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There are two primary strategies used by swing traders: technical analysis and fundamental analysis.

Technical analysis is the art and science of reading the charts and technical indicators.

Fundamental analysis is more concerned with earnings reports, company valuations, and corporate events, such as acquisitions.

Both strategies have their pros and cons, and you can combine them if you want.

A swing trader who relies solely on technical analysis only cares about what the charts and indicators tell him or her.

Unlike fundamental analysis, the technical analyst doesn’t care about what the company does, how it makes money, or what the management is like.

Technical analysis is important for short-term trading. It allows you to look at any security and make an educated guess on which way it is going to move, either up or down in price.

On the flip side, if you are thinking of holding a security for the longer-term, fundamental analysis becomes more important.

For a swing trader using fundamental analysis, a high-level overview is sufficient. Unlike position traders, the swing trader will not have the time (or need) to dive super deep into a company’s fundamentals.

Most swing traders prefer technical analysis. It is less work, yields faster results (either good or bad), and is not as subjective as fundamental analysis. However, the best results usually come when the fundamentals and technicals line up.

What you decide to do is up to you. Don’t think you have to combine fundamental and technical analysis into your strategy. You may be more comfortable with one or the other. The main thing is to create a trading plan, including strict risk management, and to stick with it.

Another decision you need to make is whether to be a top down trader or a bottom up trader. Don’t combine these. Do one or the other!

A top down trader will start at a macro level and drill down to an industry and then a specific company.

A bottom up trader does the opposite. She will look for promising individual companies to trade first and then choose the ones with the industry group and macro-level fundamentals.

You can use technical and fundamental analysis for either approach.

Technical analysis relies on your interpretation of the charts and technical indicators. You are ultimately assessing the strength of the buyers vs sellers.

When you look at the charts and indicators, ask yourself the following questions:

• Is the security bullish or bearish in the short and long term?
• Is the security trending or in a trading range?
• Who is currently in control (buyers or sellers) and is that control likely to continue or reverse?
• What will signal a good time to enter the trade?
• What will signal a good time to exit the trade?

Technical analysis works because individual traders all act in a similar fashion when they hear major news. It is kind of like a herd mentality, even though each trader is an individual.

Additionally, there is something called market memory. This occurs when past market events influence current investor behavior.

One type of market memory is support and resistance levels. A support level is the price that a security will stop falling and begin to rise. A resistance level is the opposite. These support and resistance levels often form at round numbers.

Another reason technical analysis works is because it allows you to see what the institutions (also known as ‘smart money’) are doing. They have professional traders doing a lot of fundamental analysis, and when they make a move it shows in volume.

It is important to realize that technical analysis is far from foolproof. Often, patterns and indicators can give you one signal and then reverse shortly after. To combat this, plan your trade and trade your plan!

Charting is when you look for patterns created by the price movements of a security coupled with volume. It can be done with known patterns (double bottom, cup and handle, etc) and with candlestick patterns (bullish engulfing, morning star, etc).

Technical indicators are mathematical formulas that can give you clear buy and sell signals. There are specific indicators to use when a security is trending and specific ones to use when a security is in a trading range.

When doing technical analysis, you need to be adept at both reading charts and using indicators.

When doing fundamental analysis as a swing trader, it is best to keep it simple. Instead of spending hundreds of hours looking into a single company's history, you can focus on the key parts that have the biggest impact on share prices.

Focus on the following aspects of a company to get a broad understanding of what a company’s share price should be:

• Relative value to its peers
• Growth rate
• Return on capital
• Amount of debt

A trader who relies on fundamental analysis should become an expert in one or two specific markets. This is because different industries act differently. Being an expert in the tech field wouldn’t help you much in commodities.

The main weakness of fundamental analysis is the inability to time your exit. Fundamentals changes don’t occur quickly enough for the swing trader. To combat this, you can look for catalysts.

A catalyst is a fundamental event that triggers the market to re-evaluate a company’s share price. For example, a merger, new products, or a major news event.

Companies are often classified as either a growth stock or a value stock. This is an important difference to understand because growth stocks and value stocks outperform each other at different times.

When growth stocks are stronger, for example, you will want to focus on trading them more if going long.

Growth stocks are typically companies that trade at a premium in comparison to the overall market.

Technology and healthcare are common industries to find growth stocks in.

Value stocks typically trade at discounts to the overall market. Financial and consumer staples are common industries to find value stocks in.

The main thing for a swing trader when it comes to trading either growth or value stocks is to analyze recent history and go with the trend.

This is in fact a key theme. Always trade with the trend!

Read the next chapter here.

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