The Ins and Outs of a Swing Trade

While day traders try to capitalize on minute-by-minute shifts in the market, swing traders may hold a position for days or even weeks as they attempt to capture profits from upswings and downswings within longer-term trends.

Let's explore the basics of a swing trade, along with its risks and some strategies worth considering.

There are three elements to any swing trade:

Swing traders typically trade with the broader trend: Stocks in an uptrend will 
make higher highs and higher lows, while stocks in a downtrend will generally maintain lower highs and lower lows.

• Uptrends: Upswing traders generally look for opportunities to buy at a trough, ride the upswing, and sell at the peak.
• Downtrends: Downswing traders, on the other hand, use a short sale to get in—ideally at the peak—ride the downswing, then close where they think they see the trough.

Most swing traders use technical analysis to pick entries and exits, starting with support and resistance levels. (When a stock comes close to falling below a particular price but rebounds instead, that is said to be its support level; when a stock comes close to surpassing a particular price but drops instead, that is said to be its resistance level.)

There are two common entry signals when trading on support and resistance:

• A bounce occurs when the price moves to a support or resistance level and then heads in the opposite direction. Someone looking to trade off a bounce would set a target exit at the previous level of resistance in the case of an uptrend or support in the case of a downtrend.

• A breakout occurs when the price moves past a support or resistance level. Someone looking to trade off a breakout would typically set a target by measuring the previous distance between the support and resistance lines, and then add that range to resistance for an upswing trade or subtract it from support for a downswing trade.

With either a bounce or a breakout, traders can use stop orders to help limit losses in the event a trade turns against them:

• With a bounce trade, a trader can set a stop order below the line of support in the case of a bounce up (see "Swing trading a bounce"), or above the line of resistance in the case of a bounce down.
• With a breakout trade, traders can use the line of support or resistance that the price broke below or above to set their stop order, since a retreat to that price would keep losses to a minimum (see "Swing trading a breakout").

It's important to note that relying on stop orders carries risks. If a stock falls and that triggers a stop order, the trader may be able to avoid further losses if the stock keeps sinking. However, if the stock shoots back up, the trader may miss out on potential gains.

As an alternative, traders often set alerts to be notified when a stock reaches their target or loss thresholds. Executing the trade themselves would allow them to take more of a wait-and-see approach—but would work only if they're in a position to act once the alert is triggered.

Also, stops may not fill at the target price. When a stop order triggers, it creates a market order, so the position could fill where expected or far away from the desired price. If the stock gaps up or down on market open, the trade is likely to execute above or below the intended price, which can result in greater losses than expected.

There's no one-strategy-fits-all approach to swing trading, so traders commonly develop a personal style by experimenting with other technical tools and indicators. It's also imperative that traders align their swing trading with their risk tolerance and determine what percentage of their portfolio they're willing to risk. For traders who are just starting out, using the thinkorswim^® paperMoney® experience can help them explore a trading setup first before putting real capital at risk.