5 Tips for Creating A Successful Swing Trading Strategy

To be successful at swing trading the market, you need to have a fundamental understanding of the goals for swing trading. Rather than buying a stock to hold, we’re hoping to make short to intermediate gains from overnight trading strategies. Nothing discussed here is a guaranteed way to earn money consistently, but these quick tips should help you refine your approach as you familiarize yourself with the concept.

Spontaneous Trading is Almost Never Profitable

Since the goal is to trade stocks overnight, swing trading success may seem like it’s a game of roulette and choosing the winners over the losers. However, that’s a good way to lose a lot of money, fast. You need to develop a strategy that you’re going to follow to set yourself up for more profit than loss. You’ll need to be willing to assume a little risk to execute your strategy properly, and you won’t always come out on top. That’s just the nature of swing trading strategy.

Find Repeatable Patterns to Build Your Foundation

The whole goal of swing trading is to find the most profitable trades to make over a multi-day or multi-week period. This due diligence requires plenty of technical analysis on your part, comparing price action to movements over your chosen period. Find stocks that appear to offer price movements that are trending in a stair-step pattern with varying degrees of a pullback. Range bound stocks show no identifiable pattern and have a higher degree of risk because there’s no obvious way the stock is trending towards buyers or sellers.

Create the Rules of Your Swing Trading Strategy

Once you’ve identified trending stocks that you want to swing trade, next you need to set up a clear set of rules to take profits and continually return a profit rather than ignoring the plan for greater gains (and losses). Identifying patterns in a stock’s movement will help you set up a buy line, stop loss line, and an exit position once the trade has reached the desired level of profitability.

Keep in mind when creating your strategy:

  • Target stocks that are trending upwards
  • Have stop loss ready to go.
  • Always take partial profits at 1.5 times your risk to reduce losses.
  • Run with the remainder to see how much you can gain but be ready to jump at a moment’s notice.

These tips may seem like basic advice, but it can be hard to nail down the actual numbers for each specific stock until you’ve done proper research on price trends and moving averages over your chosen period.

Backtest Before Using Live

If you want to be a successful swing trader, then backtesting should be an integral tool in your kit. Running your strategy against the historical metrics makes sure you’ve done your math right, and you’re consistently returning a profit with the trading plan you’ve set up. When setting up your backtesting simulations, keep in mind the commission costs for your chosen brokerage. Also, make sure you’re backtesting in both bullish and bearish markets to understand how your strategy can change as the market dictates.

Tweaking Afterwards

Once you’ve got a strategy that consistently performs well in your backtesting, you’ll want to experiment by taking it live with current market conditions. You’ll want to watch the market because any swing trading strategy can lose its effectiveness over time as the market shifts.

Continuously monitor the stocks you’re trading for changes in patterns and feel free to dump shares that move from a trending model down to a range pattern. Conversely, if a stock you watch that traditionally traded at range suddenly has a trend upwards, develop a strategy to ride that upward trend and make profits.