What is swing trading?
Swing trading is a popular trading style used by traders aiming to profit from short to medium-term price movements. Swing traders usually hold positions for a few days to a few weeks and seek to capitalise on short-term swings rather than long-term trends.
Main characteristics of swing trading:
- Timeframe: Swing traders focus on intermediate timeframes. Unlike day traders, who close their positions before the end of the trading day, and position traders, who might keep their positions open for months or even years, swing traders hold their positions for a few days up to a few weeks at most.
- Flexibility: Swing traders can go with or against the trend. For example, traders might attempt to buy EUR/USD on dips when it is trending higher but close the position after a few days instead of riding the trend for months. Swing traders can also go against the trend; for example, a swing trader could try to sell USD/JPY on a rally if their strategy indicates the currency pair is overbought in the short term.
- Technical analysis: Technical analysis is commonly used by swing traders. It helps them identify trends, key support and resistance levels, key entry and exit points, and whether an asset could be overbought or oversold.
- Diversification: Swing trading strategies can be applied to virtually every asset class that exists, including forex, stocks, commodities, bonds, and cryptocurrencies. However, swing traders tend to focus on instruments that have a reasonable level of volatility, as it would be difficult to apply swing trading strategies to instruments that are barely moving.
How to swing trade?
Swing trading is not a strategy but rather a trading style. Swing traders use a variety of different trading strategies, from trend-following to counter-trend strategies. While some swing traders rely solely on technical analysis, others might purely use fundamental analysis or a combination of both. However, the goal remains to profit from price swings that occur within a certain timeframe.
To get started with swing trading, traders should consider the following:
- Build a strategy: Swing traders can follow the trend or go against it. If you have a trend-following strategy, you will be looking to buy the dips and sell the rallies. With a counter-trend strategy, a trader tries to make a profit by trading against the current trend. A rally will eventually run out of steam and will be followed by a retracement. The same applies to a downtrend: it will eventually reach a level from which it bounces until the downtrend potentially resumes.
- Identify the right instruments: Swing trading works across all asset classes, but you still need to pick instruments with a certain degree of volatility, such as GBP/USD or (highly volatile) crude oil. There is no point in applying your swing trading strategy to an instrument that is stuck in a tight range most of the time.
- Analyse the markets: Most swing traders use technical analysis to scan the markets for trading opportunities. There are plenty of indicators that can help identify if an instrument is potentially in overbought or oversold territory, such as the stochastic oscillator, the relative strength index (RSI), or the commodity channel index (CCI). Swing traders often use chart patterns or indicators, such as the simple moving average (SMA), to identify key support and resistance levels.
- Identify entry points: Technical analysis can be extremely useful in identifying potential entry points, i.e., levels at which an instrument is likely to reverse or resume its current trend. Support and resistance levels are often used as entry points, and they can come in the form of previous highs and lows, a chart pattern (such as a trendline), or an indicator (such as the moving average).
- Execute the trade: Some swing traders utilise limit orders, which can be useful when they do not have time to monitor markets actively and manually execute the trade.
- Risk management: Risk management is important for every trader, but swing traders are more exposed because they keep their positions running for a longer period. Day traders might be able to trade without a predetermined stop-loss and/or take-profit order because they are constantly monitoring markets and their positions. However, for swing traders, this could be extremely risky, as there could be an adverse event overnight or during the weekend. Using stop-loss and take-profit levels is therefore crucial.
- Managing positions: Markets can change rapidly, and sometimes traders will have to adjust their stop-loss and/or take-profit levels or decide to close the position early.
- Exit the trade: When the price reaches the predetermined take-profit or stop-loss level, the trader will realise their profit or loss.
- Analysing past performance: As they place fewer trades, swing traders can easily keep a trading journal and analyse past trades. Analysing past performance and identifying mistakes is crucial to ensuring that the trading strategy currently being used will continue to work in the future.
Advantages of swing trading
Swing trading offers several advantages that make it an attractive trading style for many individuals. Some of the key advantages of swing trading include:
- Time: Day trading can be very time-consuming as traders need to frequently monitor the markets and their positions. Swing trading allows traders to check their positions periodically and gives them more time to analyse the markets and work on their strategy. Day traders usually need to dedicate their whole day to this activity, which makes swing trading attractive to traders who may have less time at their disposal.
- Emotional control: Day trading can be not only time-consuming but also stressful. Not every trader is capable of remaining calm when forced to make quick decisions, and those traders may benefit from swing trading because it is less emotionally taxing than day trading.
- Less noise: The shorter the timeframe, the greater the noise. Trading on a 5-minute chart will generate a lot of signals, and being able to filter out the good from the bad ones is far more difficult than on a higher timeframe chart.
- Lower transaction costs: Every trade is subject to a spread, commission charge, or both. The less frequently someone trades, the lower the total transaction costs.
- Trend and counter-trend trading: Swing traders can take positions in the direction of the current trend or try to profit from short-term reversals.
Disadvantages of swing trading
Swing trading can present traders with several challenges of which they should be aware:
- Risk of unexpected events: The risk of an unexpected market event always exists, but swing traders are more vulnerable to this as they often hold positions overnight, unlike day traders. Unexpected events can trigger significant price fluctuations and market gaps, which could cause losses.
- Volatility: Swing traders are more exposed to short-term volatility than position traders, who hold positions for months and are more prepared for markets to temporarily move against them.
- Timing: Finding the right entry and exit points can be more complicated compared to day trading. Swing traders are also more likely to adjust their stop-loss and take-profit levels, which again requires effort and time.
- A number of trading opportunities: Swing traders often trade on higher timeframe charts, which naturally means that there will be fewer signals and trading opportunities.
- Trading psychology: While swing trading allows traders more time to plan and reflect than day trading, which is all about making quick decisions, it can be difficult to hold positions open for an extended period of time. Traders are more likely to doubt themselves and make mistakes when their position is running for several days rather than just a few hours.
- Costs: While swing traders will pay less in commission and spread their swap costs will be higher as they often hold positions for a longer period of time. The swap costs can add up quickly if they are not closely monitored and negatively impact the trader´s PnL (profit and loss).
Data is sourced from third party providers. The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking into account your personal objectives, financial situation and needs. Readers should seek their own advice. Past performance is not indicative of future results, and any forecasts about future performance may not occur.