Anyone can be a swing trader, but being successful at it requires a few key rules.
IBD® Staff
Swing trading is a short-term stock trading style. You take smaller profits, cut losses quicker, and hold stocks for less time. To make it work, your rules for trading need to be specific to the shorter time frame. Though the gains might be smaller, the shorter holding period means you can compound your gains into big profits over time. Here are the basics of implementing a swing trading strategy.
Swing Trading Strategy: Smaller Gains, Smaller Losses
Rather than targeting a 20% to 25% profit for most of your trades, a more modest 5% to 10% will be the first profit goal. The difference is largely due to the holding period. Swing trades don't last months. It's more like a couple of weeks. By taking the smaller gains, often on the way up, you get the majority of a quick move and sidestep the areas when the stock consolidates. Don't plan on selling at the top all the time. You'll often see stocks go up more and kick yourself for selling too early. But you'll also tend to avoid pullbacks.
While you are taking profits quickly for most stocks, occasionally you may have enough initial strength to warrant giving a stock more room to run.
Of course, not every stock idea will work. Cutting losses quickly is key to keeping your portfolio healthy. You can have only half your trades end positive and still make a lot of money as long as you keep your losses small compared to your gains.
Example Stock: Here’s How to Swing Trade Peloton (PTON)
Here’s how a group of expert swing traders at Investor’s Business Daily traded PTON. This is an example of a real trade that was added to SwingTrader, IBD’s subscription service that gives you a handpicked list of stocks to swing trade plus full trading plans for each stock. Here’s a link for a 5-week SwingTrader offer.
Peloton Interactive (PTON) made the bulk of its move in 2020 before September. The correction that followed gave a new opportunity after Peloton stock clung to its 50-day moving average a number of weeks. It was added to SwingTrader on Dec. 14 after crossing back above the 50-day line.
The profits came quickly for PTON stock. We sold a third of our position the next day with a 3.5% gain. Another third came off the following day with 7.5% profit. The goal in swing trading is to get the bulk of the move quickly in a stock and then move on. By booking the early profit, you can give the remaining position some room to run.
And Peloton stock did run. After a strong six consecutive days of gains, it jumped more than 10% when Peloton announced the acquisition of Precor. Investors applauded the potential step-up in manufacturing capability to address supply constraints. While that is good for the long-term prospects for Peloton stock, the swing trading view is different.
Since we already had nearly a 20% gain, we viewed the 10% move on top of that as an opportunity to exit our remaining position. Peloton stock provided more than a 30% move in just seven days. No reason to get greedy.
Did we leave some potential gains on the table? Possibly. Peloton stock tested the lows of the gap-up day on Dec. 23 but found support. The next day it got into new high territory briefly but then closed low in its trading range. It was also back below our final exit price.
If we waited for weakness in Peloton stock as our exit signal, how would we have fared? Not as good. We often use a decisive close below the short-term 5-day moving average as a line in the sand for swing trading exits. That would have meant giving up nearly 7% from our sell into strength when it triggered.
There are plenty of examples where a stock moves higher without us. But this is a case where selling into strength was the better call.
To see the full list of stocks currently on SwingTrader, you can sign up for a 5-week trial here to get instant access.
Does Swing Trading Produce Big Gains?
When done correctly using sound trading rules, swing trading can absolutely produce big gains. Even though you’re aiming for 5-10% profit in a swing trade, those gains add up quickly when you reinvest the profits in new stocks and grow the overall size of your portfolio.
And remember, you’re shooting for 5-10% in a matter of days, not 20-25% or more over weeks or months in a traditional position trade.
To prove that small gains add up quickly, here’s how SwingTrader’s model portfolio of swing trade stocks performed in 2020 vs. the benchmark S&P 500. That’s over five times the performance of the S&P.
Data from 12/31/2019-12/31/2020
Can SwingTrader Help You Make More Money Trading?
If you want to add swing trading to your investing toolbox, IBD has a great product to help you make more money. The biggest difference between SwingTrader and other swing trading products is that this isn’t just a technical analysis tool. Our experts use both technical analysis and fundamental analysis to pick the stocks for you, then give you a full trading plan for each one.
SwingTrader is curated by experts, simple to use and backed by a track record of big returns. That’s why SwingTrader’s stock picks outperformed the S&P 500 in 2020, 86.4% to 16.3%.
When you subscribe to SwingTrader, you get:
- A curated model portfolio of top-rated stocks to swing trade, selected by IBD’s investing experts
- Ideal buy and sell prices for every stock
- Instant alerts that tell you when to buy and sell
- A free app for iOS and Android
- Monthly virtual meetups with the experts behind SwingTrader
- Support from IBD’s best-in-class Customer Service team
You get everything above for only $69/month. Even better: If you’re new to IBD, you can try SwingTrader for 5 weeks to see if it’s right for you.
We’ll leave the last word to SwingTrader member Jo P.:
"[SwingTrader] is a great money-making addition to IBD. I started in May and my new Swing Trades paid back the annual fee within the first weeks. I am now making a very respectable return with its short-term trading ideas. Risk is well-managed and profits are quick. Thank you, too, for the new app version which now provides instant trade notifications! Happy."
