The phrase “swing trading” can be used very loosely and many traders who believe they are riding market swings are sorely mistaken. Like any other type of trading strategy, there is a right and a wrong way to swing trade.
Want to learn how to swing trade the right way? Read on to find out some key components of swing trading that may help you on the road to profitability.
Swing Trading is NOT Trying to Call Tops or Bottoms
Many traders are under the false assumption that swing trading means trying to sell market tops and buy market bottoms. Although catching a top or bottom would be highly desirable, the fact is that it is a great way to go broke quickly.
Swing trading is meant to ride market swings, not sell tps or buy bottoms. The patient trader will look for key changes in price action that may indicate a reversal before putting their capital at risk. Meaning, you need to be one of those patient traders.
Swing Trading is NOT Day Trading
Swing traders make trades based on swings in price action. Typical swings in price action can last anywhere from two to five days. The swing trader should be looking to catch the “meat” of such moves. Smaller intraday moves should usually be ignored, as such moves typically won’t be large enough to account for wider stop-losses. A simple rule of thumb is to look to make at least four times the amount of money you risk on a given trade.
Swing Traders do NOT Use Extremely Tight Stops
If you were day trading and looking to make a few ticks in crude oil, a stop-loss order a few ticks away could make sense. However, swing trading involves trying to catch a larger market move that could take several days to develop. That being said, the trade must have some breathing room in order to be successful. Trying to swing trade using very tight stops could lead to numerous stop-outs right before the market turns in your favor.
Use Wider Trailing Stops
There are numerous ways to manage a profitable swing trade. Some traders may prefer to set a profit target while others may look to use a trailing stop with a winning position. Still, other traders may look for cues in price action to determine when it might make sense to take a profit.
Although this is largely a matter of personal preference, allowing the trade to unfold with a wider trailing stop may lead to premature stop-outs but also larger potential winners in the event of a significant move in price.
The right way to swing trades involves looking for clues of a potential reversal and waiting for confirmation of such reversals before entering the market. Such clues could include a lower high, a lower low, or various technical indicators.
Swing trading done the right way also involves active and appropriate risk management techniques, while allowing the market to do the heavy lifting for you. When done correctly, swing trading may potentially increase profitability while lowering overall transaction costs.
