Swing Trading: Definition, Strategies, and Examples

Swing trading involves buying and selling financial products over a period of a few days to a few weeks. This medium-term trading style exploits the market’s upward, downward, and counter-trending movements.

Swing traders strive to ride the market’s fluctuations and earn money. They use different methods of analysis to determine the best points of entry and exit.

Key Takeaways

Swing trading is a medium-term kind of trading with trades typically lasting from a few days to a few weeks.

The swing trader takes a bullish or bearish position in the markets and will earn money if their forecast is correct.

Unlike day trading, swing trading exposes the trader to distinctive risks, such as overnight gap risk, when prices change abruptly from one trading session to the next.

WARNING

Trading exposes you to the risk of losing more than your initial investment and incurring financial liability. Trading is suitable only for well-informed, sophisticated clients able to understand how the products being traded work and having the financial ability to bear the aforementioned risk.

Transactions involving foreign exchange instruments (FOREX) and contracts for difference (CFD) are highly speculative and extremely complex. As such, they are subject to a high level of risk due to leverage. Please keep in mind that CDF trading is banned in the US.

Information published on the NewTrading.io website is for educational purposes only and should not be construed as offering investment advice or as an enticement to trade financial instruments.

What is swing trading?

Swing trading is medium-term trading, typically lasting from a few days to a few weeks.

The swing trader seeks to earn money by riding the wave of an up or down market, whether trending or range-bound.

They use fundamental, technical, and behavioral analyses to determine the best entry and exit points. 

The swing trader’s goal is to capture price movement in the market and collect the difference between their buy price and sell price. When their prediction is correct, they earn money. When their prediction is incorrect, they lose money.

To manage their risk more efficiently, swing traders usually place a stop-loss order to prevent excessive losses in the event of adverse market movement and a take-profit order to take profits once the target price is reached.

Noteworthy

When volatility is exceptionally high, a swing trader’s stop-loss or take-profit order may be triggered after only a few hours.

Conversely, when volatility is particularly low, a swing trader sometimes has to wait several months to close their position and pocket their profits.

Advantages and Disadvantages of Swing Trading

Swing trading is one of the most popular trading strategies.

Swing Trading vs Position Trading

Once you’ve done your research and identified potential targets, you only need a few minutes a week to place your trades for both swing and position trading. This significantly reduces the time you spend in front of your monitor. You can easily swing or position trade and keep your day job.

Swing trading is suitable for all financial markets (stocks, indices, commodities, etc.). It’s an active kind of trading that offers plenty of opportunities daily. What’s more, it can deliver attractive, feel-good returns.  

However, while swing trading can potentially provide decent yields, there’s a high risk of capital loss or even debt if you use leverage.

Swing Trading vs Day Trading

Unlike scalping or day trading, swing trading exposes you to overnight gap risk, i.e., the risk that prices shift suddenly from one trading session to another after the market closes.

The longer the investment horizon, the higher the probability of encountering a trading gap. Most gaps are generally harmless, but some can catch a swing trader off balance and cause a loss or, in extreme cases, a delisting due to a takeover bid or involuntary liquidation.

Finally, unless you’re spot trading, your brokerage fees can quickly soar due to the cost of financing leverage or derivative-specific rollover fees.

Pros
  • Many bearish and bullish trading opportunities
  • Lower brokerage fees (fewer trades than with scalping or day trading)
  • Minimal time commitment; possibility of adopting simple strategies
  • Opportunity cost: may miss out on longer-term trends
Cons
  • There’s a high risk of loss per trade due to the relatively high stop-loss distance
  • Presence of specific risks and costs (overnight gaps, rollover, etc.)
  • Opportunity cost: may miss out on longer-term trends

Swing Trading Strategies

Swing traders look for reversal or trend continuation signals to take a position at the right time.

To do this, swing traders use trading screeners to filter all market assets and produce a refined list of assets according to predefined market conditions: Japanese candlesticks, Chartist figures, technical signals, etc.

However, since there’s no leading off-the-shelf swing trading strategy, swing traders usually make their own trading plan to try to beat the market. As a result, there can be a tremendous amount of variation in conditions for entering and exiting a position, as well as in the risk-reward ratio used by swing traders.

However, throughout the history of the financial markets, some major swing trading strategies have found a special place in the hearts of freelance traders.

1. The Momentum Strategy

The principle of the momentum strategy is to follow the underlying trend. The swing trader rides the current price movement before exiting the position just when the market threatens to turn around.

This strategy assumes that price action will continue in that direction when the financial markets are trending, resulting in momentum that the swing trader can exploit. In short, trends are a swing trader’s best friend when it comes to the momentum strategy.

In the above example from ProRealTime Web platform, a swing trader could have taken advantage of the uptrend on NVIDIA shares by entering a buy position once the stock rose above the resistance level of $502.50. Then, the trader could have taken profits after the stock’s first down-trending session at $903.

2. The retracement strategy

Fibonacci’s retracement strategy assumes that any impulse move is sooner or later followed by a counter-trend called a “correction” in an upward trend or a “rebound” in a downward trend.

The idea behind this contrarian strategy is that the swing trader takes a position “contrary to” the underlying trend. They short the stock when an upward trend runs out of steam and they hope to repurchase it at the end of the correction. Conversely, they buy the stock when the downward trend shows signs of weakness and resell it at the end of the rebound.

In the above example from ProRealTime Web Platform, a swing trader could have taken advantage of the NASDAQ Composite’s uptrend when it hit the Fibonacci 61.8% retracement level by entering a buy position at $10,982 and then selling at $12,269 during the last market high.

3. The turtle strategy

Commodity trader Richard Dennis taught the turtle strategy in the 80s. The idea is to buy breakouts and exit the position when prices start to consolidate at a high point or begin to decline. Conversely, in a downward trend, a swing trader exits when prices start to consolidate at a low point or begin to rise.

This breakout strategy relies on Donchian channels, allowing the swing trader to easily visualize the extreme points reached during the last 10, 20, and 55 sessions.

In the above example from the ProRealTime Web Platform, the swing trader could have taken a buy position at $1,684 once the upper limit of the Donchian Canal had been reached during session 20 and sold it once the lower limit of the indicator had been reached at $1,860.

Conclusion

Swing trading rewards traders who can gracefully dance to the rhythm of market swings. Conversely, traders who are “out of step” will end up getting hit from both directions, losing money on the long sale and then again on the short sale and quickly getting blown away.

Like any trading strategy, swing trading is “risky business.” Before starting real trading, it is better to practice on one of the best free trading simulators.

FAQ

What is the between day trading and swing trading?

The fundamental difference between day trading and swing trading lies in the investment horizon. While the day trader exits positions before the end of the current trading session, the swing trader stays in their positions for several days or even for weeks.

What tools and indicators do swing traders use the most?

Swing traders particularly appreciate graphical (chart) analysis to identify optimal price levels for entering and exiting positions. They use charting tools such as Japanese candlesticks and various technical indicators to track trends (moving averages), reversals (stochastic), and overbought/oversold securities (RSI). They also use more comprehensive indicators such as the Ichimoku trading system.

Which market is best suited for swing trading?

Swing trading is suitable for all asset classes. However, swing traders prefer stocks, stock indices, and commodities.

Which type of account do swing traders prefer for trading?

While trading in your retirement account may be possible, you should thoroughly investigate certain advantages and disadvantages. A standard brokerage account with one of the best trading brokers will be more suitable.

What financial products do swing traders prefer?

Swing trading with stocks or index futures is an effective strategy for minimizing overnight fees, which are particularly expensive for instruments such as CFDs. Regardless of your choice, make sure you understand how the financial instruments you select work and that you have sufficient financial resources to cover the risk of capital loss.

How much capital is required to start swing trading?

Many online brokers let you start swing trading with a modest initial investment, including via fractional shares. It would be best if you established your initial capital investment in accordance with your trading budget.

author
Maxime Parra

Maxime holds two master’s degrees from the SKEMA Business School and FFBC: a Master of Management and a Master of International Financial Analysis. As founder and editor-in-chief of NewTrading.fr, he writes daily about financial trading.

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