How to Pick Stocks for Swing Trading

If you are interested in learning more about swing trading, chances are you have a lot of questions.

You may be wondering how to pick stocks for swing trading or you may be searching for swing trading tips to help you avoid making costly mistakes.

Today I will break down this trading strategy in simple terms, go over some of the swing trading basics and show effective ways to find and identify the best stocks to swing trade.

Understanding What Swing Trading Means

First, lets define swing trading.  In simple terms, what it means is you are not buying and selling stocks within a single trading day nor are you holding the stocks for many years. You buy a stock and hold it for a few weeks or months until you reach a profit level that suits your needs or in the case that you had a small loss you get out before it becomes too large for you to handle.

As always there is the risk that you could lose it all the day after you buy the stock but your risk in general is less with the swing trading strategy because you are ready to buy and sell the stocks when you are ready rather than being forced by time limits.

You should know that some investors criticize the strategy because of the fact that you pay more in fees and taxes since you trade more often than a long term investor. It is also considered risky by some because it’s not as diversified as let’s say an ETF or mutual fund and it is not guaranteed like a bond or savings account with interest.

Despite the risk, learning how to swing trade is an extremely popular method for traders because it can be an effective way to earn profits without being committed for the long haul and without being exposed to the dangers of day trading. Also, you can take your profits in a relatively small amount of time as opposed to waiting for 20 years.

Popular Swing Trading Techniques

Ready for some swing trading techniques? Here are a few ways to analyze charts and read the charts that will help you with picking stocks.

Trade Technique #1: Find Stocks with Volatility

One swing trading technique that is a popular choice to consider is to find stocks with volatility. Volatility in the stock market means that stock prices go up and down a lot and they do it often. If you are looking at charts think of a boat on massive choppy waves going way up and down. Your aim is to buy it near or at the lows and sell it near or at the highs. Remember you will never nail it at the exact bottoms and tops but you want to get as close as you can.

Here a few chart examples that display high volatility:

In the chart above we have the choppy waves so this could be a candidate to swing trade this stock. However, if you look closely. you will notice the prices seem to have one common factor: the longer you hold this stock the greater your chances become that you are going to lose money if this downward price movement continues. This could make this a bad investment decision. While it’s possible that you could make money swing trading this stock if you get in and out fast enough, this would probably be more of a day trading strategy {which given this chart data I would avoid that also}.  You’ll also want to take into consideration the price range of the stock. If you look at the chart above, this is considered to be a penny stock so your risk is substantially greater.  We will get more into swing trading penny stocks later in this article.

Trade Technique #2: Avoid Stocks With Sideways Movement

Upon first glance this chart has great volatility so you could buy low and sell high in a reasonable amount of time.  This at first appears perfect.  However, lets zoom out and look at this over a longer time frame.

As you can see this would still work for swing trading.  You could buy on the lows and sell on the highs so this one is not bad for swing trading.  I am a little concerned however that it has sideways movement. Sideways price action means the price doesn’t really break through and continues in a general range over time. What this means when trading is that the longer you hold this stock the greater your chances become that you might end up breaking even. Breaking even means you end up not making much if any profit on the trade. Now, when this happens, the broker is actually the one who wins because they get  all of your fees and you end up owing tax on any small gain. For these reasons, you are most likely going to want to pass on any stocks with sideways price action. In addition, this too is a penny stock and it’s really risky so let’s look at one that is trading at a higher price point.

Technique #3: Look for Prices With a Steady Gain Over Longer Periods of Time {1-2 years or longer)

At first glance we look at this chart and we see that this one has great volatility and the stock prices appear to be trending up. Before we can make a decision however, we need to zoom out to a larger time span to truly do our due diligence in researching.

Now that we look at a 1 year period, this looks even more promising for swing trading.  When using this technique, the longer you hold the stock the better your chances are of making a decent profit.  This is one I would consider swing trading given the current data. HOWEVER:  Always remember that any company could go bankrupt and any stock pattern could reverse {see examples of stock reversal patterns here and some candlestick charts here} so always be aware of your RISK and make your own decisions – at any time you could lose it all!

If you imagine that you bought the stock above at $67/share in September 2015 and sold it at $72/share in October of 2015, you might have earned about a 7% return.  That’s not bad for only waiting a few weeks. This is relatively a “safe stock” {though bear in mind no stock is truly safe!} – Let’s see what happens if we analyze a stock with  even more volatility and risk.

Technique #4: High Risk or High Reward?: Seek Out Penny Stocks with High Volatility

I consider this stock to be a penny stock since it trades pretty close to the $5 per share range.  Many traders would not even consider a stock like this because of the increased risk associated with penny stocks.

However, if you are willing to swing trade penny stocks despite the huge risk you also run into greater volatility. That means if you are able to time it right you can make a nice percentage gain in less time. Let’s say we bought the stock above at $5.50 in May of 2015 and sold it for $6.60 in October of 2015.  We would have made around a 17% gain in only 5 months!

With that being said it is difficult to time things perfectly but since this stock is gradually rising over long periods of time  you can hold the stock until it finally reaches a result you are happy with if the uptrend continues.  Of course the pattern could reverse and you could lose it all but the idea is to do what you can to better your chances.

That’s what technical analysis in stock trading is all about.  You are basically trying to forecast what comes next and win more than you lose.  It’s extremely challenging but it’s also extremely rewarding when you guess right.

What are your thoughts on swing trading?  Feel free to share below.  As always, remember that this is for research purposes only and I am not endorsing any specific stock or strategy.   Ultimately, you and you alone must decide for yourself what strategy or stock is for you.