Best Swing Trading Strategies and Chart Setups to Generate Profits

In this post, you’ll learn how to use the best simple swing trading strategies, how to look for stocks to trade, and some of the best setups for generating profits.

Swing trading is a method that’s accessible to new traders, so it’s a great skill set to have in your repertoire.

The swing trading strategies are fairly easy to grasp, and this style of trading doesn’t require the same urgency and split-second decision making required in day trading.

For many people, this is the perfect way to ease into trading, and can help build good habits that will serve you no matter which other directions your future investing takes you. 

Here’s an introduction to swing trading — what it is, how to look for stocks to trade, and some of the best setups for generating profits.

Download a PDF version of this post as PDF.

What is Swing Trading?

Swing Trading Strategies & Setups to Generate Profits
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First things first: What, exactly, is swing trading?

Swing trading is a method of trading where you only hold the stocks for a short period of time.

However, unlike day trading, where you move in and out of a trade within the same day, swing trading positions can last anywhere from two days to a couple of weeks.

The idea is that you’re holding on to the stock to profit from price changes or ‘swings’. These swings in the price change are where this style of trading gets its name.

Why Swing Trading Strategies?

What’s so great about swing trading? Well, several things …

First, it’s an accessible method for even new traders. While the pace is fast, it’s not as fast as day trading. This means that swing trading allows a little more time to think out your process and make educated decisions with your trades.

For many, the quick pace of day trading can prove a little bit overwhelming at first. Swing trading can be a great entry to day trading, and a strong trading practice in general. 

This doesn’t mean that swing trading is totally relaxed. But you’re only holding on to the stock for a few days or weeks, so swing trading offers potential profits that exceed taking longer positions on a trade.

And since you’re only holding on to the stock for a short period of time, you can take advantage of the market volatility and potentially gain assertive profits from trades in a relatively short window.

Another benefit of the short term involved with swing trading is that it allows traders to zero in on the work involved in coordinating entry and exit of the trade. Many traders find it easier to really focus on the trade at hand for the full duration of the time they hold onto the stock, since it’s relatively short lived.

Often, when you take longer positions, you can forget about the stock or it can be easy to stop being diligent, so it’s easy to lose track of what’s going on in the market and miss your opportune moment to exit the trade.

Put more bluntly, it’s easy to get lazy with longer positions. The short time period involved in swing trading helps guarantee that you’ll stay on the ball about things.

What is the Goal of Swing Trading?

Obviously, the primary goal of swing trading is to earn profits. But how is that achieved?

The goal of swing trading is for you to find stocks that are poised to make a movement over the course of several days, weeks or months — not just minutes or hours — and then capture these gains by trading within the trend.

To find these stocks, it’s your responsibility to employ technical analysis and research so that you can identify trends and catalysts that will ideally improve your chances of making profitable trades.

How to Profit With Swing Trading

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To profit with swing trading, you must choose stocks with movement that will gain you profits as they fluctuate or swing in value.

The traditional model of investing is ‘buy low, sell high’. Simple as that is, it’s the most traditional way to profit with swing trading.

You begin by identifying a stock that is gaining. Then you get really obsessed about it. You research the stock, pore over its chart, survey its history, and research potential catalysts that could be affecting the stock’s movement.

If, through your research, you determine that you’ve found a stock that still has room to continue gaining, you can invest, hold on to the stock for a short period of time, and determine when to sell so that you can profit.

Of course, to do this you must be disciplined and think about your entry and exit before you even trade. You’ve got to aim for the “just right” Goldilocks zone — where you don’t hold on too long, but not too short a period of time, either.

Yes, it’s easier said than done, particularly when your emotions get in the way.

You can also profit by combining short selling with swing trading. In this scenario, you’re basically going for the opposite phenomenon of the ‘buy low, sell high’ approach. You’re looking for stocks that you can try to predict losing big so that you can profit as they go down. To learn more about short selling, check out this post.

Whether you’re seeking gainers or losers, the most important aspect of profiting from swing trading is choosing the right stocks.

Some of the best companies for swing trading are those with high trade volume. By volume, that means the amount of stocks that are being bought or sold each day. For swing traders, these constant price fluctuations — even if by small amounts — can be beneficial.

The market also matters when it comes to swing trading. When the market is operating in an extreme, be it bullish or bearish, swing trading can prove difficult. During extreme times, stocks aren’t as easy to track; the stability isn’t there to help you plot out a clear course of action.

In an extreme market, momentum can make stocks do things that are out of the ordinary. This makes it hard to determine patterns. Since I’m all about patterns, I don’t think those are ideal conditions for swing trading.

Times of market stability are the best times for profiting from swing trading. It’s when you can do solid research and determine a stock’s history and potential future. This allows you to catch short-term movements with more of a sense of security.

Determining the market sentiment can prove challenging, particularly to new traders. However, with time, practice, tons of studying, and experience, it will become easier. 

Swing Trading vs. Day Trading

Still unclear on the difference between swing trading and day trading? Let’s tackle this now, because while swing trading bears some similarities to day trading, there are several important differences.

One of the biggest differences is timing. In day trading, you hold a stock for a very short period of time; it might be minutes or hours, but won’t be more than a day. With swing trading, you might hold a stock for a few days to a few weeks, or even several months.

Another one of the big differences is trend awareness. In this way, swing trading can be more like trend trading, where you take a long, hard look at the fundamentals that trends play into the value of a stock, and based on that info, hold the stock. 

With swing trading, you examine any trends playing into the stock’s value and trade based on a combination of fundamental research and examining the stock’s movement and chart patterns.

Best Swing Trading Strategies

What are the best swing trading strategies?

While there are endless variations, several tried-and-true setups are considered traditional swing trading strategies.

Here are some of the important ones you should know.

Breakouts

The breakout strategy is an approach where you take a position on the early side of the uptrend.

Here, you monitor a stock, and when it has a desired level of movement and volatility and breaks a key point of support or resistance (i.e. it falls within a defined price range), you get into the trade.

Support, resistance, and volume are key. Of course, you’ll also monitor catalysts and other factors that might affect the price of a stock — those are important swing trading strategy facets.  

The setup is a key starting point to enter a trade and benefit from future increases in volatility and price swings.

Breakdowns

A breakdown is the opposite of a breakout, where the stock price moves below a defined support level. With a breakdown, the chart points toward lower prices, and you monitor the same fundamentals.

Options

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Swing trading with options can be a great strategy, particularly if you’re looking for leverage on your investment.

By exercising swing trading options, you’re gaining the ‘option’ to buy or sell later if certain criteria are met within a defined time period. You put in a call option or a put option depending on whether you’re buying or selling. 

Only commit to the trade if your desired levels are met. For this peace of mind, you have to shell out an advance or down payment of sorts. If you don’t exercise your option within the time window specified, you’ll lose this initial payment. However, it’s less of a loss than if you made the full investment.

Setup of a Profitable Swing Trading Chart

What should you look for in a profitable swing trading chart? Let’s break it down.

Moving Averages

Moving averages are an important factor in determining support and resistance levels. They can also help you determine the current climate of the market. There are two key types of moving averages.

  • Simple moving average (SMA): The SMA can help you determine the current climate of the market. Is it bullish or bearish? You can also learn support and resistance levels as well as price points, which can help you decide where and when to enter and exit a trade.
  • Exponential moving averages (EMA): This variation looks at trend signals. It can help you determine your entry and exit points based on trends, which can help further refine your entry and exit points and plot a clear-cut trading plan.

Float

A stock’s float can be influential in helping you decide whether it’s a wise investment for you.

The float is the number of shares that are available for public trading. But don’t confuse it with the shares outstanding — that figure includes restricted shares.

You’re aiming for the Goldilocks zone again here. You don’t want an excessive float, because when a massive float is happening, it’s harder for the stock to move in a way that will make you profits. A stock that has a smaller supply of shares is more likely to show more impressive action and movement.

A too-low float can also inhibit movement. If a stock isn’t highly traded, it may not be able to gain the movement you’d like.

Short Interest

Short interest can help expand your knowledge before making a swing trade. It’s a ratio that compares the number of floating shares to the number of shares short.

Often, short interest is calculated on a monthly basis, but there’s no truly accurate source of data for this so it’s more of a guessing game. It includes all shares that have been sold short.

So why does that matter? Because a high short interest may be an indication that the market is trending toward bearish with this stock. However, if the stock has a low price and a high short interest, this could be a warning sign that a short squeeze is occurring.

If a stock has a relatively high short interest that can be cross-referenced with a positive catalyst, this might give you a sign that short sellers want to cover themselves in this situation. This could affect the stock price.

Volatility

Looking at volatility is key in determining a swing trade setup. Volatility is the liability to change rapidly and unpredictably, especially for the worse.

In the stock market, volatility generally implies greater risk, which means higher odds of a loss. However, risk can also lead to reward, so it’s important to look at a stock’s volatility in conjunction with other aspects such as catalysts and other fundamental data.

Key Tips for Swing Trading

Here are some of my top tips for those who want to enter the world of swing trading.

Limit Losses

I live and die by this rule: Cut stock losses quickly.

Obviously, I don’t want to lose anything. But if it becomes clear that a trade isn’t working, I’m quick to get out.

Say that I’m shorting a stock and expecting a morning panic the next day. If there’s no panic, yet my inbox has a press release from the company that’s serving to pump up the stock and squeeze the shorts and the stock starts going up, then I’m out.

It’s not about prospecting or holding on hoping to salvage a trade. I look to patterns, not hunches. Don’t try to be a hero — if things aren’t working out for you, in a swing trade or in any trade, cut losses.

Never Risk More Than 1% Per Trade

I constantly tell my students to focus on small-but-reliable profits.

Not every trade has to be a home run. In fact, the smaller hits can add up to bigger gains over time. So I generally don’t advocate taking large positions.  

There’s a commonly held idea that traders should not risk more than 1 percent of their total account on a single trade.

If you stick to this idea, it can keep losses small. Though it might also keep gains small, they can amount over time. If you have a small account, 1 percent might be a drop in the bucket, so in this case, it could be safe to consider upping the limit to 10–20 percent. Don’t go beyond your comfort level.

Mental Stops

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A mental stop is the art of making an internal decision about when you’ll exit a trade or investment.

Consider a mental stop a promise that you make to yourself.

Having this plan in place and using mental stops when swing trading can help reduce your potential losses. If you’re able to remain true to the promise you made to yourself, it will help keep you from becoming too emotional or making bad decisions in your trade.

Mental stops can also help you cut your losses. Use them.

Make Sure to Watch the Stock’s Historical Volatility

The best way to determine future volatility is to look at historical volatility. You can calculate historical volatility by using a mathematical equation. This book includes a helpful step-by-step process on how to easily do this in Excel.

To summarize the steps necessary to determine a stock’s historical volatility, here’s what you need to do:

Step 1: Assemble the historical data in a spreadsheet. Put together the stock’s past performance.

Step 2: Calculate the logarithmic returns. This might sound difficult, but it’s not. As you’ll see in the book’s tutorial, it’s just a calculation based on the ratio of closing price and the closing price the day before.

Step 3: Calculate the standard deviation. Now you calculate the deviation of the daily returns. This helps you begin to see the stock’s volatility over time.

Step 4: Annualize the historical volatility. You’ve already calculated the daily volatility. Now multiply it by the square root of the number of days of potential trading per year. Done!

Stick to Your Plan

Entry, exit, research, calculating risk …

If you’ve gained anything from this post so far, hopefully it’s the fact that to find success as a swing trader, you have to be on top of your research so that you can be extremely calculated about the trade.

You must consider your entry, exit, potential losses, and to be prepared to cut losses quickly if needed.

All of this is well and good, but as I — and most traders who have been at it for a while — know, things can get emotional in the heat of a trade.

So in a way, this rule becomes more important than any other: You must stick to your plan.

Make a trading plan and stick to it. Otherwise all of your hard work can go to waste and you can suffer losses. Sure, you could learn your lesson the hard way, but why not just stick to the plan?

How Do You Shortlist Stocks from Thousands of Stocks?

There are literally myriad stocks out there competing for your attention. How do you decide which ones are worthy of your attention?

This requires time, effort, and education. The StocksToTrade software can also help — in a big way.

What Is the Best Way to Learn These Strategies?

The best method to learn the strategies l’ve covered here is by pursuing a trading education.

While this article covers swing trading basics and might help you decide if you’re interested in pursuing this style of trading, if you really want to dive in, you’ve got to commit to educating yourself.

Who is Timothy Sykes?

I’m a trading teacher. My college experience was probably different from yours: I turned $12,415 in Bar Mitzvah gift money into $2 million and started a hedge fund during my senior year at Tulane.

After years of trading and running a hedge fund, I came to realize that my knowledge of trading is the best thing I can offer to others.

Experience led me to create Profit.ly, a community of traders who share their performance and trades openly (see ALL my trades here) to help each other learn and improve. Moreover, there’s Investimonials.com. Check it out.

Today, I’m still a trader — but my primary focus is teaching and mentoring trading students.

Trading Challenge

While I’m best known for teaching students how to trade penny stocks, that’s far from the only thing you’ll learn in my Trading Challenge.

My goal: to teach you how to forge a sustainable, long-term career as a day trader. My team and I strive to educate you on all sorts of different trading styles so that you can diversify and remain nimble in the market.

The Bottom Line

Swing trading can be a fantastic way for new traders to get their feet wet.

While I wouldn’t go so far as to say it’s easy, it’s one of the easier methods of trading to wrap your head around. Many traders find the concepts easy to grasp.

But, if you consider the pace, and the fact that it often rewards routine and research, AND the potential profits, you’ll understand why swing trading is widely considered a worthwhile trading style for old and new traders alike.

To learn more about swing trading and the methods, consider signing up for my Trading Challenge. You’ll gain a greater education on swing trading and much more.

Have you tried swing trading?

Let us know in the comments below!

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