Making Money Swing Trading: A Helpful Illustrated Guide
I’m going on my ninth year of swing trading and it has been such a wild ride. At first, I would just buy stocks of companies I knew, then I moved on to following the advice I got from CNBC. Now, many years later I have my own way of swing trading that has been formed from a ton of trial and error. Years have passed, wisdom has been gained, and my returns have been growing consistently.
In order to make money swing trading, you need to be able to do your research, spot opportunities, and most importantly follow your rules. Swing trading, or any stock trading in general, is, for the most part, a mental game. Being able to control your thoughts and follow your process will increase your returns exponentially.
Before we get into swing trading, I feel like it is my duty to warn you of the risks you could be taking. Playing in the stock market is gambling; you don’t have a crystal ball so you have no clue what will happen. You aren’t going to get rich quick so if that’s what you think this is then close the page now. If you haven’t yet, check out my article 4 Reasons You Shouldn’t Trade Stocks as it puts this into perspective.
Now, there are dozens of ways to swing trade, each no better than the other. My goal is to keep it simple, not over trade, and control my emotions. For the purpose of this post, I’m going to assume you already have set up and funded a trading account. The goal here is to guide you through the steps I take in making a swing trade and how you can replicate it.
What Is Swing Trading
Swing trading is a style of trading where you buy or short a stock anywhere from a couple of days to a couple of weeks. It sits in the middle of day trading and trend trading. When you day trade you can hold a stock for a couple of minutes but never more than a day. Trend trading is usually a couple of weeks to a couple of months. For people that want to get into trading, I think that swing trading is a happy medium.
For the most part, you will be looking at blue-chip or large-cap stocks. While you can swing trade any stock, I like to stick to those for the most part. These stock’s price will vary from a high to low and have a relatively low chance of completely crashing as a penny stock does.
This is different from Jeremy’s strategy over at Modest Money. Him and his wife swing trade stocks that are usually under $10. He states they hold each one for 1 to 4 days where I usually hold a little longer. No strategy is perfect and they have found something that works for them so why change it?
If you want to learn more about the specifics of how they trade then check out their post: How We Make Money Swing Trading Stocks.
Start With Research
Your Core Patterns
Before you even start looking at individual stocks, you need to know what you’re looking for. In swing trading, it’s all about patterns. There are dozens of patterns to look for
I’m not going to go through all of these patterns because that would take forever. Instead, my main focus is on the ascending wedge, head and shoulders, and cup and handle pictured here:
These are my favorite and the easiest for me to spot. If you want a full list of patterns and a better description than I can offer to you, then check out Option Alpha’s article: 13 Stock Chart Patterns That You Can’t Afford To Forget.
You have your choice of patterns now it’s time to go find stocks that match them. The easiest research tool I’ve found is Finviz.com. Finviz can tell you everything you need to know about a stock and more. It seriously can be information overload unless you know how to control it. It does have a free version which has everything I need so no need to pay $40/month.
The most valuable tool on the site to me is the screener. The screener allows you to set presets for what you are looking for in a stock and it gives you a huge list. It is then your job to go through this list and find the patterns we talked about above. Here is a screenshot of my set up:
On the picture above I added two circles, a red and purple one. The red one is where you click to get to the screener and the purple is the ‘all’ tab. Clicking this tab will give you all the options that you can filter by. After that, you will see a bunch of different things highlighted in yellow; these are all the things I’ve changed to give me my desired list. Some of these filters include that the stock’s price is over $15/share or that it’s currently priced above its 200-day simple moving average.
These settings are all up to you but I think this is a great place to start. Once you get a screener like this set up, it will take 90% of the work out of trading stocks as the stuff you don’t want to see is already gone.
Build Your Rules
Before you hit that buy button, you need to set rules for yourself. You may think you’ve found a perfect pattern but again, you have no clue what that stock’s price is going to do. Setting rules may be the easiest part of swing trading. Actually following them though, is a constant mental battle. I used to think about these and just forget them. Now I have them printed out and posted so I’m always conscious of them.
Here are my seven trading rules:
1. Every stock must be charted first.
The very first thing you need to do is chart the stock. If you’ve done the research that we talked about above, then you’re 90% done with this. Charting the stock acts as a double check for what you already believe to be true.
Charting can be done with the platform you trade on or through websites like StockCharts.com or even Finviz. Personally, I use Think Or Swim which is a TD Ameritrade Product even though I trade on Interactive Brokers. The reasons behind that are for another post but you need to find a platform that you can chart on as well as look at different time windows. For example, a year view broken down into weekly candles or a three-month view broken down to daily candles. All of these factors are important.
When you take the time to chart a stock it doesn’t allow you to make an impulse buy. This also helps with FOMO which we’ll talk about in a minute. Chart your stocks, take your time.
2. A line of support or resistance must be found. From here an entry price will be established.
Chances are if you are charting the stock then you already have an idea of what a line of resistance or support may be. Resistance is a price that a particular stock has hit a certain time and been unable to break through. Support is just the opposite. A stock’s price has bounced off of a couple times but has not gone under. Resistance or support will be one side of the pattern you found above.
In the image above you can see an ascending channel on the stock XPO. Over and over again it was getting rejected around $116/share. This is a line of resistance. An example of a line of support would be what is currently happening in the stock BABA. Which has bounced off of the $129/share three times now!
3. Any buys/shorts must be done via a stop-entry or when a breakout is obvious.
Once you’ve established a line of resistance or support, then you can find an entry price. This price is when the stock breaks through the line. This is often referred to as a breakout. For the XPO stock above I would say that my entry price would be somewhere in the neighborhood of $117. What I’d then do is set a buy-stop order at $117. Here is a screenshot of what that would look like:
Using stops as entries
4. Position size and max risk guidelines must not be broken.
Position size is the easiest yet most ignored rule in a trader’s toolbox. I’ve broken this rule a dozen times and 9 times out of 10 I get burned, bad. Every time you buy a stock you need to consider your position size because the facts are you will have losing trades. It doesn’t matter if you’re the best trader in the world you will have some losses. Unless you have a crystal ball, which if you do then email me.
How you manage your position size is 100% up to you. Through trial and a lot of losses, I’ve settled on different percentages I’m willing to lose per trade. This is based on the percentage of my portfolio that the position is. Sounds complicated but it’s actually simple. Here is what I follow:
- 20% of portfolio position, max loss of 2.5% = .6% potential total portfolio loss.
- 30% of portfolio position, max loss of 2% = .6% potential total portfolio loss.
- 40% of portfolio position, max loss of 1.5% = .6% potential total portfolio loss.
As you can see every scenario leaves me with a max loss of only .6% of my whole portfolio which is relatively small. I used to trade my whole portfolio into one stock. I did this over and over again losing 1%-3% every time. T
I’ve now decided to keep all of my positions between 20% and 40%. Just big enough to make a difference if I do see a gain and small enough to mitigate risk. It’s not perfect, but it feels balanced to me.
5. When a trade is initiated, a counter trade must be placed immediately.
My next rule is the easiest of them all IF you follow rule #4. When your stop entry occurs and you finally own a stock, you need to place a trailing stop to counter it. This needs to happen immediately especially if you’re like me and don’t have the time to sit at a monitor all day.
A trailing stop works by setting a certain % that the stock has to go down before it will automatically sell. Automatic being the key. An example of this is if I buy a stock for $100 a share with a 2% trailing stop-loss and that stock immediately drops to $98 then it will sell. Let’s say that stock goes up to $110 without dropping then the stock would need to drop 2% from that $110 or down to $107.80 before it would automatically sell.
If you have a good entry then the stock should go up almost immediately. All a trailing-stop does is protect any gains you may have received. While also protecting you from the potential downside of that stock. Here is a screenshot of what that looks like from my trading account.
The first thing you need to do is make sure the order type is a trail or trailing stop. Then set your stop price. If you’re using a percentage (which I highly recommend) then this number won’t matter. Just set it a couple dollars less than the current stock price.
Trailing amount, type, and time-in-force are the three most important things here. The amount is going to be based on rule #4. In this example, I have a 2% loss because my position is 30% of my portfolio. Make sure type is %, but you can choose the amount if you want to do the math. Lastly, time-in-force needs to be ‘Good till Cancel’. Your other option is just for the day but remember, we want to set it and forget it.
Stops have saved my account more than once. Use them.
6. Don’t Hold Through Earnings.
My last rule that deals with individual positions are to NEVER hold through earnings. Yes, again I’m speaking from experience here and not a great one. Earnings are a literal coin toss. Every quarter a public company has to report their earnings. On the other side of it, a bunch of ‘smart’ people decides how much these companies should be making. These numbers are compared and if companies beat the estimate their stock will go up, usually by a decent amount.
On the other side of this, when a company misses their projected earnings, it can get real ugly real fast. I had a position in Twitter that dropped 20% overnight and there was nothing I could do about it. Your stops, which you set in rule #5, are only available to go through when the market is open and companies don’t report their earnings when the market is open.
The easiest and smartest way to mitigate risk is to just not hold through earnings at all. If you buy a company and want to know when they report earnings, google it. It takes a couple seconds and will save you a lot more money.
7. Always work to fight FOMO.
FOMO (fear of missing out) encompasses all of the rules above. Your worst enemy as a trader is yourself. Many times I have seen people making buckets of money on a particular stock and I want a piece of it. By the time I buy in, it’s usually too late and the majority of the breakout is over with. This has literally cost me thousands of dollars in the past.
I and many other traders will be working on our mental game as long as we are trading. If you want to learn more about FOMO in trading read Trader Lion’s article: 5 Ways to Beat FOMO. It’s a great article.
Executing Your Trade
My rules are essentially my trading process. This is done purposely to force me to be more likely to follow them. The best way I’ve found to execute these rules and make a swing trade is to trade just once a week.
On Sunday night I’ll go through my Finviz screener and find 5-10 stocks that fit my criteria and I see a pattern in. I’ll take these over, chart them, and narrow it down to 3-5. From there I’ll set buy orders on 1-3 at the set entrance price that I found. It’s important to remember that funds that aren’t invested aren’t losing money. I’d rather be in cash than buying a stock that I don’t feel 100% comfortable with.
If an order goes through I get an alert on my phone and I’ll immediately set my trailing stop to mitigate my risk. Then I do nothing but wait. Yes, I’ll occasionally check my positions to see how they’re doing but for the most part, I let them manage themselves.
I do this process over and over again. Week after week and it has made a world of difference in my returns.
Keep a Trading Log
Understanding what is working and what is not, is key to being a good swing trader. I’d be willing to bet that most people (seriously like 99%) don’t have a trading log and have no clue what their returns are. They just estimate and most of the time they are way above their actual number.
Keeping a trade log keeps you accountable. It allows you to recall every trade and learn from your wins and losses. It also gives you a real return value. This value also takes out your trading fees which most people forget about. Yes, I understand that most platforms offer a report on your rate of return but I believe you actually need to do this. The closer you are to the trades, the more likely you are to follow your trading rules. Thus, increasing your return in the long run.
If you’d like help tracking your trades, download the Excel sheet that I have attached below. It’s nothing groundbreaking but it is what I use and in this case, I think simple is better. At the least, it’s better than having nothing at all.
Lastly, if you’d like to see my trading diary you can anytime, anywhere. All you have to do is go to www.YoungDumbAndNotBroke.com/TradingDiary
Or if you want to just keep up to speed, then subscribe to my newsletter at the bottom of this article. At the end of each month, I will give an update on my previous month’s return.
Wrapping It Up
Swing trading is dangerous and you can lose everything. You wouldn’t be the first and you won’t be the last. Your goal is to preserve capital and make that money grow which can be done through risk management. Personally, I love swing trading. It gives me the right amount of excitement mixed with making a little extra money.
It wasn’t always like this though. When rules weren’t followed, it was just excitement and pure gambling and just like gambling, the house usually won. Over these last 9 years, I’ve slowly become wiser and my trading has become profitable. Hopefully, this article saves you some of my headaches.
The last thing I want to mention is that there is much more to trading then just this process. Do I think you can be a profitable trader following this guide? Absolutely. I also believe there is a ton of value in understanding things like SMA, EMA, RSI, MACD, overhead supply, and the dozens of other market indicators.
People every day are getting into trading and losing it all. This guide is for those people that want to get their feet wet without diving in headfirst. If you don’t want to dive headfirst then read: How to Make Money in Stocks: A Winning System in Good Times and Bad, Fourth Edition. This book is a step further and has taken my trading game to the next level.
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