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If swing trading is a sport, it would be a high-stakes game of timing and precision.
Ever seen a tightrope act? That’s what it looks like when you trade swings, but instead of walking the fine line of a rope, you must find the delicate balance between risk and reward.
Maybe you read about the upsides of swing trading in an online forum, and you’re interested in it but don’t know what stocks to pick or how to determine profitable entry and exit points.
Perhaps you may already possess a bit of know-how in trading swings but want a better risk management strategy to optimise profits and limit losses.
Either way, you need an edge, a weapon that can give you an advantage over the herd.
Whether you’re an amateur or professional trader, we’ve created this article to help you understand swing trading, including its definition, mechanics and potential perks and disadvantages.
Read on for more information on integrating swing trading into your approach without risking considerable capital.
Swing Trading 101
You might have heard of these swing trading analogies: “It’s like surfing a rough wave” and “It’s the trading world’s version of a roller-coaster ride”. The bottom line is that swing trading isn’t for the faint-hearted.
If swing trading is notorious for being risky, why do some new and experienced traders still find it appealing?
Conventional (medium-to-long-term) trading is no cakewalk as it is, so why shoulder more risks?
For some, swing trading’s appeal is precisely its focus on quick profits via short-term trades. Swing traders dive into the volatile market, enter positions, hold for a few days or weeks and exit after (hopefully) raking in profits.
What Is Swing Trading?
Unlike day trading, which focuses on multiple trades daily, swing trading involves holding positions for several days and sometimes for a few weeks.
Both day and swing traders depend heavily on chart patterns and technical indicators to time entry and exit positions.
Swing traders aim to profit from short-term price movements on the stock market’s long side (buying) and short side (selling).
Key Takeaways
- Swing trading is midway between trend and day trading. Trend trading lets traders hold positions for several weeks or months.
- Swing trading relies on market conditions, although every market type calls for different trades.
- Swing traders generally enter trades, hold for days to weeks and sell, hopefully with a profit.
- One primary factor for successful swing trading is identifying the right stocks, usually volatile and liquid.
- Swing traders use moving averages and focus on technical and price channel analyses.
Understanding Swing Trading: How Does Swing Trading Work?
As stated above, swing traders often hold positions for days or weeks. However, this timeframe is general, as some trades may last a few months.
Additionally, some swing trades can happen during a trading session. However, these cases rarely occur and usually result from highly volatile market conditions.
All this is to say that swing trading isn’t a buy-and-hold style.
Long-term investors could retain securities through seasons of market weakness, thinking that the tides will turn eventually and move in their favour.
Meanwhile, swing traders don’t care much about poor short-term performance.
If you’re a swing trader, you focus on opportunities from a potential price move. You exit first (conversely, you buy when the price is high) and ask questions later.
In addition, you might invest in volatile or more sedate stocks.
Either way, swing trading works if you can predict where the asset’s price will likely move next to enter a position. You earn a profit if the move materialises.
Simply put, swing traders have a “hit-and-run” trading style: they enter, exit and move to the next opportunity.
What Are the “Swings” in Swing Trading?
“Swings” are short-term (daily or weekly) price actions which help determine your entry and exit points.
Advantages and Disadvantages of Swing Trading
Here’s a table showing the pros and cons of swing trading:
| Pros |
On the other hand, long-term investors buy and hold stocks to preserve and grow wealth. They don’t invest for current income and often must wait long to see if their market expectations are correct. On the other hand,
Unlike intraday trading, which requires constant monitoring of price charts, you can get by just by spending an hour or two monitoring chart patterns and technical indicators in swing trading. |
| Cons |
In doing so, swing traders might miss out on an exceptional stock that would’ve given them more money if only they had held it for the long term.
|
Types of Swing Trading
Swing traders often use a combination of various trading strategies. Retracement (or pullback), reversal, breakouts and breakdowns are among the most popular swing trading options.
Reversal Trading
Reversal trading depends on fluctuations in price momentum. A reversal signals a change in a specific asset’s price trend direction.
For instance, if an upward trend loses momentum, the price moves downward. Reversals can be positive (bullish) or negative (bearish).
Retracement Trading
Retracement or pullback trading focuses on temporary price reversals within a broader trend.
Consider retracement as a minimal counter trend within the overall trend. The turnaround must be short-lived and temporary in a retracement.
Breakout Trading
This trading approach requires you to trade on the early side of an uptrend and determine the price to “break out”.
You enter a position after the price breaks a critical resistance level.
Breakdown Strategy
This strategy is the opposite of breakout trading. A breakdown strategy requires you to enter a position at the beginning of a downtrend and search for the price to “breakdown”.
You enter into a position after the price breaks a crucial support level.
Types of Swing Charting
Swing charts offer a convenient way to observe trends by reducing market noise and the time factor.
Market noise comprises price data, including corrections and volatility, that distort an underlying trend.
These tools can support your technical analysis by helping you get more accurate predictions and stop-loss and take-profit points even as the price action evolves.
Traders often say: “The trend is your friend.” Swing charts can help you find that trend.
Day Trading vs Swing Trading
As mentioned above, the primary distinction between day and swing trading is the holding time for positions.
Swing traders typically hold positions for days and weeks, while day traders trade multiple times before the market closes.
Day trading is like a 9-to-5 job but even more time-consuming, depending on your goals and the market movement.
A 1% price change can make or break a day trader’s trading day, so you must keep your eyes peeled.
Day traders usually have larger position sizes and may stick with a day trading margin of 25%.
In contrast, swing traders are OK with incurring the unpredictability of overnight risks. For this reason, swing trades are often made with a smaller position size than day trading.
Swing vs Position Trading
The primary difference between position and swing trading is the timeframe for holding financial assets.
Position traders usually buy and hold assets for several months or even years. Swing traders aim to profit from up and down swings for a shorter period of time.
How to Swing Trade Stocks
Here are five steps to swing trade stocks:
- Plan your approach: “Failure to prepare is preparing to fail” may seem like a worn-out cliché, but the short-term focus of swing trading demands a clear plan.
Otherwise, you will find yourself panicking with every unexpected price swing and fall into the trap of making things up as you go.
Get the necessary info and experience to improve your chances of making profitable trades. An excellent way to practise trading skills is by using a demo account.
- Set up a trading account (if you still don’t have one): Open a brokerage account with a reputable broker that offers high-quality trading platforms and tools.
- Pick a stock you’ll trade: Sometimes swing traders trade stocks exclusively due to the convenience, familiarity and variety of corporate stock trading.
Here are some stocks to trade:
- Apple (AAPL)
- Facebook (FB)
- Amazon (AMZN)
- Alphabet (GOOGL)
- Netflix (NFLX)
- Choose a trading style and strategy: This step refers to the “when” and “how” of your trading activities. Whether you place orders during or after market hours impacts your entry and exit plans.
Swing traders use two primary analysis techniques to inform their trading decisions: technical analysis and fundamental analysis.
Technical analysis includes chart pattern analysis and the application of mathematical formulas to security volume and price.
Fundamental analysis focuses on earnings, sales and other company or security fundamentals.
- Develop the right swing trading mindset: Swing trading is a relatively fast-paced trading technique, so as such, your primary “enemy” when swing trading is intense emotion.
Whether you’re all hyped up by a win or frustrated by a loss, the key is to stick with your trading approach and uphold your risk management strategy.
How to Pick Stocks for Swing Trading
You can use the tips below to sharpen your market selection skills when swing trading.
- Monitor chart patterns: Scan stock charts for patterns that signal reversal, like double or triple top chart patterns.
- Track the economic and earning calendar: Keep tabs on the economic calendar. This tool can provide insight into the health of a nation’s economy and potential trading opportunities or future risks.
On the other hand, earning calendars can help you adjust for sudden price changes in your swing trading strategies.
- Be cautious when trading volatile stocks. Volatile stocks like penny shares are highly speculative investments.
While the penny stock market’s volatility offers high-growth opportunities, it also presents substantial risks.
Trend Following Swing Strategies
Applying swing strategies can help you ride potentially profitable trends. You can categorise them as trend following, breakout, momentum or mean reverting.
Remember that developing a solid swing trading strategy takes time and effort. Hence, before you risk your hard-earned money, it is best to use a demo account to practise trading.
Demo accounts let you trade in real-time without risking capital to see whether your strategy works. You can also back-test a strategy that works in a simulated market environment but is unsuccessful in real-world transactions.
Swing Trading Tactics and Strategies
How do you detect promising opportunities? How do you time your entries and exits after you find those opportunities?
Below are swing trading strategies you can use to trade various markets.
Price Action Strategy
The price action trading strategy involves monitoring price charts and historical data without technical indicators.
Price action traders can spot candlestick patterns, like trends and reversals, by paying close attention to swing highs and swing lows.
Short-term trading techniques like swing trading rely heavily on trend and price chart analysis to identify the best entry and exit points.
Swing Trading Forex
Swing traders who trade on forex (FX) capitalise on the inherent fluctuations of many of the world’s currencies. Some even aim to benefit from crashes that could have resulted from political and economic unrest.
For example, traders can buy low and then sell high as currencies recover, perhaps with the support of national central banks or international lenders.
Bull Flag on Daily Chart
A bull flag is a type of trend pullback setup with a conservative trading pattern. The setup got its name because it appears like a flag when you trace the price movement.
While trend pullbacks are one of the most straightforward patterns to trade and the most likely to persist, they aren’t the most exciting trades.
Consider these setups as retracements of a recent swing high.
The sharper the spike on the flagpole, the more impactful the bull flag. Meanwhile, the flag’s break signals an entry into a long position.
Most days, you have hundreds of bull flag patterns to choose from in the market, so how do you determine which trade to initiate?
Generally, the best trades are upswings with high volume and momentum and downswings with lower volume and momentum.
Seeing the Forest Through the Trees
If you want to swing trade, it is best to focus on short-term price movements where you can see both a broad and narrow view of the trend. You can use filters to evaluate asset price changes.
Trading Off Support or Resistance
Success in support and resistance trades depends on how accurately you predict trend directions.
Ensure the stock is trending and has well-established support and resistance levels within range-bound stocks when trading support and resistance levels.
Note that price action often moves more randomly in range-bound markets than in trending markets. One way to minimise the risk is by monitoring momentum.
For instance, when a stock reaches a new low on its pullback, more often than not, that’s bad news.
The Role of Technical Analysis
Swing traders use technical analysis, which focuses on statistical data and patterns on a stock chart, to find trading opportunities.
Traders use these indicators to gain actionable insights into market psychology, studying multi-day patterns to know the probable direction of a stock price.
The complexity of and changes in technical indicators make swing trading risky for many traders and investors.
What Technical Indicators Can Be Used in Swing Trading?
A technical indicator is like a trader’s compass. It helps guide you in the correct direction when trading.
Below are some technical markers you can examine to improve your trading decisions.
1. Fibonacci Retracements
The Fibonacci retracement pattern assists traders in identifying support and resistance levels. Consequently, it can help you determine possible reversal levels on price charts.
For instance, stocks typically retrace a specific percentage within the trend before reversals. The four standard Fibonacci retracements are 23.6%, 38.2%, 50%, and 61.8%.
2. Support and Resistance Triggers
Support and resistance lines are arguably the cornerstones of technical analysis. Understanding how these triggers affect your trades is necessary to develop a successful swing trading strategy.
Support levels indicate where buying is powerful enough to resist selling pressure. Hence, a price decline is halted and the price turns back up again.
In this case, swing traders would place a stop loss below the support line by entering a “buy” trade on the bounce (an indicator of the lowest price) off the support line.
Meanwhile, resistance shows where the selling pressure is high, suggesting the possibility of the price movement opposing an uptrend.
In this scenario, swing traders would place a stop loss above the resistance line by entering a “sell” position on the bounce off the resistance line.
3. Channel Trading
This swing trading strategy involves identifying assets with a strong trend and executing trades within a channel.
Say you’ve drawn a channel around a bearish trend on a stock chart. In that case, you could consider going short after the price bounces off the top line of the channel.
4. 10- and 20-Day SMA
SMAs (simple moving averages) smooth out price data by continually updating the average price, usually from movements spanning multiple periods.
You can apply the 10- and 20-day SMA swing trading system to your stock chart.
When the short SMA (10 days) crosse the long SMA (20 days), it could signal a “buy” option, indicating that there’s a progressing upswing.
Conversely, when the short SMA falls below the long SMA, it could indicate a “sell” option since this SMA crossover suggests a downward swing.
5. MACD Crossover
The MACD (moving average convergence/divergence) comprises two moving averages: the signal and the MACD line. These indicators could also buy and sell signals during crossovers.
Suppose the MACD line rises above the signal line, indicating a bullish trend. In that case, ordering a “buy” trade is likely a good opportunity.
On the other hand, a bearish trend, which could happen when the MACD line crosses below the signal line, signals a “sell” trade.
Swing traders would wait until the two lines crossed again, indicating a potential trade in the opposite direction before exiting their positions.
Swing Trading Watchlist
A comprehensive trading watchlist can help you locate trading opportunities.
While many stock options exist, only so many are actively traded and popular. You can list the names of these well-known stocks and include them on your watchlist.
The Right Stocks for Swing Trading
Choosing the right stocks is another crucial element of a successful swing trading venture. When picking stocks, consider these two factors: liquidity and volatility.
Actively traded or volatile stocks have a high transaction volume suitable for swing trading.
Meanwhile, selling or demanding considerable price discounts when releasing your shares may be challenging if your stock has poor liquidity.
What Markets Can You Swing Trade-in?
Depending on the broker, you can implement your swing trading strategy in various financial markets, including stocks, forex, indices, commodities, and ETFs (exchange-traded funds).
One way to ensure safe and optimal trading conditions is to trade with a reputable broker offering assets in major markets worldwide.
The Right Market
Financial markets typically exhibit three long-term trends: the bull market, the bear market, or an intermediate trend. Swing trading strategy is different in every environment.
Bear Market Swing Trading
Bear market swing trading is challenging for natural buy-and-sell trades. In a downtrend market, stock prices are dropping over the long term.
Bull Market Swing Trading
Bull market trading might be more manageable. As prices typically rise in these market conditions, buying securities and making a quick profit is easier.
In-Between Market Conditions
Optimal swing trading conditions often form when financial markets are in the happy medium of the bear and bull market.
When a market transitions between bear and bull markets or faces general uncertainty, you can have more options (and chances of finding good positions) for swing trading.
Using the Exponential Moving Average
The exponential moving average (EMA) is an SMA variant emphasising more recent data points.
The EMA can provide traders with clear trend signals and entry and exit points much faster than the moving average. The EMA crossover can help swing traders time their entry and exit points.
Using Baseline Value
Once the swing trader uses the EMA to determine the baseline on the stock chart, they go long (buy) at the baseline when the stock is trending upward and short (sell) when the stock is trending downward.
Taking Profits
To take profits, the swing trader could exit the trade close to the upper or lower channel lines without getting too precise. Note: this strategy might cause the trader to miss the best opportunity.
Swing Trading and CAN SLIM
The CAN SLIM investment system focuses on long-term investments. Still, it can add value to swing traders by monitoring the following factors:
- Current quarterly earnings
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- Annual earnings growth
- New product or service
- Supply and demand
- Leader or laggard
- Institutional sponsorship
- Market direction
Example of Swing Trading
Say trader Z keeps track of extensively traded security SEC on the exchange.
Over time, Ms Z monitors the performance of securities in the chart. Eventually, she finds that the price trend of SEC is upward.
Ms Z seeks to profit by doing the following:
- Investing in SECT at a support level
- Placing a stop loss order for the security at a price slightly above a previous low
Trader Z continues to monitor the price movement of SEC, looking for the right time to exit the trade(once the price goes to the resistance level).
As soon as the security reaches the appropriate exit point, trader Z sells her SEC shares to profit from the price swing.
Real-World Example of Swing Trade in Apple
Another example: Say Apple’s (AAPL’s) price chart initially showed a strong price move higher, followed by a small cup and handle pattern that usually indicates continued price rise if the stock exceeds the handle’s high.
In this case, the price rise above the handle’s high could mean a potential buying opportunity. After the “buy,” you can set a stop-loss order just below the buying point to minimise possible losses.
These entries and stop loss levels can help you calculate your trade’s risk.
Suppose the handle is around $193.70, and you set a stop-loss order near $188.50 (stop-loss levels are just below the handle, usually marked by a rectangle in a price chart).
In that case, you have an estimated risk of $5.20 per share ($193.70 − $188.50). If you want a reward that’s at least twice the risk, any price above $204.10 is a viable option.
$193.70 (buying point)+ 2 × $5.20 (estimated risk) = $204.10
You Might Want to Be a Swing Trader if:
- You have a full-time job. Swing trading is a less time-consuming commitment than day trading.
- You can dedicate a few hours weekly to analysing markets and securities.
- You have the self-control to place stop-loss orders consistently.
- You are getting subpar returns in your existing investment portfolios.
You Might Not Want to Be a Swing Trader if:
- You can’t handle the stress of monitoring (mostly unexpected) price movements.
- You don’t have the time to analyse technical indicators and chart patterns.
- You are too emotional and are usually more reactive than calm and proactive when trading.
Swing Trader Mindset
The “secret” to swing trading is knowing that holding a position is half the battle. Don’t panic if your trade isn’t working out immediately.
No matter the asset, markets often break when they’re good and ready, not when most people expect them to.
If you want to be a swing trader, prepare to wait for days, weeks or even months to see your move unfold fully.
Patience and the ability to step aside and not obsess over the charts all day are must-have attitudes for swing traders.
How Can I Start Swing Trading?
To start trading, you choose a trading platform, open a trading account and pick an asset to trade in.
But as you’ve read above, swing trades can be risky.
Say you trade, but it’s not going your way. In that case, finding a trading platform protects you from losing more than your capital, preventing you from going into debt.
Swing Trading as a Part-Time Job
You don’t have to give up your full-time job to swing trade. You could consider swing trading as a supplement to other income-generating activities.
Part-time swing traders typically analyse charts and technical indicators after work and execute trades the next day.
Is Swing Trading Really Profitable?
Swing trading could be profitable if you fully understand what you’re getting into before you swing trade. The first step is to learn the basics.
Additionally, as indicated above, discipline, patience and composure are traits you’d want to foster in yourself to improve your chances of achieving significant returns. But as with all trading, there are financial risks involved.
How Much Money Can I Make Swing Trading?
There’s no specific figure, as your potential profit depends on how well your swing trades do in the market. Be wary of brokers and online gurus who guarantee overnight success.
Is Swing Trading Risky?
Yes, but swing trading is less risky than other types of short-term trading. Holding positions briefly and relying on technical analysis could mean you have a lower risk of getting stuck in an unliquidated position.
Risk Management
If a market movement turns against you, a reliable platform can help minimise your potential risk.
It can give margin calls and alert you when your market exposure is approaching the maintenance margin requirement.
Why is Risk Management Critical in Swing Trading?
How you manage risk on individual security and the portfolio level as a whole is one of the most, if not the most, crucial aspects of swing trading.
A trading plan with a weak entry and exit strategy might still be profitable if the risk management strategy allows profits to run and limits losses.
Trade Management
Swing trading involves combining your skills of tracking a watchlist, analysing technical indicators and executing a trade. That’s why trade management in swing trading depends on how well you manage your emotions.
Emotions tend to hold traders back from exiting their trades proactively. Proper planning and following a system are great ways to maintain a calm disposition when trading.
Rule of Thumb
Another crucial element of swing trading is having a winning mindset. This rule of thumb might seem too touchy-feely. Experts say the human mind can “shape” reality. In other words, belief can translate into action.
Successful swing traders often believe they will succeed. They don’t dwell on their past mistakes but on previous successes. They chart their goals and trades and view losses as inevitable outcomes of certain decisions.
Always Be Investing
Like any of life’s pursuits, continued investment is necessary to succeed in trading swings. Ensure you invest in the way that makes sense to you and your overall trading plan.
FAQs
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What are some tools and indicators used by swing traders?
Swing traders typically use the following tools or indicators:
- Momentum indicators
- Moving averages plotted over daily or weekly candlestick charts
- Price range tools
- Market sentiment measures
Swing traders also look for technical patterns, such as the following:
- Range consolidation: Traders who like to play safe use this pattern often. It forms when the trading asset or stock price stays within a specific range.
Range consolidation has upper and lower limits acting as support and resistance levels.
You can use this pattern to anticipate possible reversals and breakthroughs.
- Head and Shoulders: This pattern comprises three distinct peaks, including the highest peak (head) and two smaller peaks on either side (shoulders).
Each peak is separated by troughs, the pattern’s lowest point, indicating economic expansion.
Head and shoulders can also help predict trend reversals.
- Triangle: This pattern has two forms: ascending and descending triangle patterns.
Ascending triangle patterns occur when the price movement forms an “L” shape, indicating that the buyer is in control and the stock will probably swing up. This pattern is beneficial for sensing bullish reversals.
To see this pattern, look for a flat horizontal line (resistance) converging with a rising diagonal line (support).
In contrast, descending triangle patterns form the flat horizontal line (resistance) and meet the downward-sloping line (support).
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Which types of securities are best suited for swing trading?
If you can commit, large-cap stocks are one of the best securities to trade. These stocks are one of the most actively traded stocks on major exchanges.
Why choose an active market? Stocks often swing between broadly defined low and high points.
Swing traders can capitalise on these movements — ride the wave in one direction for some days or weeks, then switch to the opposite side of the trade during reversals.
Actively traded commodities and forex markets are also viable options for swing traders.
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Is swing trading safer than day trading?
Whether swing trading is safer than day trading depends on what factor you highlight.
Some think day trading is safer because it focuses on minimal price movements and eliminates overnight risks and price chart gaps.
Still, others see swing trading as safer because it lets traders spread over a broader period and doesn’t require them to monitor price charts as a full-time job, making it less costly and time-consuming.
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Can you swing trade on penny stocks?
Yes. You can trade swings on penny stocks or shares. These shares offer high-growth trading opportunities due to their volatility.
Remember that penny stocks are high-risk investments, so if you trade them, trade cautiously. Major price swings can lead to significant losses when the market moves against you.
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Which chart timeframe is best for swing trading stocks?
As indicated above, swing trading is a short-term trading strategy. As such, swing traders typically use hourly or daily charts to analyse price trends.
There’s no cookie-cutter approach to swing trading, so learning to trade using different timeframe charts will be best.
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Is swing trading a good strategy?
It depends on who you ask. Swing trading can be an excellent way to supplement income and boost investment returns.
Note that the transaction cost of swing trading can be quite high since you frequently buy and sell positions.
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Is swing trading good for beginners?
Swing trading can benefit beginners if they are properly guided and willing to learn.
Sure, you don’t have to have an MBA (Master of Business Administration) or an economics degree to swing trade, but make no mistake, swing trading isn’t a walk in the park either.
Like in other activities in life, swing trading is only as good as the amount of time and effort you put into it.
Reference
- Stanford researchers explore how the human mind shapes reality
https://news.stanford.edu/2018/06/11/four-ways-human-mind-shapes-reality/
Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial advice. It is not intended to be a recommendation to buy or sell any financial instrument or engage in any investment activity.
While we strive to provide accurate and up-to-date information, we do not guarantee its completeness or accuracy. We rely on various sources for the information presented, and we cannot guarantee the reliability or accuracy of these sources.
The information provided here does not necessarily reflect the products or services offered by our company. Any mention of financial products or services is for informational purposes only and should not be considered an endorsement.
All investments involve risk, including the potential for loss of principal.
This information should not be considered as financial advice. You should always seek professional financial advice from a qualified advisor before making any investment decisions.
