How to Get Started Swing Trading Stocks is an introductory guide for new traders looking to get active in the stock market.
We start right at the basics — defining what exactly swing trading is and why someone would want to adopt this trading style — and then dive into all of the important high-level resources and knowledge a trader should have in order to succeed.
This isn’t meant to be a comprehensive guide, rather a lightweight overview of what we consider some of the most important topics worth digging into deeper.
We recorded the contents of this article in a video, so if you’d rather sit back and listen (and probably hear me go off on some added tangents), click the play button. Otherwise, read on.
What is swing trading?
Trade Risk Definition: Swing trading is an active approach to trading the markets where the planned holding time of the trade extends beyond a day (overnight) and the goal is to capture a single leg (swing) in a stock’s trend.
There are a few keywords and key things to point out.
- Swing trading is not day trading; it requires holding stocks overnight.
- Swing trading is not trend following, as we’re only interested in capturing single legs within a trend.
- Swing traders are not interested in sitting through the pullbacks that are inevitably going to occur in a fully developed trend.
Generally, this is a completely technical approach to trading the markets, meaning we’re going to be looking at charts, trends, and price action. We’re not going to be as focused on the fundamentals of the company, such as what the management team looks like, how earnings are, or what sector the company belongs in.
Those can be supplemental factors and they can certainly help you determine which stocks you want to trade, but they’re not going to be the primary component of a swing trading strategy. Swing trading is shorter-term in nature, which relies on market timing; therefore market technicals are going to be your best friend.
Take a look at the Priceline ($PCLN) chart below where we’ve highlighted the start to finish swings within pink circles:
Swing traders are mostly interested in capturing those low to high points over and over again — or the high to low points, if you want to short stocks.
Buy at the first circle, sell at the second circle, rinse and repeat.
Why choose swing trading?
First, why trade at all?
Most folks will start trading to either earn additional income or to make trading their primary income. Others want to trade because they are not interested in “buy and hold” strategies, so rather than investing in an index fund or blue chip stocks, they choose to actively pick and trade stocks.
There are lots of benefits of swing trading, but the primary reason for choosing this style, is to be active in the market without needing to stare at charts and screens all day.
Why swing trade over other choices (day trading, trend trading, position trading):
Lower stress, yet active
Trading in general can be very stressful depending on how you approach it. While swing trading is very active, it’s not quite as active as day trading, but it’s the “next step up”.
This makes it a very comfortable spot for a lot of people because you don’t have to make minute-by-minute decisions. With swing trading, you’re trying to capture swings in a stock that manifest themselves over days and weeks. This gives you the time to plan a trade, sleep on your analysis, and then execute and watch it unfold over a period of about a week or so.
Maximizes screen time:
You can easily hold a 9-to-5 job or have a life outside of the markets while still being active. After a day at work, you can look over how markets moved, and see what stocks are setting up based on your strategy. You don’t need the markets to be open to do your research and place your trades, it can all happen after hours or even on weekends if that fits your schedule.
What’s needed to swing trade?
Discretionary trading capital
You need capital to trade — and it shouldn’t be money that you need tomorrow. Because trading involves a substantial amount of risk, especially when you’re just starting out, make sure you have some discretionary money set aside to start trading.
A low-cost broker to place your trades through and that provides you with the research and accessibility that you desire.
When swing trading, you need to account for commissions. Commissions are the cost of doing business as a trader. Luckily, the costs of trading are trending lower (and in 2019 went nearly universally free), so if you have just $500, you can actually start trading with that amount as long as you’re using a broker with zero commission fees.
If you’re starting with a few hundred dollars, don’t expect to quit your job tomorrow and become a full-time trader. It just doesn’t make sense and the math is not on your side.
You want to think in terms of percent. If you can earn 10%, 20%, or 30% in a year, you’re doing great — you’re better than 99% of traders out there!
So if you have a $500 account and you can make $50 or $100 on that money in a year, that’s actually pretty great. But don’t expect grand visions of retiring and owning a yacht on just a few thousand dollars of trading capital. It’s not realistic.
Finding Your Broker
Commissions are the most important consideration when determining which broker you want to start trading with. Fortunately in 2019, there was a big movement across retail brokers to begin offering free trading to all clients. Nearly all of the big name discount brokerages slashed commissions to zero, saving active traders hundreds and possibly thousands of dollars per year relative to their former pricing models.
The second consideration when deciding which broker to choose is ease of platform use and mobile features in general. You want to work with an interface that’s easy and intuitive to use and sometimes you’re going to need to trade on the go. Consider both of these factors when selecting your broker.
The final core consideration is brainstorming what information you need to make buy and sell decisions. For instance, if you want a list of all of the big stocks that are moving on the open or stocks that had news catalysts overnight, you should inquire to the broker if this information is available. If it’s not, then you’ll probably need to consider subscribing to extra tools and software which we’ll dive more into in the next section.
Commission costs, platform functionality/ease of use, and stock market data are the three primary factors you should consider when finding your broker.
Swing trading tools and software you need and why
In this section, we’re going to discuss the additional tools and software you might need if your broker doesn’t already offer these things to you. When swing trading, you’re probably going to be trading off technicals, which means you need a good charting platform, stock screeners and quality data.
Here’s a brief list of popular screeners and charting platforms below. You can find more recommendations on our Trading Resource page.
Finviz is a free stock screener that you can use to narrow down trade ideas and find potential trade setups. It’s really easy to use with simple drop down filters that can search on both fundamental and technical stock criteria. If you’re looking for an easy way to scan for stocks and you don’t have coding experience, this is a great place to start.
Stockcharts is a free and premium charting platform that really excels at offering up high quality data with great visual representations. Most of the advanced features do require a subscription, but the intermarket relationships and unique and advanced charts make this a high quality and worthy investment. They do have screening capabilities similar to Finviz but it’s not really their strong point.
Worden TC2000 is my personal favorite. They offer a free and paid product to customers, and while I do consider it a bit more advanced of a charting platform with a learning curve, it is incredibly powerful once you get the hang of it. It offers a screener like Finviz, but in this platform you can take it one step further and write custom scripts to find stocks, allowing you to get very specific and nuanced in your criteria.
Recently, TC2000 also turned their platform into a full service brokerage so that means you can do your analysis, screening, and execute your orders all in one place. TC2000 is one of the core platforms we support and develop at the Trade Risk with offerings of:
- One-on-one platform consultation
- Custom stock scans and indicators
- Pre-built free and premium stock scans
If you’re interested in exploring TC2000, we just published a platform review and getting started guide. You can also use the Trade Risk’s referral link to take advantage of any discounts and promotional pricing they have available.
What knowledge is required to swing trade?
The first is going to simply be experience, and I encourage you to start slow.
There are no barriers to entry into trading the stock market, you’re in the big leagues right away. You can log onto your computer, open an account with a broker, and start trading immediately. And as soon as you do, you’re going to be trading against professionals on Wall Street that get paid millions of dollars to essentially take your money.
To reemphasize: the most important piece of this is to start slow. Your greatest education will come from accumulating hours of screen time and you can’t do that if you go broke in the first week. You’ll want to build up experience, learn what not to do, what works, and what makes sense to you.
Embracing that process is going to be your greatest asset.
If you come in and try to push as many buttons as possible in an effort to make a lot of money right away, you’re setting yourself up for disappointment and maybe even worse, disaster.
Forget about memorizing Japanese candlestick formations, technical chart patterns, measured moves, and all of the other technical jargon and literature out there. When you’re just starting out, it can seem like these things are the secret sauce that can make you loads of money, but the truth is, they aren’t as important as they seem – especially without the proper foundation built first.
What’s really important is understanding the psychology and collective behavior that charts represent. Charts, through price action, give us the collective sentiment reading on an individual stock, ETF, or whatever it is that you’re charting.
There’s a few ways you can learn to improve your chart reading skills and understanding of price action. We publish a weekly market recap video on YouTube at least once a week breaking down the price action of all major markets. Subscribe to our channel, or our newsletter, and listen closely to how we frame out markets and describe what’s going on. Analyze the markets on your own first and then listen to our take and then compare and contrast.
Al Brooks’ books on trading price action have been the best that we’ve found, but be warned, they are a difficult read. The series consists of three very dense books on trends, reversals, and trading ranges, and they do a great job of explaining the underlying psychology of how markets move, and the battle between buyers and sellers.
- Al Brooks Price Action Trading Ranges
- Al Brooks Price Action Trends
- Al Brooks Price Action Reversals
Knowledge: Risk Management
If you’re a new trader, you’re probably going to glance over this section because I did the same thing when I was starting out. Most people get into trading to make money, so the last thing on their mind is to be conservative when that doesn’t align with the reasons for trading in the first place.
Unfortunately, if you don’t fully respect the risks involved in trading, the market will eventually teach you that lesson the hard way, so it’s best to learn on your own terms.
We’re going to cover just a single rule (takeaway) in this article but we’ll leave with you other lessons to read to give you a more complete foundation on risk management.
When you place trades, you should at most risk only 1% of your capital on that idea. For instance, if you have a $5,000 trading account, you should only be risking $50 per trade. Note, this is not a 1% position size allocation rule, rather this is the amount of your total account balance you would lose if you are wrong in your trade.
By only risking only 1% per trade, you can:
- Place lots of individual unique trades (no eggs all in one basket)
- Take many losing trades in a row without going broke
- Have the staying power necessary to accumulate the ultimate wealth of experience — screentime
It’s very important to think of trading in terms of your next 100 trades. Don’t focus so much on this next trade. This next trade that you make is just one little drop in the bucket. You want to be thinking for the long term, about getting to your next 100, 1,000, and 10,000 trades. That’s what the real journey is all about.
There’s a lot more on risk management, so highly recommended reading:
We’ve finally arrived at the fun part.
You need to have a strategy to trade the stock market. You can’t just go in there and throw darts at the screen all day, you need to be able to consistently repeat your decisions and those decisions need to actually have an edge.
So how do you gain an edge?
Reading a chart is one way you might be able to do that, this is what I would consider traditional technical analysis. Bar by bar price action analysis, in particular, has been well-researched and well-documented; trading a breakout pattern or a pullback pattern can lead to consistent returns.
Another way to gain an edge is by introducing technical studies and indicators. These are things like volume, moving averages, an RSI indicator, and MACD. You can study indicators like these to try and discern a pattern or relationship that they have with price to help you make more consistently profitable trade decisions.
In addition to discretionary eyeballing of charts, you can approach things like a quant and backtest your assumptions and uncover rules and patterns that have worked profitably in the past. This method of coming up with a strategy is a bit more involved as it requires you to have good quality data, programming experience, and statistical or data analysis experience to understand where you might be curve fitting or simply data mining your strategy.
Recommended: Beyond the Charts is a brand new series where we ask questions about the market and uncover edges by writing code and backtesting strategies on historical market data.
Regardless of the path you choose, there’s going to be a lot of experimentation and testing when developing a strategy, especially starting out.
What you’ll want to understand is that you’re ultimately dealing with probabilities and edges that can be small. All trading strategies will have losing trades and losing streaks.
A perfectly viable and profitable trading strategy may only have a 5% edge (aka win rate 55% of the time). That strategy can easily have five, six, seven or more losing trades in a row, and it doesn’t mean the strategy doesn’t work – it just means there is variance in the distribution of outcomes.
This probabilistic endeavour is partly what makes trading so difficult because it takes time to know if you actually have a true edge versus something that might just be luck within the noise.
There’s a lot more to be said on this topic so a good next place to continue your education is our article: How to Develop Simple Swing Trading Systems.
Putting it all together – How to get started swing trading
It should be clear by now that there is a lot to consider when you are getting started swing trading. As much detail as we provided in each topic, we really only scratched the surface on what’s available and what’s required to become profitable.
The best way to approach swing trading as a beginner is to forget about the money and just focus on learning and developing your skills. Be curious, try different methods and techniques, risk extremely small amounts at the start (or paper trade), and accumulate that screen time.
If you find this article helpful and interesting, please feel free to leave a comment below. I would love to read them!
Thanks for reading and good luck in your journey as a swing trader.
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