Short-Term Trading in Slow Motion: The Swing Trade

Want to try your hand at short-term trading? Consider swing trading: holding positions for a few days to try to capture a larger intermediate-term price swing. Markets Trading
4 min read
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Key Takeaways

  • Understand what a swing trade is
  • Learn about the different swing trading strategies 
  • Know the risks associated with swing trading

The idea of jumping into the market to make a quick profit might sound appealing to many investors. It may seem like a quick way to seek small returns on the side, separate from your longer-term investments. But in practice, the smaller your time frame, the more difficult it gets. That’s because on smaller time frames, volatility and market noise are often greater.

Markets respond to micro-levels of supply and demand that may not have much to do with longer-term fundamentals. Overall, trading smaller time frames creates a more stressful environment. So, it may make more sense to slow down the pace.

Why not consider taking longer-term trades—a style called swing trading—lasting one to a few days? Yes, it’s slower, but it affords you the time to plan your trading setups.

What Is Swing Trading?

If you slow down the principles behind a short-term trading approach and try to capture a larger intermediate-term “price swing,” then what may result is a short-term trade setup with a well-defined entry and exit point.

In the example in figure 1, a trader might have entered a short-term trade based on a bullish flag pattern. The entry point—where price breaks out of the pattern—is clear. The exit point—a calculation based on the height of the pattern—is also clear, and so is the stop order exit point. The trade lasted all of eight days. It didn’t attempt to capture the entire trend. It only captured a fraction of it. Keep in mind that a stop order doesn’t guarantee an execution at or near the activation price. Once activated, they compete with other incoming market orders.

Chart patterns for entry and exit points on thinkorswim platform

FIGURE 1: TRADING SHORT TERM AT A SLOWER PACE. You can use chart patterns to identify your entry and exit points. Chart patterns such as a bullish flag can help you plan a trade before placing it. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Swing Trading Strategies

Swing traders use different methods to try to skim a fraction off a stock’s larger swings, from basic technical analysis (like moving averages and support/resistance breakouts) to more complex indicator-driven strategies.

In terms of principles, many swing traders hold fast to these critical components:

  • A clear trading setup based on a specific trading tactic or strategy—support and resistance breakouts, indicator readings, trend reversals or continuations, etc.
  • Entry and exit points—know when to enter and exit based on risk/reward or profit and loss (P&L).
  • A position sizing strategy—knowing how many shares to buy so the return may be worth the risk, and the risk won’t exceed your own personal loss limits (say, 2% on a given trade).

Indicators to Identify Potential Swing Trading Opportunities

There’s a universe of indicators you can use to help guide your swing trades. It all depends on your trading style, knowledge, and personal preference.

Here are a couple you can find on the thinkorswim platform.

The Market Maker Move Indicator

Traders who want to make short-term trades typically look for something that moves or something with volatility. And one period in which a stock could exhibit volatility is during earnings season. Enter the Market Maker Move, or MMM.

Highlighted in yellow on the thinkorswim platform’s symbol bar, MMM shows you the “expected magnitude of an upcoming move, expressed in dollar terms, for a given stock.” The MMM symbol tends to only show up on the week of a stock’s earnings date.

One thing to note, however: The MMM only shows up during times of outsize volatility. For options geeks, it’s essentially when front-month volatility is higher than those of deferred expiration dates. It’s also important to keep in mind that the probability analysis results from the MMM indicator are theoretical in nature, not guaranteed, and don’t reflect any degree of certainty of an event occurring.

Say you’re looking to trade stock XYZ, which is expected to announce earnings in a few days. The MMM indicator shows a value of +/- 13.48 (see figure 2). This means the market is pricing in a move up or down by around $13.48.

Market maker move indicator on thinkorswim platform

FIGURE 2: THE MARKET MAKER MOVE (MMM). Although nothing is certain in the world of stocks, the MMM indicator can give you some idea of potential expected moves before a company announces earnings. In this example, the MMM indicator is suggesting a move of $13.48 either way. Chart source: The thinkorswim platform. For illustrative purposes only. Past performance does not guarantee future results.  

Compare this to a stock that has an MMM of +/- 44.5. Which one would you rather trade? It boils down to your personal preferences.

When evaluating a potential trade, ask yourself these questions:

  • Will the stock present a potential trading opportunity? This is where you need to check your technical setups against the fundamental picture.
  • Which setup might present a more favorable price swing?
  • Might the potential price swing present a potential positive payoff that exceeds its potential negative payoff?
  • Most important, can you handle the loss of being stopped out of your trade, should it not pan out as expected?

There are other ways to gauge a stock’s volatility, such as using Bollinger Bands® to get a better picture of its current volatility profile and probable range of motion. There are other indicators to use, of course, but these two provide you with a few ideas with which to start.

The Risks of Swing Trading

Short-term swings are frequent and make up intermediate-term ups and downs that define a larger trend. If you trade using a method that produces more negative than positive returns, those smaller yet more frequent losses can build up and could leave you with an overall loss.

So, if you decide to place short-term trades to complement your longer-term investment strategy, you might want to consider testing and backtesting your “trading thesis” using software such as the OnDemand tool in thinkorswim. Keep in mind that backtesting is the evaluation of a particular trading strategy using historical data. The results presented are hypothetical; they didn’t occur; and there’s no guarantee the same strategy implemented today would produce similar results.

In Full Swing

Many investors get the itch to become active traders and try their hand at seeking short-term profits. But it’s not for everybody. It requires time, discipline, and a willingness to take risks. But if you decide to give it a go anyway, take a longer-term approach and “slow it down.” Be sure to start small and practice with your paperMoney® virtual account on thinkorswim.

The risk of loss in trading stocks can be substantial. Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.


Key Takeaways

  • Understand what a swing trade is
  • Learn about the different swing trading strategies 
  • Know the risks associated with swing trading

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