Swing trading is a short-term trading strategy that involves holding positions for one to several days. It differs from day trading in that day traders, by definition, must close out their day's positions prior to market close. As such, they they do not carry overnight risk. Swing traders have a longer time horizon of several days, and will accept the risk of holding positions while the market is closed.



Swing trading relies upon the stock market's natural tendency to move in a non-linear fashion. Stock prices, or the prices of any traded security for that matter, do not move in straight lines. They tend to make a move higher or lower, consolidate for a period of time, then continue the prior move.

In the case of an upward trending stock, it will reach new price highs and then pause to consolidate it's gains. That push into new high territory is referred to as a "swing high" and its subsequent retreat during the consolidation is called a "swing low." A swing trader wants to purchase the stock as it returns to the upward trend, after completing the swing low. They want to trade the swing, hence the name.

A similar process is followed for stocks in a downtrend. Most good swing trading systems incorporate both a bullish and bearish outlook, allowing a trader to position trades for differing market conditions and to diverse their portfolio of trades.

While all prudent swing traders utlize stop loss order to prevent any one trade from creatinga sizable account loss, some swing traders will also have a pre-defined profit stop. A profit stop will take them out of the trade once the stock reaches a pre-determined price level. Other traders will hold their position so long as the trend continues, relying upon a trailing stop loss or similar device to take them out of the trade once a counter move occurs.

The concept behind swing trading is simple, but not one easily implemented. The one factor that most separates successful swing traders from those who suffer long-term losses is a strong money mangement system. Unfortunately, the majority of traders fail to develop or implement this critical aspect of a sound swing trading plan.

Good money management requires establishing a pre-defined exit for each position before it is opened, so as to limit losses when an anticipated swing does not materialize or reverses prematurely. Beyond limiting losses on a losing trade, sound money management must also take into account the profit side of the equation and allow successful trades to mature sufficiently so that profits are sufficient to out pace losses and produce an acceptable return.

One of the best swing trading systems that I have reviewed stages the profit exit, so that successful trades result in a guaranteed profit while still allowing for unlimited upside potential when a stock is really prone to move favorably. This allows a trader to move a position of their trading capital out of harm's way and avoid the emotional struggle of trying to determine whether to "let their profits run," or to "take their money off the table."

The popularity of swing trading is due in no small part to the fact that it can be undertaken by the majority of persons who have a day job. Few employers will permit you to day trade during market hours, but once you leave the office for the day you can certainly sit down in front of your home computer to check on your positons.

With the sophisticated conditional orders availble through most online brokerages, it is not necessary to agonize over every market tick. You can easily place a stop loss order that will close your trade to limit losses, while simultaneously placing an order that will capture the profits from your winning positions.

Such sophisticated systems are now available to the public. With a modest investment on your part, you can very quickly master the art and science of swing trading and begin building your financial dynasty.