If you’re looking to inject a bit of excitement into your trading style, you should consider “swing trading.” This investment strategy refers to investors who try to capture profits in only 1 to 4 days. When using swing trading strategies, you rarely hold onto stocks for more than a week. So if you’re wondering what is swing trading and how you can use it to engage in some fast paced and often profitable trading, read on!
How to swing trade
By and large, swing traders use technological analysis to evaluate stocks. This means that instead of digging into financial reports, doing industry analyses, and similar activities that look at the intrinsic value of stocks, traders using a swing strategy look at patterns in stock prices, and often use automated analytical tools. Swing investors love using data analytics and crunching numbers to find opportunities to generate great returns.
Popular swing trading stocks are often stocks that are very volatile. Penny stocks, tech stocks, bio tech stocks, and all the rest. The reason these stocks are so popular for swing trading is because their volatility creates opportunities to make big returns off of price movements in very short periods of time. Remember, swing traders want to offload their stocks within four days. Stocks that move slowly, like traditional blue chips, often aren’t the best for day trading and other short-term trading strategies because prices usually don’t move at significant enough of rates to generate returns. Big blue chips that are suffering turbulence for some reason, however, are good candidates.
If you want to engage with the swing trade strategy, you have to be good at finding patterns, or at least willing to develop your skills. You won’t be spending your time digging through financial statements, but instead trying to find insights buried within general market data.
A Swing Investing Case Study
For example, let’s say Apple just released its quarterly results and the numbers were terrible. Stock prices are plummeting, 5 percent, 6 percent, 10 percent! Is the sky falling, or is a situation presenting itself? That’s up to you to find out.
Let’s say you quickly run some numbers and examine similarly large technology companies in the last three years that reported bad quarterly data and dropped by about 9 to 13 percent. Of these ten companies, eight of them quickly rebounded within five days and posted gains of five percent or more after bottoming out.
Going back to Apple, you see that the decline is rapidly slowing and prices are stabilizing, down 11 percent. Based on the above information, you know that other technology companies in a similar situation quickly rebounded. Checking your own investing knowledge, you know that many investors simply overreact to bad news.
You pull the trigger, you invest, and then as expected, stocks rise by 7 percent over the next three days. Now, part of you might be tempted to hold onto the stocks, but it’s Friday and you recognize that you didn’t make your investment based on industry insights or in-depth knowledge of Apple itself. The knowledge you gained from that data is now running out of steam, so you decide to sell, locking up your 7 percent gains.
The risks of swing trading
Where there are rewards, there are risks and when it comes to investing, the higher the chance for rewards, generally the greater the risks. Triple A rated bonds, for example, are low risk. As a result, the interest rates generated on them are generally quite small. In fact, historically some bonds have even had negative rates! That means you pay to hold them! Why? Because of absurdly low risks.
Similarly, penny stocks, which are cheap to buy and could very well post huge gains in a short period, are high risk. The company you’re investing in could go bankrupt or suffer a huge setback. Apple was once a penny stock, before Steve Jobs returned. The company was out of touch, had little market share, and looked to be on the verge of collapse. It didn’t. If you had invested in Apple back in the late 1990’s and held onto your stocks, you would have made huge returns! Former energy giant Enron was also a penny stock at one point. It did collapse and investors lost everything.
Swing trading is a higher risk investment because it relies on volatile and fast moving stocks. If you misinterpret data or fail to consider important points and pieces of data, you might end up losing money. For this reason, we generally recommend that you use risk capital, which is money you could afford to lose, when using this trading strategy. If you over expose yourself, you could find yourself getting burned, so be careful!
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