To find situations in which a stock has this extraordinary potential to move in such a short time frame, the trader must act quickly. This is mainly used by at-home and day traders. Large institutions trade in sizes too big to move in and out of stocks quickly. The individual trader is able to exploit the short-term stock movements without the competition of major traders. Swing traders use technical analysis to look for stocks with short-term price momentum. These traders aren't interested in the fundamental or intrinsic value of stocks but rather in their price trends and patterns.

The principal difference between day trading and swing trading is that swing traders will normally have a slightly longer time horizon than day traders for holding a position in a stock. As is the case with day traders, swing traders also attempt to predict the short term fluctuation in a stock's price. However, swing traders are willing to hold stocks for more than one day, if necessary, to give the stock price some time to move or to capture additional momentum in the stock's price. Swing traders will generally hold on to their stock positions anywhere from a few hours to several days.

Swing trading has the capability of providing higher returns than day trading. However, unlike day traders who liquidate their positions at the end of each day, swing traders assume overnight risk. There are some significant risks in carrying positions overnight. For example news events and earnings warnings announced after the closing bell can result in large, unexpected and possibly adverse changes to a stock's price.

Swing trading involves identifying short-term support and resistance and where a market will likely re-assert itself. It is not about fading the market by picking tops and bottoms. Therefore, wait for follow through before attempting to enter a trade.

For instance, suppose a market is in rally mode and begins to sell off, chances are the next move will be a resumption of the original uptrend. However, until that uptrend begins to resume, positions should not be initiated. For longs, this means waiting for the market to turn back up, and for shorts, it means waiting for the market to turn back down.

Swing trading is a pure, technical approach to the markets. Simply put, we study and analyze the individual movements that comprise the bigger picture trends. Our goal is to become masters at interpreting the individual 'swings.' This is the purest form of market analysis we know of, with roots going back over 100 years to the early tape readers.

Swing trading relies on the interpretation of the length and duration of each swing. Each swing defines important support and resistance levels, or prices where the market can be expected to find increasing supply or demand. We also measure the momentum of each swing, to determine whether momentum is increasing or decreasing.

We ask ourselves: how do these various swings, with differing lengths, durations and momentum, fit into the structure of the bigger picture, higher-time-frame trend? And is there sufficient volatility to justify trading specific swings? Volatility is an area that we have done considerable research on, and which we incorporate into the classic understanding of swing trading in our own unique way. Putting these pieces together and sorting out the implications is the swing trader's job.
It is important to emphasize that the swing trader judges the market solely by its own actions. Monitoring the magnitude, duration and quality of the swings tells us when to trade for a small target or a larger objective, and which swings to follow and which ones to ignore. A professional learns how to work the swings in the direction that achieves the highest level of trading efficiency. In most cases this will be in the direction of the longer-term trend.

Trends are defined by specific patterns and are comprised of many individual swings. The individual swings define our risk points. These are all quantifiable elements. A trader who claims to be proficient in swing trading should be able to quantify both the trade setups as well as the probabilities for the outcome of each trade.

Swing trading is no different than playing poker or other card games based on statistical probabilities. It comes down to a basic understanding of game theory and the numbers surrounding each point of play. As in all games, swing trading reveals to us that money management and risk control determine the outcome of the game more than any other variable.

The Basic tenets of swing trading: During strong trends, we use retracement swings to enter in the direction of the trend. These points are also referred to as 'pullbacks' or 'dips' in an existing trend. When a new momentum high is made, we look to our highest probability trade, which is to buy the first pullback. When a new momentum low is made, we look to sell the first rally. We continue trading in the direction of the main trend until there is a buying or selling climax, or a failure test. A failure test would be the most aggressive type of trade entry when swing trading. A retracement in a trend would be the most conservative. Pattern recognition is used to determine the trend and also to define a 'failure test.' Experienced swing traders always look to trade in the direction of the higher-time-frame trend, while using the lower time frame patterns to determine risk and entry.