What is swing trading and how to swing trade?

Education /
Milan Cutkovic

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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).
  5. 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.
  6. 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.
  7. 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.
  8. Exit the trade: When the price reaches the predetermined take-profit or stop-loss level, the trader will realise their profit or loss.
  9. 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).

 

Ready to trade your edge?

Join thousands of traders and trade CFDs on forex, shares, indices, commodities, and cryptocurrencies!

 

 

This 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 your objectives, financial situation, or needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability regarding the accuracy and completeness of the content in this publication. Readers should seek their own advice.

FAQ


What is swing trading?

Swing trading is a trading style where traders aim to profit from short to medium-term price swings. Swing traders hold positions for several days to several weeks.


What is the difference between swing trading and day trading?

The main difference between swing trading and day trading is that swing traders hold their positions for several days to several weeks, while day traders close their positions by the end of the trading day. 


What is the difference between swing trading and position trading?

Position traders hold their positions for several months, or in some cases, even years.


What markets can I apply swing trading to?

Swing trading can be applied across all asset classes, from forex to commodities, stocks, bonds, and more 


What are the advantages of swing trading?

Some advantages of swing trading are greater time flexibility, lower transaction costs, and the chance to use both trend-following and counter-trend strategies. 


What are the disadvantages of swing trading?

Some disadvantages of swing trading are the risk of market gaps, greater exposure to unexpected events, fewer trading opportunities, and potentially higher swap costs.  


Can swing trading be profitable?

Yes, swing trading can be profitable, but it primarily depends on the strategy being used as well as risk management and trading psychology. 


Is swing trading suitable for beginners?

Swing trading can be used by both beginners and advanced traders. As it is not a trading strategy but rather a trading style, beginners will need some time to identify if swing trading suits them or not. 


How much capital do I need to start swing trading?

There is no specific dollar amount a trader would need to start swing trading. However, since it involves higher timeframes and potentially holding positions for weeks, a trader could require more capital compared to a day trader to ensure that the margin requirements can be met. 


How do I get started with swing trading?

To begin swing trading, familiarise yourself with technical analysis, select a suitable trading strategy, create a trading plan, find a reliable broker, and practise on a demo account before risking real money. 


What are some popular technical indicators used in swing trading?

Moving Averages (simple or exponential), Bollinger Bands, Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and stochastic oscillators. 



Milan Cutkovic

Milan Cutkovic

Milan Cutkovic has over eight years of experience in trading and market analysis across forex, indices, commodities, and stocks. He was one of the first traders accepted into the Axi Select programme which identifies highly talented traders and assists them with professional development.

As well as being a trader, Milan writes daily analysis for the Axi community, using his extensive knowledge of financial markets to provide unique insights and commentary. He is passionate about helping others become more successful in their trading and shares his skills by contributing to comprehensive trading eBooks and regularly publishing educational articles on the Axi blog, His work is frequently quoted in leading international newspapers and media portals.

Milan is frequently quoted and mentioned in many financial publications, including Yahoo Finance, Business Insider, Barrons, CNN, Reuters, New York Post, and MarketWatch.

Find him on: LinkedIn


More on this topic

Read More

Ready to trade your edge?

Start trading with a global and valued trading partner.

Try a Free Demo Open a Live Account