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.
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.
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.
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 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:
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.
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.
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:
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.
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.
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.
Explore our expanded education library.
Karl Montevirgen is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2021 Charles Schwab & Co. Inc. All rights reserved.