Swing trading is a popular approach to trading that focuses on longer time horizons than day trading, but much shorter time horizons than investing.
The key to succeeding as a swing trader is to be able to find trading opportunities early on, often before they become obvious. In this guide, we’ll cover the basics of swing trading and explain everything you need to know about how to pick stocks for swing trading.
What is Swing Trading?
Swing trading is a style of trading with a time horizon of several days to several weeks. Like other types of trading, it is mainly focused on technical analysis. Swing traders typically look for stocks with strong momentum or that are about to experience a breakout or reversal.
The goal of swing trading is to profit from short-term momentum in a stock. If a stock breaks out above a resistance level, for example, a swing trader might try to capture the bulk of that movement from when the breakout confirms to when the bullish momentum slows down.
Swing traders usually prefer to capture the middle of a price movement and then move onto another opportunity. Attempting to perfectly time a price movement from start to finish can lead to much higher risk.
Swing Trading vs. Investing
Swing trading is distinct from investing. Swing traders’ goal is to profit off of a short-term price movement, while investors’ goal is to profit off of long-term appreciation in a stock’s price.
In general, swing trades have a shorter time frame of several days to several weeks. Investments, on the other hand, typically have a minimum time horizon of several months and can last years or decades. Very long swing trades of up to several months are possible and these trades may resemble short-term investments.
Another difference between swing trading and investing is in the type of analysis used to find opportunities. Swing traders typically rely primarily on technical analysis to identify opportunities like breakouts or reversals. They may use fundamental analysis to support a technical thesis, but fundamental analysis is a secondary consideration.
Investors rely primarily on fundamental analysis to identify stocks that could deliver long-term value. They may use technical analysis to identify entry points, but not to decide what to invest in.
Picking Stocks for Swing Trading
Now that you know more about the basics of swing trading, let’s take a closer look at how to find swing trading opportunities.
Step 1: Define Your Strategy
Swing trading is a style of trading, not a well-defined strategy. It’s important to approach swing trading with a clear idea of how you want to trade.
The most important part of your strategy to define is what kind of setups you’re looking for. Are you targeting technical breakouts above strong resistance? Are you looking for breakouts from a specific technical pattern? Or are you looking for momentum after earnings or another catalyst?
There are many different types of swing trading setups, and each will have its own characteristic risk/reward profile and time horizon. Be sure to think about your ideal risk/reward ratio and trade length when choosing the setups you want to target.
Step 2: Identifying Stocks
Defining your swing trading strategy is so important in part because you need to know what you’re looking for before you can start searching for it. Once you have a strategy in mind, you can start creating shortlists of candidate stocks to monitor for opportunities.
One of the best ways to find stocks for swing trading is to use a stock screener. There are many stock screeners available, but some work better than others for swing trading.
FinViz and Seeking Alpha both offer user-friendly screens with a combination of technical and fundamental parameters. They’re good for developing lists of stocks that meet your broad strategy criteria, such as market cap, average trading volume, price, industry, or performance.
For finding setups that are forming right now, Scanz and Trade Ideas are good options. These scanners focus more on technical analysis and offer highly customizable scanning criteria. They also update your scan results in real-time, so you can keep an eye on them throughout the day to spot new opportunities.
Another way to find stocks to swing trade is to use a stock picking or research service. These services are generally more focused on fundamental analysis than technical analysis, so they are geared more towards investors than swing traders. However, they can still be very useful for finding strong stocks that might present shorter-term trading opportunities.
Some research services to consider include Motley Fool Stock Advisor, which focuses on growth stocks, and Seeking Alpha, which focuses on undervalued and financially strong stocks. These services can save you hours of research and help you identify stocks that may beat the market.
You can also use Zacks, which offers a list of stocks that the firm’s analysts like for their combination of value, growth potential, and momentum.
Step 3: Identify Setups
Swing trading setups take time to form, and you need to be ready to execute an order when an opportunity arises. So, it’s important to carefully watch stocks that are good candidates for an upcoming swing trade. Before a setup fully forms, you should already know the entry point, stop loss, and profit target for the trade you want to make.
It can help to create alerts during this stage. If you identify the conditions that you’re waiting for a stock to meet before you open a trade, you can build an alert that will trigger based on those conditions. Platforms like TradingView and Scanz support custom technical analysis-based alerts.
Step 4: Trade
Executing a trade is the culmination of a lot of research and planning. At this point, you should have a clear game plan for your trade, including not just your entry price but also a price target and stop loss.
Be sure to stick with your trade plan and don’t let emotion get in the way or lead you into holding onto a trade that doesn’t work out. A good rule of thumb to follow is to add to winning positions and cut losers early.
Swing trading is a type of trading that aims to profit from short-term technical movements in stocks. In order to swing trade effectively, you need to have a well-defined strategy and then use tools like scanners and stock research platforms to find stocks that meet their strategy. You can use alerts and scanners to spot trading opportunities in real-time, then execute your trade and follow through with your trade plan.