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What Is Swing Trading and Does It Work?

Swing trading is a method of short-term trading that involves buying a stock (or option) and selling it within a time period that is longer than one day but less than one month. During this time period, the investor attempts to sell at a higher price than the amount originally paid for the shares (or contract).

Swing trading differs than day trading in that the shares or options contract are held at least overnight. If done correctly, swing trading can realize a quicker gain than the more popular buy-and-hold strategy.

Does Swing Trading Work?

Most studies have shown that it doesn’t. One study in particular conducted by Fidelity found that, out of all of their investors, the ones who rarely traded fared far better than the ones who traded regularly.

This is because, as always, market timing is difficult—there are too many factors that affect share price.

Another huge factor is time: To be successful, an investor would have to dedicate enough time to learn how to study the markets and know when to trade on a regular basis. Most people simply don’t have the time (or desire) to do so.

That isn’t to say it can’t be done. What causes most swing traders to fail is not finding the right balance of simplicity and studying the market. Some traders over-complicate the process and spend hours studying the most minute details. Others don’t realize that some companies, as well as specific sectors, simply do not lend enough volatility to swing trade the stock.

A Simple Swing Trading Strategy That Has Worked For Me

There is no such thing as the perfect strategy. But what has worked well for me when I have bought stock with the intention of selling it within a month is to look at five things:

  • the overall popularity of the company
  • the current share price
  • the average share price within the past year
  • the latest news on the company
  • the sector the company operates in

For starters, I look for well-known companies that have been in business for at least 10 years in what I consider to be more lucrative sectors, such as tech, pharmaceuticals and financials.

Next, I look for a share price that is at the lower end of the spectrum for its 52-week range.

Then I look at the latest news to make sure there isn’t any devastating news that could keep the share price down for a long time.

Finally, I make sure the company operates in a moderately volatile sector.

The sectors that are typically more lucrative with moderate volatility are:

  • tech
  • electronic gaming
  • pharmaceuticals
  • financials

The reason you want moderate volatility is because high volatility can equal huge losses and low volatility doesn’t offer enough arbitrage opportunities.

For that reason, I tend to stay away from more volatile sectors such as oil and gas (although there are sometimes a few exceptions) and less lucrative sectors such as consumer staples.

It’s also difficult to swing trade sectors that typically don’t fluctuate much in share price in the short term, such as utilities.

Turning Your Swing Trade Into a Buy-And-Hold Situation

One way to approach swing trading is to start by looking for companies that operate in sectors that offer some stability and growth potential. Why? Because if your trade goes south, it will most likely to be temporarily.

There is no hard and fast rule that says you can’t hold onto the stock for a little longer.

Although the idea of swing trading is to sell the security within a month, there is no hard and fast rule that says you can’t hold onto it for a little longer—over even for the long term.

For example, if I were to buy shares in Microsoft with the intention of selling them within a month but the price per share continued to drop, I could choose to hang onto the shares for longer—even indefinitely. Since it’s a well-known company, I could turn what was originally going to be a swing trade into a buy-and-hold situation.

The other option is to attempt to swing trade stocks that also pay a dividend. This could even provide an opportunity to capture the dividend before selling. But like the Microsoft example, should the share price not recover, at least I would gain regular dividend payments until I decided to sell.

Some Popular Companies For Swing Traders

There are some larger, more stable companies that have enough volatility to offer swing trade opportunities. These are (by sector):

Tech

Facebook (FB)

Microsoft (MSFT)

Amazon (AMZN)

Netflix (NFLX)

Apple (AAPL)

Pharmaceuticals

Pfizer (PFE)

AbbVie Inc (ABBV)

Merck (MRK)

Financial Services

Goldman Sachs (GS)

Morgan Stanley (MS)

PNC Financial Services (PNC)

Electronic Gaming

Activision Blizzard (ATVI)

Electronic Arts (EA)

What To Do Before You Start Swing Trading

If you think you might want to try your hand at swing trading, try doing it “on paper” first. Meaning, you don’t actually put up real money.

Get a notebook dedicated just to practicing your trades (or create a new document on your laptop or phone).

Do a little research, decide on which stock you would buy (without actually buying the shares) and write down the date, time, and how much it is trading for at that moment. Then watch the stock for the next several days to weeks and write down the moment you think you should sell the shares.

Repeat this process many times before you actually start trading for real. Look at your notes. Are you doing well? Did you sell to soon or too late? Only when you start having solid returns most of the time should you consider swing trading for real.

Remember, too, that you can turn your positions in larger, more solid companies into a buy-and-hold strategy if needed. You don’t necessarily have to sell within a certain time period.

Getting the “swing” of swing trading takes patience. But with a little practice, you’ll be hitting it out of the park in no time.

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