Want to get into swing trading, but don’t know where to start? In this summarized version of a webinar hosted by Benzinga’s own Ryan Faloona and Jonathan Mallard, we teach you tips and tricks to make swing trading easier to understand to yield the most profitable results.
What is a Swing Trade?
Swing trading can differ a lot from day trading in terms of time frame and strategies. A swing trade can be thought of as a short-term trade that you intend to hold at least overnight. The time frame in which you intend to hold it can range from several days to even a month. One of the main differences in swing trading compared to day trading is that with day trading you’re looking at making smaller profits, maybe around $1.00 or so, but with swing trading, you’re getting in to make bigger profits.
The idea behind swing trading is to use less capital and less capital per trade, hold it for a bit longer and collect those gains over time. With swing trading, you’re also not subject to the pattern day trader rule, which limits the number of trades you can make unless you have a whopping $25,000.
How to Find Stocks That are Going to Move
One of the main questions many swing traders ask is how to get into those companies that seem to just explode over-night. Although there isn’t just a one-size-fits-all answer, there are a few tips that we can give you to help you find those moving companies before they move.
Tip #1: Find a Theme
Finding a theme helps you identify drivers that will move more than just one stock for more than just one day. Finding underlying catalysts in a theme that’s moving more than one stock, can result in potential gains to spread out for days to weeks. One thing to be wary of when identifying themes is to avoid just following a headline or a PR announcement. This type of news will make a stock pop, but ultimately, you’ll see it settle back down to the original state.
One way Ryan finds these themes is by looking to see what sectors or groups of names have been trending. For example, electric vehicles. If you’re noticing that a bunch of names in the EV space are moving together, it might be a good idea to get in on that trend. And you don’t have to just buy one name. You could buy multiple names as a protection against one of them going south.
Another easy way to find themes is by asking others around you in different demographic groups what the “hot” topics are. For example, if you’re a parent, maybe you ask your kids what toys all their friends are asking for their birthdays or the holidays.
Tip #2: The Benzinga Pro Screener Tool
To make searching for themes a lot easier, Benzinga offers a tool that allows you to simultaneously analyze charts and use indicators to help you catch those stock moving themes.
The Benzinga Pro Screener tool offers you a way to customize the stocks you’re watching for. One of the biggest factors to realize with swing trading is that everyone is going to have different risk tolerances and different resources. Using the Screener Tool gives you a huge advantage over others to find stocks that meet your specific criteria to fit into your trading plan.
For example, let’s say you’re a swing trader who prefers to trade more low float stocks. Using the Screener tool, you can adjust your filters to get alerted for only those types of stocks. You can adjust the price, market cap, or any other related variables to fit your trading style.
- Volume: Ryan’s favorite customizable fields to use when swing trading is the volume and relative volume fields. Instead of trading low float stocks, he prefers to trade more towards the downside, with more liquid stocks. Having filters set in the volume and relative volume fields in the Screener tool helps him implement this aspect of his trading plan.
- Relative volume just means you’re looking at how much volume is being traded over the average. In Ryan’s example, he chose to look at stocks with a volume of over 1.5, what that means is that he was looking for a 50% increase in average volume. Additionally, he selected only to look at the daily aggregation, meaning, in order for a stock to show up on his list they only need to have that relative volume for one day.
Ryan uses $TSM as an example to illustrate a swing trade move that you might want to be in, using volume and relative volume to analyze the trade. Ryan goes back to see how the stock was performing previously to the volume illustrated in the chart. The question you may be asking yourself is how do you get in before the move was put in. Even if something looks extended, there still might be another move on the other end. Your job is to come up with a trading plan that can address the three possible scenarios that could happen:
- The stock will pull back
- The stock will keep going higher
- Or the stock will go sideways.
How to Setup a Trading Plan for Extended Stocks
Ryan’s first tip to attacking this scenario is look for support and resistant levels to enter the stock at. To do so, you can use a Fibonacci Retracement. Using the Drawing Tool in Benzinga Pro, you can actually draw your own retracement. You would want to draw this from a recent low point to a recent high point. This helps you visually see where those levels are in order to make an entry.
It’s okay to not have it drawn to the exact penny, or enter in on the exact penny. This is to just give you an idea of where to enter. Instead of thinking of them as entry “points” think of them as entry zones. For this example, a good zone would be between 119.50 and 121, giving yourself a $1.50 worth of play. Fibonacci Retracement lines offer you possible levels to enter in incase the stock pulls back.
If the stock does pull back you’re faced with two possible scenarios:
- If you believe in the particular stock itself (the story of the company), you may want to enter in on support levels. Entering in on a support level helps you control your stop-loss. Let’s say you think the stock is going to go higher, you should consider taking a starter’s position. Having a starter position enables you to a position in case the move happens the next day.
It’s very normal for stocks to move up and then pull back and test some of those support levels before making its next leg higher. In this particular example, Ryan would approach this by taking a small starter position at the top then waiting for some of the other levels to come into play before loading up into his full position. In order to make this type of move, you should look at the different Fibonacci levels, mainly paying attention to the top three lines.
- Another way Ryan approaches this type of scenario is by using a moving average line. For this example, he uses common averages you may have heard of; a 200-day moving average, 100-day moving average, and a 50-day moving average. What the moving average does is:
- Confirms that you’re actually in a trend.
- Gives you possible support levels.
The key here is that you want this planned ahead of time. Having this planned ahead of time lets you avoid the stress of changing your plan on a whim when things aren’t going your way.
Overall, Jonathan suggests that when approaching how you setup your swing trading plan, play around with the different indicators to see how they interact with one another in order to identify trends as well as support and resistance lines.
How to Use Bollinger Bands in Swing Trading
Using the Bollinger Bands indicator can help show you whether prices are high or low.
This example shows exactly what you want to be looking for when using Bollinger Bands in a swing trade. You want to look for a price that is riding high on the channel of a Bollinger band.
The only thing that Ryan has filtered for the example is volume and Bollinger bands. When you notice that in the past there are only small gaps up and in the more present days you can see violent gap ups, that is the type of pattern you want to see when swing trading. In this scenario, Ryan would wait for a pullback at the top. If you want to have a position in the stock it’s okay to start off small, but maybe wait until price and median line meet somewhere in the low 120’s, then you can start to add.
A word of caution when adding, especially in swing trading, is to reduce the urge to make your price better. Even if you think that you can get a better price, it may not always agree with your trading plan. So, by starting small and adding on some of the support levels, you’re playing into the natural market progression of price discovery. The more that you add, the more you should tighten up your stop. If the trade goes against you, you could potentially lose more due to having more exposure. So, every time you add to a winning position, make sure you decrease or tighten up your stops so you don’t give those profits back.
Identifying News Catalysts
If you see that a piece of news came out that has benefited the company, or better yet, the sector or theme you’ve identified; you’re going to want to ride that catalyst out. One of the best ways to take advantage of news catalysts is by finding those that hold a lot of underlying weight that will carry the stock forward. One way to look for this is to identify how different news articles affect stock movement in different sectors.
The key is that when a stock has a quality news report it should last longer than a day. You’re not looking for the $0.50 pop, you’re looking for the 1 – 3x move that’s going to happen, and the only way that’s going to happen is if there’s a substantial catalyst beneath it. Those types of news can be new product announcements, analyst ratings, new regulations, or other similar news factors.
For example, a drug company has a product in trial and comes out reporting information on the efficacy rates, saying that they can serve “x” amount of people will hold more substance than just a headline announcing a company is researching a new drug. When finding substantial news headlines look for guidance, markets they can serve, and profits versus just general news headlines.
How to Know when to Enter/Exit Trades
The reality is that this is different for every single person. This also goes for common questions like how much money should I put in and at what time do you purchase/sell certain shares. In terms of entering and exiting, one tip Ryan can give you is to identify support and resistance levels. The closer you enter into a support level the tighter you can make the stop. So, if the trade isn’t working for you, you can just get out of it and wait for a new setup.
In terms of profit, Ryan suggests letting your winners run. Position sizing can help in this situation. Let’s say, for example, you buy 100 shares of a stock and the stock moves in your direction. Don’t feel guilty about selling 25 of those shares and locking in some gains. In addition to that, if you’re doing some charting and looking at actual stock performance, you can protect yourself by sizing yourself into positions properly. It may be helpful to determine your position size during paper trading. Practicing with a paper trading account that you plan to open can help you understand what to expect when you actually open up your account.
Ryan and Jonathan presented you with tips on how to be a successful swing trader but it’s up to you to determine how to utilize those tips and tricks to fit into your trading plan. Overall, swing trading is about finding trends for a particular company or sector and riding those winners. In order to find these themes using indicators like relative volume, RSI, Bollinger Bands, Fibonacci Retracements in addition to sizing yourself properly and risk management to increase your odds of success over time.
Try Benzinga Pro’s free two-week trial and see how our indicator tools can help you in your swing trading journey!