession, gap downs will happen to you at some point. That is why risk management is extremely important.

A sound rule is to never put more than 30% of your account in a given stock overnight and be incredibly careful placing 100% of your account in similar stocks as industry news may also hit the market and the whole group can be down. Let us assume that the stock gaps down 50% the next day before you get out, that would cost you 15% of your account compared to 50% if you invested your entire account. A 15% loss is manageable, but 50% is devastating. Can you swing trade options?

You can swing trade all instruments, but swing trading options are harder than swing trading the underlying instrument because there are multiple factors influencing the price.

Swing trading options take away the gap risk and give the buyer a massive amount of leverage, but option sellers know this, and you have to pay a big premium. Just think of it, when you are a seller of insurance(options) and you know you are taking on all the risk, don’t you want to get paid? Yes, you as a seller want to get paid, and therefore you require a high premium which is the options seller's edge. He will charge you an amount he feels comfortable with and the amount of risk he takes. Unless you know what you are doing and have a deep understanding of the option greeks I would encourage you to steer away.

It comes back to the concept of keeping everything as simple as possible, swing trading is hard enough and complexity will only cause frustration. Simplicity and focus in trading

As briefly touched on earlier, complexity in all sorts of trading is a huge distraction. Swing trading is difficult, and no one will dispute that fact, so why add layers of complexity? And why are so many things so complex? Not just in trading but in life generally. Well, complexity is deemed sexy by many, and it sells. Who wants to pay for something super simple, super simple things are not going to work, right? Isn't it supposed to be complex? Well no. The most challenging task is to convert something overly complex into something simple, like a trading system.

You always want to boil it down to the simplest solution. You do not need 10 indicators; you don’t need 10 different news services and you don’t need access to millions worth of research from reputable institutions. Focus on what is in front of you and ask yourself, what matters? Does this indicator provide me with any value? And in the end, the only thing that matters in trading is price action.

Only price pays. The opinions of analysts do not matter, only price pays, what the RSI indicator says does not matter, only price pays, and whether or not the fed is going to raise interest rates does not matter, only price pays (unless it is specific to your trading strategy). Keep it simple, focus on what matters.

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