How to Swing Trade Summary (C2): How Swing Trading Works

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There are several types of traders, and they are all looking for something specific.

They are all looking for positions (stocks, crypto coins, forex, etc.) that they expect to move in their favor over a certain period of time.

The rise and fall of assets (such as a stock) is constant. As a swing trader, you are looking to capitalize on this movement by holding positions over a period of days, weeks, or in some cases, months.

In comparison, day traders hold positions from seconds to hours. They will close all their positions before the trading day closes.

Stocks that make good day trades can also make good short term swing trades. Additionally, many of the analysis techniques can be applied to both swing and day trading.

The main advantage of being a swing trader over a day trader is time. You have more time to make decisions, and since it is not a ‘day job,’ for the most part, you can work around your preferred schedule.

This also makes it less stressful.

Position traders are long term investors. They buy and hold for months, years, decades, and more. Warren Buffet is a prime example of a position trader.

Retail traders are individuals who use their own money to trade. There is a very high chance that if you are reading this, then you are, or aim to be, a retail trader.

Institutional traders are all the professional traders. They are the big money and include fund managers, investment banks, and trading firms.

As a retail trader you can find many opportunities that institutional traders will bypass due to their sheer size.

Social media often exposes trends that you can follow - a swing trader should always go with the trends.

Don’t read too much into the details. A lot of social media is people out to benefit themselves and what they say is skewed. However, if you follow a handful of credible swing traders you can get some good tips to put in your watchlist for further analysis.

When you buy an asset expecting it to go up in price, this is going long. It also means you are ‘bullish.’ A bull’s horns point up.

If you believe a stock is going to drop you can short the stock by borrowing shares and then selling them with the expectation that you will buy them back at a lower price and therefore, make a profit. This is called being ‘bearish.’ A bear crawls with its nose down, sniffing the ground.

Shorting a stock is a little more complex than going long, but it is essentially buying low and selling high in reverse. It does, however, present more risk.

When you go long, you could lose all your money if the investment goes to zero (e.g., the company goes bankrupt). When you go short, however, your losses can be much greater because there is no limit to how high an asset might grow in value.

With more risk comes more reward. There is an old saying: Bulls take the stairs up; bears take the window down.

This basically means that a stock falls much faster (about three times faster) than it rises. So although going short is riskier, it does offer faster profit.

There are always at least two prices when you want to buy an asset in the market.

A ‘bid’ is how much buyers are offering to pay at that exact moment.

The ‘ask’ is how much sellers want in order to sell.

The ask is always higher than the bid because sellers always want to sell for a higher price and buyers always want to pay less.

The difference between the bid and the ask is called the spread.

As a general rule, the less traders (buyers and sellers) there are for an asset, the larger the spread will be.

When you enter a trade, you have two choices. You can either pay what the seller is asking (the ask) at that moment or you can place a bid to buy the position at a lower price.

Paying the asking price, or the market price, means your order will be filled (completed) immediately — assuming the market is open when you place the trade.

Placing a bid means you may get the asset at a lower price, but there is a chance your order will never get filled.

There are two basic types of trading accounts you can open with your broker.

An investment account is your money. You put the money in, and that is how much you can trade with. It is simple, like a debit card.

A margin account allows you to borrow money for a trade against the capital that is in your account. This allows you to buy more of an asset than you have money for, which means you will make more money on a winning trade. It also means you will magnify losses if the trade goes against you.

If you buy on margin and the trade goes against you, a margin call may be issued. Once that happens, you will need to provide more cash to keep the position open (if you expect it to turn to your favor) or sell your positions resulting in a loss.

Read the next chapter here.

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