Swing trading is a short-term stock trading style. You take smaller profits, cut losses quicker, and hold stocks for less time. To make it work, your rules for trading need to be specific to the shorter time frame. Though the gains might be smaller, the shorter holding period means you can compound your gains into big profits over time. Here are the basics of implementing a swing trading strategy.
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Swing Trading Strategy: Smaller Gains, Smaller Losses
Rather than targeting a 20% to 25% profit for most of your trades, a more modest 5% to 10% will be the first profit goal. The difference is largely due to the holding period. Swing trades don't last months. It's more like a couple of weeks. By taking the smaller gains, often on the way up, you get the majority of a quick move and sidestep the areas when the stock consolidates. Don't plan on selling at the top all the time. You'll often see stocks go up more and kick yourself for selling too early. But you'll also tend to avoid market corrections.
When you take profits on the way up, if no new setups present themselves to replace the sold stocks, you've naturally reduced your exposure. Swing trading strategy put IBD's SwingTrader in cash early in the 2018 Q4 correction and did the same for the stock market correction in February andMarch of last year. You might end up getting out too early but you can always buy stocks back if they recover.
While you are taking profits quickly for most stocks, occasionally you may have enough initial strength to warrant giving a stock more room to run. Due to a powerful gap up, SwingTrader neared its 10% profit goal for Fibria Celulose (FBR) in just a couple days. We sold half and let the remainder run for a gain of 20% in just 15 days.
Of course, not every stock idea will work. Cutting losses quickly is key to keeping your portfolio healthy. You can have only half your trades end positive and still make a lot of money as long as you keep your losses small compared to your gains.
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Swing Trading Example: Paylocity Stock
Technical analysis plays a larger role in a swing trading strategy but it's still good practice to focus on companies with stellar fundamentals. Take Paylocity (PCTY) stock. It was under consideration for SwingTrader with the best possible Composite Rating of 99. But there has to be some type of correction that offers you the opportunity for a buy. Whether buying a breakout through resistance or a reversal, a correction precedes the purchase.
On May 9, Paylocity stock pulled back to a buy point around 91.70 and found support (1). The market action on SwingTrader already turned cautious the day before, going to sideways, as did the market outlook in The Big Picture in its switch to uptrend under pressure. The stock market worsened on May 13 as the Nasdaq composite and S&P 500 sliced through their 50-day moving average lines. We switched SwingTrader market action to downtrend and The Big Picture called the market in correction. Interestingly, Paylocity stock held above its previous low on May 9 showing relative strength (2).
That's the kind of technical action we look for in addition to the fundamental strength. At just a couple weeks, it was too short for any of our traditional base patterns. But for a swing trading strategy, the shorter holding period allows for shorter consolidations.
On May 16, the Nasdaq composite and S&P 500 got back above their 50-day moving average lines. Our swing trading strategy was still cautious with potential stock market headwinds. But if the market rebound continued, it could be good for at least a short-term swing trade. That day, heavy trading volume accompanied a strong move in Paylocity stock as it cleared the 100 mark (3). As the correction in Paylocity was mild so far, compared to the stock market, the relative strength line was already in new high ground (3).By the close, we already had a 3% profit from our entry on SwingTrader.
Unfortunately, the profits didn't last. Market indexes fell right back below the 50-day moving average line the next day and we removed Paylocity stock early to protect profit (4). Taking gains quickly in a tough market is a huge benefit of swing trading strategy. The market worsened and we avoided the trade turning negative on us and instead left with a 1.4% gain. That may not be an impressive figure but consider that it was profit from a single day in a tough market. Replicate that often enough and you'll have quite the year as your gains compound.
More details onPast Tradesare accessible to subscribers and trialists to SwingTrader.Free trials are available.
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