Swing trading sits somewhere between short-term day trading and longer-term position trading or “buy and hold” investment. It allows you to get some of the excitement of day trading — that is, regular profits — with less of the risk and no need to be glued to your computer screen or mobile phone.
In this guide, we look at stocks that are suitable for swing trading. How to find them, how to trade them, and why you might want to. And we offer some candidate stocks for you to consider.
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Swing Trade Stocks Explained
Swing trading is a medium-term trading strategy that involves finding a stock or other asset whose price is oscillating up and down within an identifiable range, then buying near the bottom of the range and selling (or even selling short) near the top of the range. Rinse and repeat, until the stock breaks out of the range. As an example, Amazon shares traded sideways within a range during the year from July 2020 to July 2021.
Source: Yahoo Finance
What Are the Characteristics of Swing Trade Stocks?
Unlike other categories of stocks such as value stocks, growth stocks, large-cap stocks, or banking stocks, swing trade stocks do not have a specific set of fundamental characteristics — such as earnings — to assess. Swing trading is mainly about price action, which means it’s mainly about technical analysis on price charts. Any stock can become a swing trade stock if its price starts trading sideways rather than trending up or down.
Best Swing Trade Stocks in 2021
Although candidate swing trade stocks are identified according to their price action, some non-technical factors could give clues to stocks that might start swinging. For example, breaking news might make a stock’s price bounce up and down while traders tussle to decide which way the news will ultimately send the stock’s share price. We’ve considered the clues to come up with a candidate list of swing trade stocks.
Why Trade Swing Trade Stocks Rather Than Buy?
Trading Allows You to Go Short
In a regular stockbroker account, you can buy at the bottom of the swing cycle and then sell your shares at the top of the cycle. A trading account also lets you “sell short” at the top of the cycle, to make additional money on the downswing.
Leverage Amplifies Your Gains
To take a £100-risk trade, the broker might only require you to deposit £20, so if the stock price rises from £100 to £120 (a 20% gain) you’ve actually doubled your £20 deposit for a 100% gain.
Trading Helps You Automate
Because you know the prices at which you’ll buy and sell at the bottom and the top of the swing cycles, you can place limit orders to buy and sell automatically at those prices.
What Moves the Price of Swing Trade Stocks?
A share price moves into a swinging pattern when there is no clear consensus on which way the shares should trend (up or down). This may be because the share price is in a “holding pattern” while some news is pending, e.g. on interest rates. Or, it may simply be that whatever impetus drove the previous up or down price trend — which could be an overall bull or bear market — is now no longer present.
At a technical level, a swinging price pattern is driven by support and resistance levels that become self-reinforcing. If traders see that a share price has bounced upwards from a particular price, they will tend to buy if the shares hit that “support” price again, thus forcing it upwards. If traders see that a share price has bounced downwards from a particular price, they will tend to sell if the shares hit that “resistance” price again, thus forcing it downwards. Rinse and repeat.
How to Find Swing Trade Stocks
Finding stocks to swing trade means examining price charts for support and resistance levels that have caused the share price to bounce upwards from support and then downwards from resistance more than once so that there is an identifiable trading range. The paradox is that if you wait too long to be sure about the trading range, the swing trade opportunity could already have played out.
This “technical” approach to finding candidate swing trade stocks is different from the “fundamental” approach you would use to identify other kinds of stocks such as value stocks.
Trade Swing Trade Stocks in 3 Easy Steps
Open and Fund a Trading Account
Open an account with a broker that lets you bet on rising and falling share prices via contract-for-difference (CFD) or spread bet trades. The application process can take mere minutes, sometimes longer to prove your identity, and you can then fund your account conveniently by bank transfer, credit/debit card, or another method such as PayPal.
Check the Share Price Charts
Check your candidate stocks’ price charts to see if the share price is trading sideways within a well-defined range bounded by support and resistance levels. Theoretically, you can swing trade over any timescale, but a medium-term timescale may be the best trade-off that lets you benefit from meaningful price moves over days or weeks rather than minutes or many months.
Set Up Your Buy and Sell Orders
Unless you’re going to be hovering over your keyboard waiting to press the buy and sell buttons at the right times, you will set up your swing trades in advance by placing limit orders to buy when the price hits support and sell (close your position) or “sell short” (open a new bet on a falling price) when the price hits resistance.
How to Evaluate Swing Trade Stocks?
Swing trading isn’t about evaluating a stock’s fundamental factors such as earnings, P/E ratios, or dividends. It’s about trying to evaluate the best price points at which to place buy and sell orders that correspond with price support and resistance levels. Sometimes the share price overshoots these levels yet still bounces back, and sometimes the top and bottom bounds of the trading range are simply fuzzy.
In the case of Amazon shares in the year to July 2021, the price regularly bounced up from the 3,000 level, thus making this a good support price at which to buy shares. Over the same period, the price occasionally reached the 3,500 level but — with perfect hindsight — you would have been better off selling shares whenever the price hit the 3,400 level.
Are Swing Trade Stocks for You?
Many beginners and most “investors” believe that it’s all about choosing the best stocks to buy. Then you buy them and forget about them. If this style of trading or investment sounds appealing — because you don’t have to do much work after your initial analysis — then swing trading isn’t for you.
At the other end of the trading timescale spectrum, some new traders are seduced by the promise of quick profits from day trading. If day trading sounds too labour intensive or too risky (which it probably should) then swing trading allows you to try something similar over longer, less risky timescales.
By its nature, swing trading requires more technical analysis than fundamental analysis. It will appeal to you if you’re more turned on by looking for patterns on price charts than analysing balance sheets.
What’s the Outlook for Swing Trade Stocks?
Although there are almost always some stocks that are suitable for swing trading, most opportunities will become apparent when markets are consolidating rather than trending. The sixteen months from the March 2020 market low to July 2021 might not have been the best time to swing trade because almost all markets and their constituent stocks were in a sustained uptrend.
If the markets pause for thought while traders decide whether the bull market will continue or reverse into a bear market, it could be a good time to swing trade. If markets crash, you have to wait until the bear market bottoms out, at which point prices could trade sideways for some time until a new uptrend starts.
Summary on Trading Swing Trade Stocks
In this guide, we’ve talked about swing trading: what it is, how to do it, and why you might want to.
The best stocks for swing trading are ones whose share prices are moving sideways and oscillating between upper and lower bounds known as support and resistance levels. Theoretically, it’s also possible to swing trade stocks that are trending upwards or downwards, which have predictably rising or falling support and resistance levels, but you shouldn’t even think about this until you’ve mastered the basics of sideways swing trading.
Swing trading appeals to traders who are more comfortable with technical analysis (looking at price charts) than fundamental analysis (valuing companies based on their financials). To assist your search for swing trade stocks, we’ve suggested some that may be suitable for this trading approach.
Frequently Asked Questions
Limit orders allow you to automate aspects of your swing trading so you don’t have to sit watching the price chart for your favourite stock. Place a limit order to buy at near the support price and a limit order to sell at the resistance price.
Many swing traders apply a protective stop order to each open long trade, to close the position at a manageable loss if the price falls below the support price rather than bouncing upwards as expected. Beware that many market participants know this, so the price is sometimes forced to fall below the support level temporarily to “stop out” any traders who tried to protect their positions in this way.
You can swing trade any assets — stocks, commodities, indices, or ETFs — whose price is oscillating within a trading range. All that matters is the characteristic price action.
Some stocks pay dividends, and some don’t, regardless of what style you’re using to trade them. When swing trading, it’s more a matter of whether you’ll be holding the stock long enough to pay dividends. If you “go short” at the top of the swing trade cycle, the broker will deduct an amount proportional to the dividend if you happen to have your short position open at the dividend date.
It’s more a matter of whether the swing trading approach is appropriate for beginners. The problem is that it involves some advanced concepts — technical analysis and the use of limit/stop orders — that beginners might not be familiar with when just starting out.
Some traders make money from swing trading. The biggest problem is that the opportunity to do so may be over by the time you have identified that a stock is suitable for swing trading. In other words, by the time the share price had bounced off support or resistance two or three times, it may be time for a breakout into a new upwards or downwards price trend.