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.

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.

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.

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.

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