What is Swing Trading?
Swing trading is a trading style that seeks to capture short to medium-term profits out of directional price ‘swings’ in the market. Swing traders aim to get a huge chunk of profits out of medium-term trends in the market.
As a trading style, swing trading falls between day trading and position trading. Day trading involves holding trades within a single day or trading session, whereas position trading is a long-term strategy where trades can be held for a couple of months or years. In swing trading, trades are held for a few days or weeks.
Swing trading utilises technical and fundamental analysis to identify market direction as well as optimal price entry and exit points in the market. The swing trading strategy requires patience and calmness because there will be numerous intraday price fluctuations as the trade plays out.
Swing trading is also a flexible strategy that can be applied in most markets. Because of the relatively large profit targets, swing traders can also trade assets with wider spreads or lower liquidity.
Basically, swing trading is a style that attempts to forecast an impending price move in the market and aims to capture huge chunks of profits if that move happens. Swing traders implement a variety of strategies in the market. Some of the most common include reversal trading, retracement trading, and breakout trading.
Pros and Cons of Swing Trading
- Lower Time Commitment – Compared to day trading, swing trading demands a reduced time commitment. Because they primarily utilise technical analysis, swing traders are only required to watch their charts on daily or 4-hour timeframes. They do not need to watch their charts all day or monitor price action on smaller chart timeframes. Swing trading is, therefore, very accommodative even for traders who have daytime job commitments.
- Larger Profits On Single Trades – Swing traders always look to capture a significant chunk of profits on medium-term trends in the market. This involves looking for trades that have attractive risk/reward propositions in the market. This often results in trades that generate huge profits compared to the risks involved while taking them.
- Traders Can Depend Exclusively On Technical Analysis – The strategies applied when swing trading rely heavily on technical analysis. This simplifies the trading process because the required fundamental analysis is very basic so as to exploit the best trading opportunities in the market using the best swing trading strategies.
- Exposure To Overnight And Weekend Price ‘Surprises’ – Swing trades are typically held overnight or over the weekend. This exposes traders to risks, such as price gaps or impactful news and events that may happen during after-hours or weekends. Such events can trigger the stop loss of swing trade positions in the market.
- Can Miss Out On Quality Long Term Trends – Swing traders usually aim to enter a trade when a price swing is on the horizon. But in doing so, they may end up missing out on solid long-term trends in underlying financial assets. For instance, a stock such as Apple has appreciated for a long time and would have been very profitable for a trader that held it all along. But a swing trader would have only booked minimal profits along the way.
- Market Timing Is Difficult – Swing trading heavily relies on technical analysis to forecast medium-term price swings in the market. But market timing is an incredibly difficult endeavour even for experienced traders because price behaviour can be very random and choppy during the short term.
Swing Trading Markets
Swing trading is a versatile strategy that can be applied in a variety of markets. But some markets offer great swing trading opportunities.
Swing Trading Stocks
Stocks are particularly very ideal for swing trading. Large-cap stocks often swing between defined high and low-price points, providing traders with plenty of swing trading opportunities. Stocks usually have psychological price areas that are actively targeted by investors. Traders can ride a trend when the price is moving in a particular direction, and later take opposite trades when there is a reversal in the market. Events such as earnings reports and other company news also provide lucrative swing trading opportunities for investors.
Swing Trading Commodities
Commodities also offer very lucrative swing trading opportunities. Assets such as oil and gold tend to trend strongly during certain periods, and swing traders can take advantage of these opportunities to earn huge profits. Supply and demand news as well as the strength of the US dollar can dictate short to medium-term price action in commodities and provide investors with opportunities for implementing swing trading strategies in the market.
Swing Trading Indices
Indices are statistical measures designed to track the performance of baskets of related stocks. Swing traders tend to watch broad indices, such as the S&P 500, which tracks the performance of top 500 listed companies in the US. Such benchmark indices usually have well-known psychological price levels that are watched keenly by investors. For instance, when the price of a benchmark index is known to hit 10,000 during a recession, swing traders can look to enter sell trades when its price breaks below the 11,000-mark.
Forex Swing Trading
Forex is the largest financial market in the world. This is probably the best market for swing traders as there are usually plenty of swing trading opportunities across major, minor, and exotic currency pairs. Prices of currency pairs are influenced by multiple factors on a daily basis, and this provides numerous opportunities to place swing trades. While many traders prefer major currency pairs such as EURUSD because of lower spreads, swing trading strategies can be applied even on minor and exotic currency pairs because big price targets can offset the impact of relatively higher spreads.
Swing trading Cryptocurrencies
Although they are a relatively new asset class, cryptocurrencies have proven to be very volatile. But this can be good news for swing traders. Cryptocurrencies, such as Bitcoin, often see their prices fluctuating all year round. There are periods of strong trends and periods of stagnation. In both market conditions, traders can pick out lucrative opportunities for placing swing trades.
Swing Trading Strategies
Here are some practical strategies and some of the best indicators for swing trading in the markets:
Swing Trading with Fibonacci Retracements
Fibonacci retracements can help traders establish optimal price entry areas when swing trading. In a trending market, price usually tends to retrace before resuming the initial trend.
Fibonacci retracement tool plots horizontal support and resistance levels at levels such as 23.6%, 38.2%, and 61.8%. When trading equities, investors also watch out for the 50% level because stocks tend to reverse after retracing 50% from peak areas.
A swing trader can enter a trade when an asset’s price retraces to the 61.8% level and look to exit when the price hits the 23.6% level. Fibonacci provides definitive price levels where swing traders can achieve attractive risk/reward propositions.
Swing Trading with Support and Resistance Levels
Support and resistance are the foundation of technical analysis. These levels perfectly illustrate how supply and demand forces play out in the market to determine the price of financial assets.
Price will usually fall until demand exceeds supply – that is the point of support where prices are likely to turn higher. Alternatively, the price will rise until supply exceeds demand – that will represent the resistance area where the price is expected to turn lower.
Swing traders will often look to enter buy trades when the price bounces off support areas. When buy trades are taken, stops are placed just below the support area, with profit targets near the resistance area.
In the same manner, sell trades will be entered when the price bounces off the resistance area. Stops will then be placed just above the resistance area, with profit targets near the support area.
An important thing to remember when swing trading off support and resistance levels is that when price breaches the levels, they switch roles. For instance, if the price breaches a support line, the line turns into a new level of resistance.
Swing Trading with Channels
Using channels for swing trading is very beneficial for strongly trending assets. To swing trade effectively, it is important to identify an asset that is trending strongly, but within a plotted channel. Channels are basically parallel trendlines.
When using channels, it is important to place trades only in the direction of the main trend. For instance, if an asset is trending lower, it is advisable to only place sell orders when the price hits the top line of the channel. Price targets can then be the bottom line of the channel.
Swing trades can only be placed when the price is contained within the channel. If the price breaks out of the channel, it implies that a new market condition is forming and you may require to change strategy or plot new lines.
Swing Trading with Moving Averages Crosses
Moving averages are known to smooth out price action by plotting the average prices of an asset over a defined period of time. For instance, a 20-period moving average plotted on the daily chart will show the average price for the last 20 days.
Swing traders usually combine multiple moving averages to determine prevailing price swings in the market. For instance, you can use a 5-period moving average together with a 13-period moving average. When using multiple moving averages, the shorter-period one will react to prevailing prices faster than the longer-period one.
Swing traders watch out for moving average crosses to determine the best opportunities in the market. For instance, if the price has been trending higher, but after a period of waning momentum, the 5-period moving average crosses below the 13-period moving average, it would imply that a downwards swing is in progress and sell trades can be placed in the market.
Swing Trading with Candlestick Patterns
As mentioned, swing trading is very reliant on technical analysis. And a great way to apply technical analysis is via raw price action analysis using candlesticks patterns. When tracked keenly, candlesticks can form patterns in the market that can give vital price action cues.
Swing traders particularly look for continuation and reversal patterns. Continuation patterns such as wedges and flags indicate that the price of an asset is ready to resume the dominant trend after a period of consolidation. For instance, if a stock is trending lower and a bearish wedge forms on a chart, it is a signal to place sell orders because the price will likely continue to tumble.
On the other hand, reversal patterns such as double tops as well as head and shoulders indicate that the momentum of the current trend is fading and the price is likely to change direction. Reading price action using candlesticks can help traders identify high probability swing trading opportunities in the market.
How to Swing Trade?
Swing trading can be a lucrative trading style that can be implemented by both new and experienced traders. It is also an excellent strategy for building skills because it is neither too short term nor too long term.
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- What is swing trading?
Swing trading is a trading style that seeks to capture short to medium-term profits out of directional price swings in the market. In terms of timeframes it falls between Day Trading and Position Trading.
- Which instruments can I swing trade?
Basically any instrument that experiences medium-term trends can be a viable target for swing trades. Traditionally this style is widely used in stocks and commodities markets.
** Disclaimer – While due research has been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of investment advice.