Swing Trading Meaning and Strategies

4.7

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Swing trading is a style of trading that attempts to capture short- to medium-term gains in a stock (or any financial instrument) over a period of a few days to several weeks. Swing traders primarily use technical analysis to look for trading opportunities. These traders may utilize fundamental analysis in addition to analyzing price trends and patterns.

Typically, swing trading involves holding a position either long or short for more than one trading session, but usually not longer than several weeks or a couple of months. This is a general time frame, as some trades may last longer than a couple of months, yet the trader may still consider them swing trades. Swing trades can also occur during a trading session, though this is a rare outcome that is brought about by extremely volatile conditions.

The goal of swing trading is to capture a chunk of a potential price move. While some traders seek out volatile stocks with lots of movement, others may prefer more sedate stocks. In either case, swing trading is the process of identifying where an asset's price is likely to move next, entering a position, and then capturing a chunk of the profit if that move materializes.

Successful swing traders are only looking to capture a chunk of the expected price move, and then move on to the next opportunity.

Swing trading is one of the most popular forms of active trading, where traders look for intermediate-term opportunities using various forms of technical analysis. If you're interested in swing trading, you should be intimately familiar with technical analysis. 

Swing traders primarily use technical analysis, due to the short-term nature of the trades. That said, fundamental analysis can be used to enhance the analysis. For example, if a swing trader sees a bullish setup in stock, they may want to verify that the fundamentals of the asset look favorable or are improving also.

Swing traders will often look for opportunities on the daily charts and may watch 1-hour or 15-minute charts to find a precise entry, stop loss, and take-profit levels.

Day Trading vs. Swing Trading

The distinction between swing trading and day trading is, usually, the holding time for positions. Swing trading, often, involves at least an overnight hold, whereas day traders close out positions before the market closes. To generalize, day trading positions are limited to a single day while swing trading involves holding for several days to weeks.

By holding overnight, the swing trader incurs the unpredictability of overnight risk such as gaps up or down against the position. By taking on the overnight risk, swing trades are usually done with a smaller position size compared to day trading (assuming the two traders have similarly sized accounts). Day traders typically utilize larger position sizes and may use a day trading margin of 25%.

 

Swing Trading Tactics

A swing trader tends to look for multi-day chart patterns. Some of the more common patterns involve moving average crossovers, cup-and-handle patterns, head and shoulders patterns, flags, and triangles. Key reversal candlesticks may be used in addition to other indicators to devise a solid trading plan.

Ultimately, each swing trader devises a plan and strategy that gives them an edge over many trades. This involves looking for trade setups that tend to lead to predictable movements in the asset's price. This isn't easy, and no strategy or setup works every time. With a favorable risk/reward, winning every time isn't required. The more favorable the risk/reward of a trading strategy, the fewer times it needs to win in order to produce an overall profit over many trades.

Pros

  • It requires less time to trade than day trading.
  • It maximizes short-term profit potential by capturing the bulk of market swings.
  • Traders can rely exclusively on technical analysis, simplifying the trading process.

Cons

  • Trade positions are subject to overnight and weekend market risk.
  • Abrupt market reversals can result in substantial losses.
  • Swing traders often miss longer-term trends in favor of short-term market moves.

Wrapping up

Now that we understand the nitty-gritty of Swing Trading, let’s learn more about Thematic Trading in the next chapter. 

A quick recap

  • Swing trading involves taking trades that last a couple of days up to several months in order to profit from an anticipated price move.
  • Swing trading exposes a trader to overnight and weekend risk, where the price could gap and open the following session at a substantially different price.
  • Swing traders can take profits utilizing an established risk/reward ratio based on a stop loss and profit target, or they can take profits or losses based on a technical indicator or price action movements.
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