How to Pick the Best Stocks for Swing Trading

Source: Forex Academy

Table of Contents

• Introduction
• What is Swing Trading?
• Benefits of Swing Trading
• How to Pick Stocks for Swing Trading
• Fundamental Analysis
• Technical Analysis
• Entry and Exit Strategies
• Identifying Support and Resistance
• Using Indicators
• Managing Risk
• Swing Trading Tips and Best Practices
• Common Swing Trading Mistakes to Avoid
• Frequently Asked Questions

Introduction

Swing trading is a popular trading style that aims to profit from short-term price moves over a period of days or weeks. Unlike day trading, which seeks quick intraday profits, swing trading involves holding positions for longer periods to capture larger market swings. With the right strategies, swing trading can offer excellent risk-reward ratios and doesn’t require constant monitoring of the markets.

This beginner’s guide will provide a solid foundation for getting started with swing trading. We’ll cover how to pick the best stocks using fundamental and technical analysis, essential swing trading strategies, tips and best practices, as well as mistakes to avoid. Equipped with this knowledge, you’ll be able to swing trade stocks effectively. So let’s get started!

What is Swing Trading?

Swing trading sits between day trading and long-term trend trading. Swing traders look to profit from buying and selling as stock prices rise and fall over a period of days or weeks. They’ll identify trading opportunities from chart patterns or technical indicators that signal the start and end of market swings.

The goal is to capture gains as the stock oscillates between periods of uptrends and downtrends. Swing trades are generally held anywhere from 1 to 6 days, but could extend up to several weeks depending on the stock and market conditions. Unlike day traders, swing traders aren’t glued to their screens all day but instead check in periodically to manage trades.

Some key characteristics of swing trading:

• Holding periods of 2–6 days on average, occasionally up to 2–3 weeks.
• Goal of profiting from short-term price volatility.
• Combination of fundamental and technical analysis.
• Risk defined through stop-losses and position sizing.

Swing trading suits traders who enjoy analyzing charts to spot emerging trends, don’t mind occasional periods of increased volatility, and can withstand moderate risk for higher reward trades.

Benefits of Swing Trading

Swing trading offers great flexibility and profit potential by capitalizing on short-term price moves. Here are some of the main benefits:

• Requires less time commitment — Swing trading positions are held longer term compared to day trading. This means you don’t need to constantly watch the markets and can check in just periodically throughout the day.
• Profit from short-term volatility — Sudden stock price movements generate profit opportunities. Swing trading allows you to capitalize on these short-term trends.
• Combine fundamental and technical analysis — Swing traders rely on both fundamental and technical analysis. Fundamentals help identify stocks to trade while chart analysis assists with timing entries and exits.
• Doesn’t need big price moves — Day trading often relies on volatile fast moves. Swing trading profits can be captured from more moderate market swings.
• Higher profit potential — Swing trades aim to ride larger market moves, which translates to bigger profit potential compared to day trading.
• Controlled risk — Risk can be predefined through stop losses and position sizing. Sudden volatility is also better tolerated.

As you can see, swing trading provides a great middle ground between active trading styles like day trading, and longer term investing. Now let’s look at how to pick the best swing trading stocks.

How to Pick Stocks for Swing Trading?

Choosing quality stocks is critical for swing trading success. The best swing trade stocks generally have high volatility and trading volume. This ensures there are enough price movements to profit from.

You’ll want to analyze stocks using both fundamental and technical factors:

Fundamental Analysis

This involves analyzing the company’s financials and other underlying drivers of the business. For swing trading, focus on metrics that impact stock volatility and pricing in the short term:

• Earnings reports — Earnings announcements often lead to big volatile price swings, providing great swing trade opportunities. Look for growth stocks with a history of earnings beat reactions.
• News/hype — Major news like product launches, FDA approvals, or management changes can all cause increased volatility as sentiment shifts.
• Sector trends — Sectors that are hot often have associated stocks seeing increased trading activity and price movements.
• Technical Analysis

While fundamentals drive long term prices, technical analysis helps time exactly when to enter and exit trades. Useful technical indicators for swing trading include:

• Chart patterns — Classic swing trading patterns like head and shoulders, flags, wedges point to potential trend resumptions.
• Trend lines — Determine the overall current trend direction. Use pullbacks to trend lines as swing entry points.
• Moving averages — Crossovers between fast and slow moving averages signal shifts in momentum.
• Support/resistance — Look for swing setups when price reaches key support/resistance zones, especially on longer time frames.
• Candlestick patterns — Candlestick signals like engulfing or tweezer tops often mark potential swing reversal points.
• Volume — Spikes in volume confirm true swing breakouts as lots of market participation drives prices.

Combining fundamental catalysts with technical patterns gives you an edge in determining which stocks offer the best swing setups.

Entry and Exit Strategies

Now let’s get into the actual swing trading techniques you’ll use to enter and exit positions.

Identifying Support and Resistance

Key support and resistance levels are important for timing swing entries. Look to buy near support in uptrends, and sell or short near resistance in downtrends.

When price reaches support, this indicates buyers are stepping in and provides a low risk area to get long. The opposite happens at resistance where sellers enter and create a high probability short area.

Always wait for confirmation of a bounce off support or resistance breakdown before entering. For example, after a test of support you might wait for a candle close above a swing high to confirm upside momentum.

Using Indicators

Indicators like moving averages and MACD can also generateswing signals. The best setups occur when price and indicator signals align:

Moving average crossovers — A bullish crossover happens when a faster MA crosses above a slower MA, signaling an uptrend. The opposite crossover indicates a downtrend.

MACD crossovers — A MACD line crossover above/below the signal line shows upside/downside momentum.

Divergences — A divergence where price makes a higher high but an indicator like RSI makes a lower high hints that the prior trend may be ending.

Combining indicators creates a powerful trading edge. For example, you might look for setups where price breaks moving average support and MACD is crossing down through its signal line.

Managing Risk

Like all trading, managing risk is critical for swing trading success. Follow these guidelines:

• Use stop losses on all trades to limit potential loss if the market moves against you. Exit with small losses before they become big ones.
• 1–3% risk per trade — Risk no more than 1–3% of your account per trade using appropriate position size. This ensures you don’t blow up your account on one bad trade.
• Mind overall exposure — The more trades you have on, the greater your chance of being stopped out on one. Consider reducing position sizes if you have lots of trades on to lower portfolio risk.
• Book partial profits — You can trail a stop loss to lock in partial profits as the trade becomes profitable. Or scale out in portions to reduce exposure.

Applying smart risk management techniques will ensure you survive the inevitable losing trades.

Swing Trading Tips and Best Practices

Follow these swing trading tips to further stack the odds in your favor:

• Trade liquid stocks — Only trade stocks with ample intraday volume. Thin illiquid stocks can swing wildly and may have trouble filling orders.
• Use limit orders — Place limit orders instead of market orders so you don’t end up paying more than expected if volatility spikes as you enter.
• Be patient — Waiting for perfect entries might mean being inactive at times. Avoid overtrading and forcing marginal trades out of boredom.
• Know earnings dates — Plan entries and exits around upcoming earnings dates. You don’t want to be caught holding through a binary event.
• Markets over indicators — It’s better to miss a trade than take a low probability setup. Focus on overall market direction, support/resistance, price action first.
• Define risk parameters — Quantify maximum loss tolerated and expected reward for each trade before entering. Stick to your plan if things go south.

Following best practices around patience, risk control, and high probability setups will set you up for long term swing trading consistency.

Common Swing Trading Mistakes to Avoid

While swing trading offers great upside, you’ll also inevitably encounter challenges. Be aware of these common swing trading mistakes:

• Overtrading — Trading too often leads to forcing low probability trades and increased commissions/fees which hurts profits.
• No stop losses — Not using stops is a recipe for disaster. Unchecked losses can quickly wipe out accounts. Always trade with stops.
• Ignoring risk management — Poor risk control via position sizing, trade allocation is hugely detrimental. Risk only 1–3% max per trade.
• Revenge trading after losses — Frantically trying to make back losses by overtrading often just creates more losses. Stick to your rules.
• Not planning exits — You need a clear loss limit and exit strategy before entering any trade. Don’t wing it.
• Catching falling knives — Repeatedly trying to pick bottoms in downtrends will blow up accounts due to negative momentum.
• Fighting the trend — Trading against the larger trend direction thinking you’ll capture the reversal is low probability and usually unsuccessful.
• Overtrading earnings — Chasing stocks after earnings leads tend to cause you to enter late after the initial explosiveness has subsided.

Being aware of these common errors will help you avoid making the same mistakes most traders do when first starting out. Now let’s cover some frequently asked questions about swing trading.

Frequently Asked Questions

What is the best technical indicator for swing trading?

While many indicators can generate quality swing trade signals, the best indicators for swing trading tend to be:

• Moving averages — Crossovers signal momentum shifts. Plot short and longer period MAs like 50 and 200.
• MACD — MACD line and signal line crossovers identify high probability entries.
• Volume — Volume confirms true breakouts by showing market participation.
• Support/resistance — Look for bounces or breaks of key S/R levels for entry signals.

How much capital do I need to start swing trading?

You can start swing trading with just a few thousands dollars in a minimum $2000 account. The key is to use proper position sizing so you are not risking more than 1–3% of your capital per trade. With a $5000 account for example, risk no more than $50 per trade.

What is the win rate for successful swing traders?

The best swing traders achieve win rates around 60–65% with a solid trading edge and risk management. Remember it’s OK to have some losing trades. Cutting losses quickly while letting winners run leads to long term success.

Should I swing trade options or stocks?

Options can be used in swing trading strategies. However, it is generally recommended to start by swing trading just stocks, at least while learning. Options add additional variables that can quickly amplify losses if not properly understood.

And that wraps up our introductory swing trading guide! The key points to remember are using a combination of fundamental and technical analysis to select stocks, defining entries/exits with support/resistance/indicators, implementing risk management, and avoiding common errors. Start applying these best practices and you’ll be swing trading like a pro in no time.