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Make Money Swing Trading Basics

Updated on September 13, 2014
Singular Investor profile image

I have a B.A. and a PGCE from the University of Oxford and many years experience trading the stock market.

Day Trading and Swing Trading Basics

Day Trader, Swing Trader or Long-Term Investor

This page tells you all you need to know about swing trading so that you can decide if it for you. We all have our different trading styles, so when considering trading stocks on the stock market it is useful to consider whether you are a day trader, swing trader or long-term investor.

Day trading is, as the name suggests, trading stocks, indices, etc... in the same day, i.e. day traders close all their positions before the end of the day so that they are not holding any stocks overnight and often trade more than once during the day, sometimes their trades are held for just a few minutes. An interesting guy for learning about day trading is Oscar Carboni - he has a lot of free videos and a free real-time chat room where you can watch him trade live. He also has a paid service but I have never used it so can't comment on it. Day trading is not the same as swing trading.

Stock Chart showing Support and Resistance Levels

Stupid long-term investors!
Stupid long-term investors!
Stock Chart showing Support and Resistance
Stock Chart showing Support and Resistance

Long-term investing, is, as the name implies, taking a position for the long-term (many years) usually based on fundamental analysis. The greatest modern-day proponent of this approach is Warren Buffett - aka the Oracle of Omana - who also happens to be the second richest man in the world, so he must be doing something right. Needless to say,long-term investing is not the same as swing trading.

Swing Trading

Swing trading is for stock market traders who are interested in the trend of a stock price over a specific period of time. The aim is to buy stocks (or sell them) keep them for a few days, then, after the price has risen or fallen to close the position for a profit. A stock is said to be in an uptrend when the highs are higher and the lows are also higher. This means that when the price falls back it will nevertheless still be higher than the last time it fell back. In swing trading you need to look for patterns that repeat themselves and that are predictable, the aim being to predict when the stock price will stop falling and start moving back up.

Swing traders are not interested in the long-term. Some people say that in the long-term good stocks always go up and that you are just making your broker rich by trading in and out all the time. The problem is that if you have held stocks for the last ten years you are probably just breaking even or worse. With swing trading if you get it right every time you can make a lot more money than by just buying and holding, the difficulty of course is getting it right every time.

Swing trading is all about calculating the risk/reward ratio - if the risk of losing money is too great compared to the possible rewards then the trade is not worth it.

Swing traders also have a number of preferred criteria to be met before they trade a stock. In the US they select stocks over $10 and with a daily volume greater than 500K shares. They reason that is easier for the evil ‘market makers’ to manipulate stock prices if the stock has a low price and low volume.

To identify which stocks to buy a swing trader will make use of charts these days generally candlestick charts are used in conjunction with moving averages (MA) - 10-day, 20-day and 50-day.

A stock is said to be in an uptrend if the following criteria are met - the closing price needs to be above the 10-day and the 20-day simple MA and the 10-day MA is above the 20-day simple MA. Any chart site will plot the moving averages.

When swing trading there are a number of tips to bear in mind to try to limit your risks.

  1. You don't spend all your money at once. If a stock gaps up or down 1-2% when the markets open, then you should go long (or short) for half the amount you want to trade with. You then wait and see how the share price behaves before increasing your position. If the price continues to move up or down (depending on what is good for your position) then it is safe to increase your position.
  2. IIf the price of the stock you want to trade gaps up or down 2-3% when the markets open, then limit yourself to a trade that is only one quarter of your intended final position.
  3. If the share price gaps up or down more than 3% when the markets open, then it is not really worth making the trade as the risk is too high compared to any possible reward.In swing trading the aim is to make a profit of around 5 - 10 % before closing your trade, when you have achieved this (or if it looks like you have made a mistake) then close the trade and move on to the hext one.
  4. Stop losses. Traders always make losses, it is therefore essential to ensure that any losses are smaller than any gains. This is why stop losses are also essential. You need to set your stop loss at the time you place the trade, then if the trade starts to go against you the position will be automatically closed. If your profit objective is around 7% then you need to set your stop loss at around 4%.

Remember, in swing trading the aim is not to get it right every time but to get it right more often than you get it wrong and to limit your losses when you do get it wrong.


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      share tips 6 years ago

      Visiting this blog is our real pleasure. Should like to thank admin for sharing such a useful information and starting this thread in addition to that we suggest traders not to panic when market is in profit booking state. Investors and traders should

      understand that in volatile stock market conditions they should switch to trading.

      share tips

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      james moylan 6 years ago

      I have a web site where I research stocks under five dollars. I have many years of experience with these type of stocks. I would like to comment about day trading. I am not a day trader. I do not believe that it is possible to predict short term movements in stock prices. there are just to many factors that can influence the price of a stock at any given moment.I am a buy and hold value investor but not buy and hold indefinitely my holding period is between 2 to 5 years.

    • Singular Investor profile image

      Singular Investor 7 years ago from Oxford

      Hi Paul - thanks for the comment and the compliment - swing trading can be interesting if you can afford to lose now and then

    • Paul Peterson profile image

      Paul Peterson 7 years ago

      Wow! very informative hub. Thanks!