Swing trading is an investment strategy that involves buying and selling stock in a short period of time to make a profit, usually within a period of seven days or less. Swing trading involves fast action and quick decisions, making it important not to rush in until you understand the process. However, the practice can be extremely appealing to traders as it can result in high profits when done correctly.
If you think swing trading may be an investment option that would suit your needs, it is important to follow certain rules to set you up with the best chance of success. Below are some of the rules you never want to forget when entering into the world of swing trading.
Focus on More Volatile Markets
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The key to successful swing trading is taking advantage of wide short-term fluctuations in prices. These types of price changes can mostly be found in volatile markets. When researching price variations, remember the wider the range, the better. If you choose a security with a variation that is limited, you will likely not generate the profits you are looking for.
Utilize Stop-Loss Orders
Stop-loss orders are a necessity when it comes to swing trading. By using a stop-loss order, you can help to keep your emotions out of the trade. It is easy to get caught up in the excitement and tell yourself to wait a little longer or for the price to change just a little more, but this is a quick way to get yourself into trouble. A stop-loss order will help you to stick to your exit plan.
Stop-loss orders can also be a valuable tool in a fast-moving market, allowing you to facilitate your exit if the action gets too much for you to act on all your trades in time. A stop-loss order also acts as good protection for your capital as it will set the upper limit to what you can lose from the trade.
Once you’ve developed your swing trading plan, it’s important to stick with it. You set the specific plan for a reason, usually based on research and following market trends. Changing your strategy without taking the time to reevaluate can not only result in a possible worse trading situation, but it can also make it more difficult for you to get back to your original plan. If you feel the need to update and reformulate your swing trading plan, start by doing some paper trading to see if the profits might pan out before taking it in a live trading scenario.
While swing trading can be a good way for an investor to generate large and quick profits, it can also come with greater risk than holding long-term positions. However, by following the few rules of swing trading above, you will be better able to protect your capital, find trades that can result in the highest profits, and determine which type of strategy will be most effective to achieve your investment goals.