What Is Swing Trading & Is It Right For You?

Stock market traders are all about catching favorable tailwinds—hence the popular trading adage, "the trend is your friend."

So it goes in the wild world of swing trading, Wall Street's answer to (hopefully) riding the wave in an effort to stack up some momentum-fueled dollars in a trader's account.

What Is Swing Trading? How Does It Work? 

Swing trading targets a short-term trading strategy that aims to find a sweet spot between the day trader's hourly profit-taking and the buy-and-hold investor's long-term timetable in building portfolio gains.

In a swing trader's world, the ideal position is held for longer than a single day, but usually shorter than several weeks. The primary goal of a swing trader is to hold a security or fund long enough to capture an upward "swing" in the investment vehicle's price, using highly specific market positions to catch the pricing wave and sell the investment vehicle just as the price is cresting.

By and large, big investment firms don't engage in swing trading, but lone-wolf traders often do. More substantially-sized trading firms simply have stock market positions that are too large to get in and out of a market trade on a time-sensitive basis.

Smaller traders, on the other hand, have the nimbleness and flexibility to take advantage of immediate market pricing fluctuations and thus compose the vast bulk of the swing trader population.

These traders often turn to swing-trading specialist firms to guide them through their trades. Brokers like Forex.com, IG, and Ninja Trader offer swing traders a good platform for identifying and capitalizing on trading short-term opportunities, using online trading, algorithmic trading systems, and budget-friendly trading fees that appeal to swing traders.

How Is Technical Analysis Used in Swing Trading? 

The time frame is the key to swing trading.

A position may rise and fall in value in a 24-hour period or over a period of several weeks. To pinpoint the exact time to buy into a swing and sell out before it swings back (at a lower price), traders routinely use technical analysis to leverage the best swing trade opportunities.

Technical analysis helps to calculate the "price action" of a particular security or fund and harness that action to maximize portfolio gains.

For example, let's say ABC stock is priced at a certain market level, and a swing trader wishes to estimate, as closely as possible, where the price is going.

Technical analysis is invaluable in this estimate, as it leverages multiple stock market charts and indicators to identify the stock's price support among investors while identifying any resistance to upward price performance through the analysis of stock price ranges and trading trends.

When a swing trader plugs in the needed calculations to identify pricing patterns, they aren't necessarily interested in how a company is structured, whether or not the CEP is up to job, or if the company has a pitch-perfect operational model. Instead, the trader leans heavily on stock market algorithms that impact share pricing, digging deep into market machinations that might impact the price of the stock going forward.

In short, good technical analysis that racks pricing movements from market buyers and sellers helps a swing trader make smarter, more informed trading decisions.

Using a proper understanding of market perceptions toward a stock, especially in regard to future valuations, swing traders can lock into a security's current price and its future value. In doing so, a trader can identify any potential divergence between the two factors that might lead to a solid return on investment.

Swing Trading vs. Day Trading: What's the Difference? 

It's understandable to confuse swing trading with day trading, as both trading strategies seek to capitalize on short-term market fluctuations, but that's where the similarities end. The real difference between day trading and swing trading is the timing.

With day trading, the idea is to make strategic trades that leverage market swings, and then sell out of those positions by the end of the same trading day. Day traders also often take larger portfolio positions than swing traders, as it's easier to leverage larger amounts of stock when the goal is to sell the position in an hourly (rather than weekly or longer) trading time frame.

Swing traders need to be more patient and more tactical, as more factors can sway a position over a longer trading period.

Any trade that stands pat even on an overnight basis takes on more movement risk, as more things can happen that wind up moving a security's trading price. That usually leads swing traders to take smaller portfolio positions than day traders in order to better manage risk and reduce the chances of losing money.

What Are the Pros and Cons of Swing Trading?

Like any potentially risk-laden financial market trading strategy, swing trading has its benefits and drawbacks. Let's take a realistic view of swing trading and see if the risk level involved is within your comfort level or not.

Advantages of Swing Trading

• Wide variety of trading opportunities: Swing traders enjoy multiple investment vehicles to test their swing trade theories. They can trade single stocks, groups of stocks bundled in funds, and even apply swing trade strategies to cryptocurrencies like Bitcoin and Ethereum.
• Wide variety of trading tools: In addition to having myriad investment trading options to choose from, swing traders can also avail themselves of a growing number of swing trading platforms (like MetaTrader) and strategic resources (think mobile apps, video training sessions, and Trip Advisor-like online chat groups who have engaged in swing trading in the real world.)
• Straightforward strategy:Yes, securities trading is complex - there's no doubt about that. But swing trading, relative to other trading strategies, can be fairly simple. For example, most swing traders focus on large-cap stocks to trade, as more sizable stocks tend to offer the volatility and volume needed to capitalize on swing trading opportunities. Eliminating smaller stocks from the equation is just one example of why swing trading is an easier trading strategy to embrace for investors.

Disadvantages of Swing Trading

• Risk and anxiety:  There's really no other way to say it—swing trading is risky and can lead to significant portfolio losses if you guess wrong. Consequently, if the thought of undue market risk and losing a bundle of money has you reaching for the Xanax, swing trading isn't for you.
• Constant market watching: As the old saying goes, time is a commodity, too. With swing trading, you'll need to schedule a great deal of time away from your actual life to monitor fast-moving trading positions. We're not talking taking a peek at your swing trading position every few days or so. Instead, you'll be checking your trade on the hour in live market trading conditions, taking you away from your job, your family, your friends, and your life in general.
• Difficulty: In full-bore bull and bear markets, swing trading can be challenging. That's because more stocks and funds are in full-volatility mode and won't necessarily move in the way a swing trader needs an investment vehicle to move when financial markets are swinging as a whole for several weeks at a time.

Is Swing Trading for You?

If you've got the time and you've got the money—and you can bear the risk—a small investment in a swing trading strategy that uses a professional trading platform can be well worth your while.

At best, you'll learn a great deal about financial pricing oscillations and how they impact individual securities and make some money in the process. At worst, you'll lose some money but gain valuable market education.

As long as the amount of money involved isn't too substantial and the risk involved too high, swing trading can work under the right conditions and for the uniquely risk-aware investor.