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Swing traders take advantage of market volatility to generate profits over the course of a few weeks at most. This investment method carries some risk, but the right swing trading strategies can pay off for savvy investors. 

The good news is that swing trading isn’t hard to learn. In fact, Raymond Rondeau, the president of the New England American Association of Individual Investors Chapter, says that swing trading can be learned by “spending an hour or so on the weekend, over a cup of coffee.” So sit down with your favorite mug and learn how to swing trade with these tips.

What Is Swing Trading?

Swing trading refers to a short-term trading strategy where investors buy and sell stocks over the course of a few days or weeks. Traders rely on several swing trading strategies, particularly methods to predict price “swings” that provide the right opportunity to buy or sell. The goal is simple: to buy stocks when the price dips and then sell within a short period of time when the price spikes back up.

Swing Trading vs. Day Trading

Swing trading is a bit different from “day trading,” which involves buying and selling stocks over a much shorter period — sometimes just a few hours. With swing trading, investors will hold the stock for up to several weeks, though there’s no absolute maximum period. 

The Benefits of Swing Trading

While it depends on the asset, a short-term swing isn’t likely to offer the kinds of substantial gains you might expect from a long-term or buy-and-hold stock. And that’s okay because the truest advantage is that investors gain an immediate, short-term gain from trading a particular security.

If you can adopt a strong swing trading strategy, you can compound these earnings and build your wealth over time. Swing trading therefore has the potential to be an excellent way to supplement your primary investment strategy, and it carries less of a risk than day trading.

The Risks of Swing Trading Stocks

As with any short-term trading strategy, there are inherent risks. Traders are buying stocks with the assumption that the price will rebound and that they can reap the profits. Unfortunately, there’s no guarantee that the price will move in the short term. Some swing traders may even miss out on long-term trends.

Still, the right swing trading strategies can help traders navigate these risks and allow market volatility to work in their favor. And if you already have a well-balanced, diversified portfolio, you may be able to absorb some additional risk. But as always, never invest more than you and your family can afford to lose.

How to Swing Trade: Swing Trading Strategies 

Should you decide to try your hand at swing trading stocks, there are several strategies that can work in your favor. The following tips can help you hone your swing trading strategy to improve your chances of success.

Use the Right Analytical Methods

The first observation you’ll make is that swing trading is a bit more technical than simply tracking stock prices. Swing traders rely on both technical and fundamental analyses to assess the value of an asset.

Fundamental analysis is basically a qualitative way of evaluating a stock in which you look at broad trends in the company’s earnings, leadership structure, and industry trends. Technical analysis requires a bit more focus, and traders will rely on stock charts, technical indicators, and other tools to track a stock’s performance.

Use a Stock Screener

Once you have a better idea of what technical indicators you want to look at, you can use a stock screener to filter through the market and find the right company to invest in. Many brokerage platforms have these built in, and they can also be used in conjunction with paper trades.

Know Which Direction to Take (Long or Short)

Investors will need to know whether to take a long or short position in stocks. A long position refers to stocks that an investor has purchased and owns. A short position refers to stock that an investor owes another person but has not yet purchased. 

Investors must decide which position is the better strategy. Short positions are riskier and usually require margin accounts, which are basically loans from the broker. Long positions are the more “traditional” approach, though both options require market analysis to determine which direction you expect the price to move.

Decide When to Enter the Market

One of the hardest choices for day traders is knowing the best time to enter the market. When investing in a stock, traders must purchase the asset when its price is at its lowest, thus maximizing profits.

The analytical methods used above can help investors pinpoint the best time to purchase a stock. This means you want a stock that (1) is currently undervalued and (2) is expected to perform favorably in the immediate future. Again, stock screeners can help you find the right stock based on your analytical criteria.

Know When to Exit the Market

When you’re engaged in a swing trade, you’ll need to know the price at which you want to sell your stock to reap a profit. At other times, you’ll have to determine the price at which to cut your losses and sell the stock before its price drops even more.

As with any form of trading, this can be tricky. And admittedly, there may be times when you have the opportunity for long-term gains on a stock but deliberately sell early to reap the immediate reward. 

If your stock is underperforming, you may consider getting rid of it. However, the alternative may be to cling to those shares in the hopes of a long-term rebound, which may allow you the small blessing of cyclical price trends.

Get an Early Start

The New York Stock Exchange opens at 9:30 a.m. on weekdays. But it’s not unusual for swing traders to start as early as 6:00 a.m. Why so early? Swing traders use this time to carefully evaluate stock prices and begin the process of making trading decisions once the exchange officially opens. 

In addition to assessing general market conditions, swing traders might also create a watch list for the day to highlight new opportunities and check up on any open positions that they may consider selling.

Find a Broker With Minimal Fees

Swing trading is common enough that most brokers provide this option. The problem for traders is that some brokerage firms/platforms charge commissions for every sale. If you make a lot of short-term trades, your profits could be impacted by brokerage fees and other expenses.

To avoid this outcome, make sure to find the right broker or brokerage platform. You should compare the fees and terms of at least three providers to avoid these expenses from cutting into your revenue.

Practice With Paper Trades

If you’re new to the world of swing trading, it’s a good idea to practice with paper trades until you get the hang of it. Paper trading is basically a stock market simulator designed to mirror real-world conditions. This allows you to practice your swing trading strategy without risking real dollars.

Some stock trading platforms have paper trades built in. Aim to practice paper trades for at least six months until you get a better feel for it, and only start using real money once you’re familiar with stock screening tools and analytical methods.

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