What is Swing Trading?

Swing trading is a trading strategy where traders hold onto positions for a short period in the hope of generating profits through market movements or swings. This strategy is not the same as day trading or position trading, also known as trend trading. Swing traders often occupy the middle ground, taking longer to trade than day traders but holding onto positions for a shorter period than position traders. 

In this guide to swing trading, we’ll discuss swing trade meaning, explain how this approach works, highlight the pros and cons, and analyze swing trading strategies. 

What Is Swing Trading?

When traders hold onto a position for a short period to capitalize on market swings, this trading strategy is known as swing trading. The ultimate goal is to profit from price movements over the course of days or weeks. If you enter into swing investing, you will buy, hold onto a position for days or weeks, and then exit.

This means that swing trading is centered on short-term trends rather than long-term ones like position trading. 

How Does Swing Trading Work?

To benefit from swing trading, it’s essential to understand how swing trading works. This form of trading relies on fluctuations in the market, which drive movements in stock prices. Swing traders strive to take advantage of short-term trends to make profits. They look to enter into a position, hold for several days or weeks, and then sell.

In a nutshell, swing trading is a shorter form of position trading and a longer form of day trading. 

As with all types of investments, swing trading carries risks. To minimize risks and maximize the chances of generating profits, savvy investors use technical analysis to monitor market movements, pick stocks for swing trading, and identify opportunities to make money.

Technical analysis involves using data, stock charts, and statistics to spot emerging trends and profitable opportunities. These analyses form the foundation of swing trading due to offering insights into future price fluctuations. 

In the majority of cases, swing traders invest in large-cap stocks, which are traded most frequently. Heavily traded stocks provide plenty of information for prospective investors to help them evaluate and predict market movements. 

Example of Swing Trading

To understand how swing trading works, it’s useful to look at a real-life example of a swing trade. Let’s say a company’s share price chart shows a cup and handle pattern. This pattern suggests that the upward movement will continue if the stock rises above the top section of the handle. 

The recommended entry point is at the top of the cup, where the recent price high for the aforesaid company was $3,555. In the handle, the most recent low was $3,395. Putting a stop-loss order at $3,395 produces a maximum loss of $160 at a reward/risk ratio of 3:1. To make a good profit from this trade, traders would need to sell at $4,035. 

Difference Between Swing Trading, Day Trading, and Position Trading

When analyzing swing trading vs. day trading, the primary difference is the time frame. Day traders hold onto positions for minutes or hours, completing a high number of trades per day. 

On the other hand, swing traders hold onto positions longer, choosing to sell after several days or weeks. Position trading, also known as trend trading, is a long-term trading strategy which typically involves traders holding onto positions for weeks, months, or years.

Below are some key differences:

• Day Trading: multiple trades per day, positions held for minutes or hours, profits and losses accumulated rapidly, higher fees, relatively low profit per transaction.
• Swing Trading: multiple trades per week or month, positions held for days or weeks, more passive, profits and losses accumulated slower than day trading, relatively low costs, higher profits per transaction than day trading.
• Position Trading: few trades per month, positions held for weeks, months, or years, profits and losses accumulated over prolonged periods, low fees, relatively high profit per transaction.

Swing trading is less time-consuming than day trading, which requires traders to be actively analyzing the market and making moves constantly. With swing and position trading, traders can be more passive, allocating their time to other investments and commitments. 

How To Find the Right Stocks for Swing Trading

The first rule to successful swing investing is to identify the right stocks. To do this, it’s beneficial to learn how to scan stocks for swing trading and understand which factors drive market movements. It’s also useful to figure out how to ascertain optimal entry and exit points. 

The best stocks for swing trading are usually large-cap stocks, which are traded actively on exchanges. If stocks are not traded actively, it can be difficult to sell them. 

Another essential factor to consider when exploring swing investing is volatility. If there is little movement in the market, the opportunities to make profits are limited. Swing traders rely on fluctuations. 

Although volatility carries risks, it is required for successful swing trading, as traders need to be able to capitalize on opportunities. The goal is to take advantage of a portion of the anticipated price movement to make a profit and then look for the next position. 

Understanding Market Conditions

It’s crucial to pick stocks for swing trading that will prove lucrative. That’s why it’s important to understand market conditions, as the state of the market will dictate the best swing trading strategy. Here are the different types of markets swing traders may encounter:

1. Bear Market

A bear market is not ideal for swing traders as prices are falling, and the economy may be receding. In these circumstances, swing traders can adjust their strategy in order to lower risks. For instance, they could shorten the trade time frame, increase the amount of cash they hold, as well as sell securities and then buy them back at a later date when prices have started to rise again. 

2. Bull Market

A bull market indicates that prices are rising and the economy is more stable. Buying in a bull market is more likely to make profits through swing trading. However, remember that a bull market doesn’t guarantee success. It’s prudent to avoid becoming complacent and continue to conduct thorough research and analysis. 

3. Transitional Market

A transitional market, also known as an in-between market, offers optimum conditions for swing trading because the market moves between bull and bear. The degree of certainty is lower and volatility is higher, which presents golden opportunities for swing trading. 

What Are the Pros and Cons of Swing Trading?

There are advantages and disadvantages to swing trading. Some pros and cons to consider are:

Pros

• Less time-consuming than day trading
• Maximizes short-term profits
• Relies on technical analysis to identify optimum entry and exit points and reduce risks

Cons

• Risk of price decreases outside of day trading hours
• Risk of significant losses due to trend reversal
• Potential to miss out on long-term gains

Swing Trading Strategies

Swing traders use technical analysis to decide when to buy and sell positions. Examples of swing trading strategies include:

• Moving averages: Analyzing moving averages enables traders to look for crossovers in bull and bear markets and determine lower and upper price ranges. You can use simple moving averages or exponential moving averages. 
• Support and resistance levels: Determining support (lower) and resistance (upper) levels and triggers is beneficial for identifying the best times to buy and sell. 
• Moving average convergence/divergence crossovers (MACD): When the MACD line passes the signal line, this is one of the best indicators for swing trading. Once the crossover has occurred and the signal line is below the MACD, this is a sign to sell. 
• Fibonacci retracement pattern: This pattern determines support and resistance to help traders set stop-loss orders and price targets.