This Is What It Means To Swing Trade and How To Do It

large-1420166111Evan Medeiros has been on StockTwits for several years now. His speciality is swing trading and you can find him each day sharing interesting set-ups, charts, and blog posts about what he sees in the market. We recently connected with Medeiros because we wanted to ask him more about his strategy and style (he just had his best trading month in 2 years!).

So what is swing trading and how do you do it? In this quick chat we hope to help everyone gain a better understanding about the art of swing trading.

1. How would you define swing trading to someone who has never heard of it?

I define swing trading as an approach to trading the markets where the planned holding time of the trade extends beyond a day (overnight) and the goal is to capture a single leg (swing) in a stock’s trend.

2. What are your favorite types of swing trades? What do you look for exactly?

My favorite setup as a swing trader is the classic breakout trade.

This is a trade setup that is identified using technical analysis, takes advantage of price momentum, and works best during healthy market environments. The specific price pattern can take on many different shapes so it’s best described as follows: A clear transition from a mean reversion state to a momentum (trend) state, signaled by an expansion of range through a well defined trendline or pattern. The move should be scary.


3. Is the majority of swing trading based on technical analysis? Or is there ever any fundamental analysis involved?

Since the goal of a swing trader is to capture a multi-day, sometimes multi-week move in a stock, it’s really hard to imagine a system solely based on fundamentals that could capture that. However, fundamentals could play a supporting role in a strategy, but it’s likely only a small piece of evidence behind a predominantly driven technical approach.


4. How do you practice risk management when swing trading? Do you set tight stops? How do you know when to sell losers and winners?

Let’s use my favorite setup, the breakout trade, as an example to describe my risk management process.

By having well defined entry criteria, “A clear transition from a mean reversion state to a momentum (trend) state, signaled by an expansion of range through a well defined trendline or pattern,“ then I know exactly where I should exit the trade and calculate my risk against.

If we fail to hold that transitional state and fall back into the prior range or pattern, then it’s time to move on.

For this reason, breakout trades, in general, work with relatively tight stops. There are other setups I trade, where I believe it makes more sense to use a wide stop loss, so both can work depending on the setup / strategy.

In terms of taking profits, I prefer to scale my way out as the trade works in my favor.

There’s two primary factors that set my initial profit target expectations: assessing the size of the base (pattern) the stock is emerging from and looking back at the length of the prior price swings.

I’ll also use more advanced techniques, such as analyzing the price action of the stock and market context as the trade progresses in order to skew my initial expectations more conservatively or aggressively depending what the market is giving me.


5. What do you think makes a great swing trader?

This question deserves an entire blog post of its own, but in short there’s four key components all traders should develop or at least be aware of.

  • The ability to think long term

    • A winning trader should always be making decisions with the next 10,000 trades in mind. If you’re losing sleep or worrying about a particular outcome over the next one or two trades then you have a problem. Focus on the long term.

  • Self awareness

    • For a discretionary trader, execution is everything. You can have the most well thought out, profitable trading plan in the world, but if you fail to follow it or constantly override your rules then it won’t do you any good.

  • Patience to do nothing

    • Markets constantly call our name to jump in on the action and take a trade, but most of the time there’s really no real edge available. They’ve become noisier than ever, and patience to sit on our hands and not push buttons has become grossly undervalued.

  • The ability to adapt

    • Markets are constantly evolving. The market you traded yesterday may not look anything like the one you’ll have tomorrow. A trader’s ability to recognize changing market conditions and analyze market context is crucial for long term survival.


If you enjoyed this quick post let everyone know in the comments below! Remember to follow @evanmedeiros on StockTwits.

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