Rather than a trading strategy, swing trading is a trading style in which a trader attempts to make a profit within a relatively short time frame. Unlike day trading where a trader aims to capture gains within a day or long-term trading in which the trade can be left for months or even years, swing trading is a short to medium term trading that lasts over a period of few days to several weeks.
What is Swing Trading?
Swing trading is a style of trading that deals with capturing short- to medium-term gains in any financial instrument over a period of a few days to several weeks. Swing traders employ technical analysis to identify trading opportunities. In Addition, they use fundamental analysis to analyze price patterns and trends. In Swing trading, traders are exposed to overnight and weekend risk, where the market could open the next session at a considerably different price. However, they can make profits by utilizing an established risk/reward ratio depending on a stop loss and take profit target or depending on price action movements or a technical indicator.
Understanding of Swing Trading
A swing trader holds a long or short position for more than one trading session over a period of several weeks or a few months. However, in rare cases, swing trades can also take place during a trading session and this can occur as a result of extremely volatile conditions. In swing trading, a trader attempts to identify where an instrument’s price is likely to move next, enters a position, and then captures a portion of the profit if that movement materializes and later moves on to the next opportunity.
These charts identify price trends by indicating the “high” and “lows”.
Terms in Swing Trading
Below is a quick look at a few terms you should get started with on your journey to becoming a successful swing trader.
1. Uptrend and Downtrend: An uptrend is a price movement of an instrument when with an upward overall direction. It consists of higher highs and higher lows. The downtrend is the opposite of the uptrend and it is a movement with a downward overall direction consisting of lower highs and lower lows.
2. Support and resistance: Support is a price level where a falling price or downtrend stops due to increased demand for an asset while resistance is a price level where an uptrend or rising price reverses and begins to fall.
Day Trading vs Swing Trading
Day trading positions do not exceed 24 hours and are closed before the market closes while swing trading positions are held for several days to weeks. By holding a trade overnight, traders might incur overnight risks such as gaps up and down against the position; hence, swing trades are usually traded with a smaller position size than that of day traders with access to a margin of 50%. Day traders use a larger position size and may utilize a day trading margin of 25%.
Types of Swing Trading
How do you enter a swing trade? There are four popular trading strategies frequently used by swing traders such as reversal, retracement (pullback), breakouts, and breakdowns.
1. Reversal Trading: This relies on a change in price momentum. A reversal occurs when the change in the direction of the trend of an asset’s price has changed, meaning a change from an uptrend to a downtrend or vice versa. For example, when an upward trend attempts to lose momentum and the price begins to move downwards. A reversal in trading can either be bullish or bearish (positive or negative)
Retracement Trading: Retracement trading also known as a pullback is a type of trading in which the trader looks for the price within a larger uptrend or downtrend to temporarily reverse. Here, the price retraces temporarily to an earlier price point and then continues to move in the same direction later. While a reversal signifies a change in trend, a retracement or pullback is considered to be a shorter-term “mini reversal” inside an existing major trend. Trend reversals always begin as potential pullbacks. Hence, a challenge in trend trading is to recognize whether the movement is only a pullback or an actual reversal.
In a downtrend, when the price breaks and moves beyond a resistance level, it is called a breakout. Breakout trading involves taking a quick buy or long position when an asset moves beyond a resistance level as the trader believes the price would keep moving in the upward direction. Breakouts aim at conquering the resistance or selling pressure of an asset.
Breakdown Strategy / Downside Breakout
In an uptrend, when the price breaks and moves below a support level, it is called a breakdown. This is opposite to breakout trading and involves taking a quick sell or short position when an asset moves below a key support level as the trader believes the price would keep moving in the downward direction. Breakdowns aim at conquering the support or buying pressure of assets.
Swing Trading Tactics
Swing traders are advised to devise a strategy and plan that will give them an edge and smoothen their swing trading journey. This can be achieved by identifying trade setups that lead to expected movements in the instrument’s price. The following tactics are not restricted to swing trading alone but are also applicable in other forms of trading.
Trend Trading: This is one of the easiest swing trading strategies for forex beginners. It means trading with the trend. When looking for a trend, it’s necessary to recognize that markets do not tend to move in a straight line. Market prices move up and down. An uptrend is a market setting with higher highs and higher lows, while a downtrend is a market setting with lower lows and lower highs. For instance, in an uptrend, a swing trader may aim to go long (buy) at swing lows or go short (sell) at swing highs to capitalize on temporary countertrends (retracement) Trends can be identified using several forms of technical analysis such as price actions, trendlines and various technical indicators such as Relative Strength Index (RSI). Trendlines show the direction of a trend while RSI indicates the strength of a trend at a given time.
Counter-Trend Trading: This is the opposite of trend trading. It entails capitalizing on the frequency at which market trends tend to break down. It is trading in the direction of a long retracement (breakout or breakdown) while anticipating an overall trend reversal. In Counter-Trend Trading a trader attempts to catch the swing in the period of reversal. To achieve this, you need to recognize the break in the trend. If the market however moves against you by resuming its actual trend, you must admit that your analysis is wrong and exit the trade.
Advantages of Swing Trading
1. Benefiting from Longer Trends: it allows traders to benefit from longer trends unlike day trading and scalping which rely on short-term volatility. Hence swing trades have more time to incur profits
2. Cost Efficiency: spreads are one of the main charges in CFD trading and they are charged every time a trader enters a trading position. However, in swing trading, spreads do not matter since most swing traders place fewer trades.
3. Swing traders can rely completely on technical analysis which simplifies the trading process.
Disadvantages of Swing Trading
What are the main disadvantages of swing trading?
1. Unlike scalping or day trades, Swing trade positions are subject to overnight swap fees and weekend market risk which accumulate during longer-term trade.
2. Fundamental risk: while holding a swing trade, political and economic events outside trading hours could negatively influence the financial markets thereby disrupting the trend and resulting in a loss.
3. It’s sometimes time-consuming to analyze and understand the markets before entering a swing trade.
What are Some Indicators or Tools Used by Swing Traders?
Swing traders often use the following tools and indicators before embarking on a swing trade:
1. moving averages overlaid on daily or weekly candlestick charts
2. momentum indicators
3. price range tools, and measures of market sentiment.
4. technical patterns such as the head-and-shoulders and cup-and-handle.