How to Swing Trade? A Trader Beginners Guide 2022
The stock market goes through periods of boom and bust. Think of it as a wave movement where prices go up and down all the time. Even though eventually in the long term most stocks increase in value, in between they experience a lot of price volatility.
Under such market conditions, there are three ways to invest. First, an investor can purchase dividend stocks and earn an income every year in what is known as dividend investing. And then there is value investing where an investor buys stocks or financial assets for the long haul. Here, the aim is to benefit from long-term growth opportunities offered by the asset.
Thirdly, you also have speculative short-term trading, and here is where swing trading comes in. Short-term trading is designed to take advantage of price volatility in the market to make a return. Typically, assets under this strategy are held for a very short period of time before they are sold. In this post, we will dive deep into swing trading as a speculative short-term trading strategy and how it works.
Table of Contents
How to Swing Trade: What Is Swing Trade?
Swing trading, as noted above, is a speculative trading strategy that aims to take advantage of price volatility in the market. Swing traders typically buy or short a wide range of assets as part of their strategy. In most cases, swing trading is done through financial derivatives like stock options, CFDs, and futures.
A financial derivative is basically a financial asset whose intrinsic value is based on the value of an underlying asset. For example, a swing trader can buy options on the S & P 500. The value of his or her options is derived from the price movements of the S & P. That’s how the name derivative comes in.
However, unlike day traders, swing traders hold an asset for relatively longer. There will also normally be entry and exit points depending on the swing trading strategy in place and the asset trend. So, how does swing trading actually work in the real world?
The first thing will be to determine the assets you want to trade. Swing traders normally choose the most actively traded stocks. This is because a large trading volume means that the possibility of getting orders filled is high. After that, they develop swing trading strategies through technical and fundamental analysis.
For example, some swing traders may adopt a strategy of buying dips. In essence, the traders will buy assets when their current price drops to a certain threshold, normally below the 52-week moving average. The swing traders will then hold to this asset and wait for the market to recover.
This often depends on how fast the recovery comes but it can take a few weeks or more. However, once the swing trader hits the green or breaks even, they can close their positions and make a profit. Now, all this may sound very simple. But swing trading, and by extension day trading, is very risky.
This is because predicting short-term market movement is very difficult and requires a lot of technical analysis, reading chart patterns, and getting a wide range of trade signals for good trading opportunities and profitable swing trades.
Best Swing Trade Stock Brokers?
The best way to swing trade is through stock options. You can easily capture gains in the stock market through these derivatives in the short term. For this reason, you will need some of the best options brokers as a swing trader. Well, here are four of our top picks:
Interactive Brokers is one of the leading stockbrokers in the US. Founded in 1978, it gives customers access to the options market through its state-of-the-art online trading platform. The firm also offers powerful technical analysis tools designed to help swing traders identify important chart patterns in the underlying assets.
You also pay trading fees of as low as USD 0.15 for a single options contract. Interactive Brokers allows you to buy options for your swing trades in over 30 markets too, giving you global access to some of the best market swings in the world.
>>Read more About Interactive Brokers Review: Is it the Lowest Cost Online Stock Platform?
Although Binance started off as a crypto exchange, it has since diversified into futures and options for cryptocurrency pairs. All options bought and sold here are issued directly by the broker. This means that you don’t have to deal with order books that can increase fees for margin trading. Additionally, Binance also offers shorter expirations for its options contracts, sometimes even as low as 5 minutes.
For someone who has a short-term investment strategy with a relatively small profit target, these short expirations can be a huge advantage. Binance also offers a state-of-the-art platform that allows you to set automatic buys and exit points. You also get technical analysis tools to help you predict a bearish trend or bull market. As for the fees, the broker charges somewhere between 0.015% to 0.1% of the value of the contract.
Options are not just used for trading stock. If you want to use these derivatives to capture gains in the forex market, then AvaTrade’s AvaOptions is ideal for you. The broker offers swing traders option contracts on a huge variety of major global currency pairs. You also get to trade options on commodities like Gold, Silver, and crude.
AvaTrade offers a powerful and highly professional desktop trading platform with a fully customizable interface and interactive risk management tools. You can also opt for a money manager through the platform where a professional monitors your account and gives you investment advice, including help with trade setups on multiple assets. AvaOptions fees are based on the bid/ask spread. In other words, the amount of money paid in fees depends on the price action of the asset.
>>Read more About AvaTrade Review: Is it the Best for Advanced Non-US Traders?
If you are looking for a low fees broker that gives you access to a wide range of markets, then Tradier is a perfect choice. The broker charges are as low as USD 0.35 per contract. You can also opt to pay a fixed USD 10 fee per month instead of paying per contract. The fee gives you access to commission-free equity and options trading.
For an experienced trader who does large volume trades for large gains, using the monthly subscription to enter a short position or a long one is a good idea. You also get a professional and well-built trading platform that allows you to monitor your trades for an excellent potential reward. The platform is available for both desktops and mobile to ensure you trade on the go.
Tradier also gives you high-quality trade analysis tools that let you find resistance levels on the price action, the support level, and other trade signals that should help you execute trades for profits. It only takes a few minutes to sign up as an options trader and after that, you can access various forms of assets.
>>Read more About Tradier Brokerage Review: Is it the Best Intuitive Trading Platform?
How to Swing Trade Options?
Before we give you details on how to take advantage of trading opportunities in options, it is important to note that this is a very risky venture. Just like day trading, it requires that you know what you are doing. Nonetheless, day traders and other investors can trade options in the following simple steps.
Choose the Asset
An option is a financial derivative and as such, its value will be based on an underlying asset. So, the first step for day traders looking to trade options in modern markets is to choose an asset. There is a huge variety here including stocks, indices, ETFs, commodities, currency pairs, and recently crypto. As a rule, always pick an asset that you are experienced in. This will help reduce the potential risk of day trading.
Decide on a Call or Put Option
Secondly, you will also need to decide whether you want to buy a call option or a put option depending on the asset trend. A call option simply gives you the right, but not the obligation, to buy the underlying asset at a chosen strike person before the expiry. You buy a call option on an asset if you think its value is going to go up before the option expires.
You can also buy a Put Option as a part of your day trading strategies. A put gives you the right, but not the obligation, to sell the underlying asset at a chosen strike price before the expiry period. You buy puts if you think the value of the underlying penny stocks or assets will go down. All options are typically cash-settled. This means that you don’t actually need to purchase the underlying asset to close once you hit your profit target.
Choose The Strike Price and the Expiry Date
After you decide between call and put options, it’s time to choose a strike price and expiry date. Strike prices are divided into three categories. The first one, and perhaps the most popular, is known as the “On the money” price. Here, the strike price of the asset is the same or very close to the current asset price.
Secondly, you can choose “out of the money” prices. So, a call option for example will be Out of the money if the strike price is lower than the current price. But if the strike price is above the current market price, then that call option is said to be “In the Money”. This brings us to our third category of strike prices. The same logic also applies to puts. A put is in the money if the strike price is lower than the current price and vice versa.
Once you choose a strike price you should now set an expiry. Since you are a swing trader, you don’t need a long position. You can hold the asset for several weeks or even a few days depending on your entry and exit profit target.
Buy and Wait
Now that you have decided the strike price and the expiry date for swing trading options, you just need to buy and wait. You can look at moving averages and the past performance of the underlying asset to estimate where the markets will go.
But at the end of the day, the closer the option gets to the expiry date, the riskier it becomes. So, most traders with some money management skills will lock in their profits as soon as they appear. This can take a few days or more. But the future results or profits of the option come down to the movement of the markets.
Swing Trading Options Pros and Cons
Trading options have a trend of highs and lows. While you can make larger gains on your stock, the risk of losing money is also high. Here are some pros and cons to note:
- Options allow you to trade the financial market with minimal risk. These derivatives give you control of larger positions using small premiums
- The highest amount of money you can lose in an options trade is the premium you pay for the contract. This limits your risk substantively.
- Options allow stock traders to take advantage of a market trend in the short term without buying the actual stock
- Small price movements can be magnified into large profits when trading options
- You also get to choose your own entry point and exit point depending on your risk appetite
- Options are very risky trades and require a lot of knowledge on financial markets to trade them
- Very few brokers offer options trading and most that do have lots of restrictions.
- Mostly used by speculative day traders who want to take advantage of stock chart movements in the short term.
- Fees charged for stock options can be very high compared to trading stocks.
What is the difference between Swing Trade and Day Trade?
It’s very easy to confuse swing trading strategies and day trades. After all, both these trading strategies rely on short-term volatility in the markets to make profits. Well, to be fair there are a lot of similarities between a day trader and a swing trader.
But the biggest difference is that swing traders hold on to assets longer. You see, an intraday trader normally buys an asset at the lowest price possible. They rarely hold on to that asset for more than 24 hours due to overnight risk. A swing trader also buys at a low price. But he or she holds on to the asset for a bit longer, but not long enough to become a long value investor.
The risk management involved in both these trading strategies is quite the same. But it can be argued that a day trader takes bigger risks than a swing trader. As a rule, you must always do a lot of investment research before you start trades. Technical analysis like checking a momentum oscillator before choosing a trading entry point will also be needed.
Conclusion: Is Swing Trading Good Investment?
Swing trading is one of the many trend trading strategies that have become part and parcel of modern financial markets. Although it may be seen as a form of day trading, swing trading strategies tend to be more long-term and as such, the risk is relatively low.
There is money to be made from swing trading in fact, with proper analysis, a good swing trading strategy, and trading temperament, anyone can make decent returns. Besides, over the years, innovative financial derivatives like options and futures are making it easier for folks to get into swing trading. Brokers too are offering global access to major financial markets for those who wish to start swing trading.
Based on these conditions, there is no doubt the opportunities to make money on swing trades are there. But there are some important downsides to keep in mind. First, since swing trading depends on short-term market volatility to make money, the risks involved are very high. This is because it’s very hard to predict a short-term trend in the market.
In addition to this, swing trading and by extension day trending, attract very high fees from brokers. But this is a new trend and it’s catching on among retail investors. As long as you know how to trade stocks and take time to learn swing trading, you too can make decent returns in the long term. Do not also forget to get a good broker with a credible service mark for your swing trade.
Swing Trading FAQs
Is it profitable to be a Swing Trader?
The simple answer is yes. Swing trading can be profitable but that is not really the final true story. Since there are so many fundamental risks involved, you must do a lot of research on the stock you want to buy.
You can start on robust analysis to find a resistance level and a support level on charts. After that, determine the trend of the asset. That way, you can estimate or predict where the stock might go and make some returns.
Do professional traders, Swing trade?
Yes, there are actually so many professional day traders, in fact, some hedge funds also engage in swing trading. However, they rely on computerized algorithms to find sell signals and reduce overnight risk on their positions. Day trading can be done and it all depends on how good you are at analyzing data. That way, if the price breaks in your favor, then you stand to make excellent gains.
Is Swing Trading better than Intraday?
Well, you have to take your own risk when you buy and sell stocks. But since swing trading allows you to hold assets for a bit longer, it can be argued that it is less risky compared to day trading stocks. Day traders typically lose more money in the long run compared to traders who are using swing trading strategies. But it all depends on how good you are.
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Author: Wilbert S
Wilbert is an avid researcher and is deeply passionate about finance and health. When he's not working, he writes research and review articles by doing a thorough analysis on the products based on personal experience, user reviews and feedbacks from forums, quora, reddit, trustpilot amongst others.