In this video, we'll talk about how swing trading works.
We'll cover what swing trading is, how to swing trade,
and the pros and cons of swing trading.
Swing trading is a trading strategy
in which the investor buys a stock or other asset
and holds on to it for a certain period of time,
usually a couple of days for up to a couple of months,
then they sell it to try to make a profit.
Swing traders analyze and study trends
to decide the best time to buy or sell an asset
to try to maximize on their profits.
Swing trading is considered
an intermediate-term investing strategy.
To figure out which stocks to trade and when,
swing traders use something called technical analysis.
With technical analysis,
you look at the previous trends of a stock's performance
to see how it might perform again in the future.
This is different than fundamental analysis,
which looks at a company's current financial situation
instead of looking at historical trends.
Figure out how much value a stock would have to gain
for you to decide that you've earned enough,
and then you're ready to sell the stock
and put that money towards another stock.
You should also decide how much a stock would have to lose
for you to call it quits and minimize your losses.
For example, let's say you buy a stock for $50
and the most recent low for that stock is $45.
You would set a stop-loss order at $45.
A stop-loss order is an order
that you put with your broker to sell a stock
once it reaches a certain value.
This way, you don't lose more money
than you're comfortable with.
Part of swing trading is looking at
multiday chart patterns.
There are several different types of patterns
swing traders can look for.
A few examples are moving average crossovers,
head and shoulders patterns,
and cup and handle patterns.
Let's look at cup and handle patterns in more detail.
With a cup and handle pattern,
a stock value steadily drops,
then stabilizes and starts to move upward
so that the value is back near the point
it was at before the dip started.
Looking at the data on a graph,
this decrease, stabilization, and increase
loosely makes a U that looks like a cup.
Then the value on the graph would move sideways
or maybe go down a little bit.
This straighter part on the graph
looks like a handle to the cup.
With this strategy, you'd buy an Amazon stock
when it's at the top of the cup,
which is at or above the most recent high,
of $3,555 in this case.
You would place a stop-loss order
at the most recent low in the handle,
which is $3,395.
This way, the risk, or maximum amount
you would lose, would be $160 per share.
With a cup and handle strategy,
the recommended reward/risk ratio is 3:1.
This means that once you've earned three times the risk,
you'd sell and reap the rewards.
In this case, you'd sell when the stock has gone up by $480,
which is three times the risk of $160,
so you'd sell the stock
when its value is at $4,035.
Many swing traders will also look
at support and resistance triggers.
In the stock market,
a support is a point where you can expect
a trend downward to stop and bounce back up.
A resistance is a point where you can expect
a trend upward to stall or bounce back down.
Let's say your research shows that a stock
has gotten to about $50 several times,
but it doesn't seem to go past $50.
It's also gotten as low as $40 a few times,
but it doesn't seem to go below $40.
In this case, $50 is the point of resistance,
because you can likely expect the value
to go back down once it reaches $50,
and $40 is the point of support,
because you can reasonably expect the value
to go back up once it hits $40.
Ideally, you'd buy the stock when it's at around $40,
then you'd place a stop-loss order at $50
to avoid losing money when it trends back downward
and a stop-loss order at or just below $40
to make sure you don't lose too much money.
Here are the pros:
You can invest aggressively
without dedicating too much time.
When you buy a stock, you can decide
how much you want it to gain or lose
before you're ready to sell,
then set stop-loss orders for those amounts.
You can hold on to a stock for a few days,
weeks, or even months so you don't have
to monitor your stock throughout the day.
It has the potential to be very profitable.
You could hold a stock
during its most profitable market swing,
and then instead of continuing to hold it,
you sell and you use that money to buy another stock,
and hopefully hold that stock during a strong swing.
Here are the cons:
It may involve a lot of research.
You need to take the time to understand technical analysis,
then decide which swing-trading strategy you want to use.
Deciding which stocks to trade and when
will probably become easier over time,
but it definitely requires more research up front.
You're vulnerable to changes that happen
when the market is closed for trading.
With swing trading, you hold on to a stock overnight
at least once, and you may even hold it over weekends.
It's possible for factors to occur
when the market is closed during nights
and weekends that will affect the stock's price.
For example, if a scandal
about a company's CEO breaks over the weekend,
the stock could start at a lower point on Monday morning.
You might get higher gains
if you hold on to a stock for longer.
Here's the bottom line:
Swing trading can be a great option
if you're comfortable taking risks with your investments,
because it has the potential to be very profitable.
However, you do need to do your research,
understand technical analysis,
and develop a strategy to be a successful swing trader.