What is Swing Trading?

SWING TRADING

Swing Trading is not a trading strategy as such, rather it has to do with the period of time a trade is held. Scalpers and daytraders, for example, hold positions between a few seconds/minutes to a maximum of 1 day. With typical trend and position traders this is more likely to be weeks/months or even years. Swing trading falls in between, somewhere between the short to medium term, from several days to weeks.

Swing Trading is mainly based on technical analysis. Specific elements from fundamental analysis may also be considered but that is the exception rather than the rule. Swing traders base their entries primarily on support and resistance levels in the price chart because these are price levels that are watched by many types of traders.

THE TREND IS YOUR FRIEND

The vast majority of most swing trading strategies only trade in the direction of the long-term trend. This usually involves inspecting the larger timeframe of the product in which one is trading. For example, a common combination is the weekly and daily chart where the weekly chart is taken as the basis for determining the long-term trend. If the trend on this weekly chart is positive (for example using the ChartMill Trend Indicator), the daily chart is only used to look for long positions.

STOPLOSS AND PROFIT TARGET

Because the swing trader trades on very specific support or resistance levels, the stoploss in such a setup can be kept fairly short. As for exit, usually profit targets will be used, as the swing trader has no intention to hold the position for a very long time.

When selecting swing trading setups, the risk/reward plays an important role. Setups in which the profit target is several times higher than the initial risk are preferable. For example, a risk/reward of 1:3 means that the potential profit is three times higher than the risk incurred. Many swing traders use a minimum of 1:2. If you earn twice as much as you risk each time, you are profitable this way if you are correct in four out of ten cases. With a risk/reward of 1:3 you only need to be right in 30% of the setups to be profitable.

Entry, stoploss and target price in a pull-back setup


swing trade setup

  1. Buy Order just above the last white candle (confirmed test of the support level).
  2. Stoploss just below the last candle
  3. Profit Target which in this case is +/- 3 times higher than the loss at the stoploss.

ADVANTAGES OF SWING TRADING

  • Swing Trading requires less time than trading on intraday timeframes. Setups are reviewed after the market closes and then orders are prepared for the next trading day. This way of trading is much calmer than scalping or day trading but still remains much more active than what a typical trend or position trader does. Moreover, it can be perfectly combined with another fulltime job besides trading.

  • Invested capital is released much faster than with strategies where positions are held as long as possible. It is therefore possible to respond more quickly to new opportunities.

  • The basis of swing trading is technical analysis, which is a lot easier to learn than strategies which make use of fundamental analysis.

DISADVANTAGES OF SWING TRADING

  • Unlike day trading, Swing Trading does involve overnight risk. This means that an open position that was still in profit yesterday can suddenly show a large loss today. This can happen if, for example, the company has announced bad news after trading hours. So when swing trading, keep an eye on when the company publishes important news such as quarterly figures. You can consider to close your position the day before for a part or even completely. Keep in mind that your stoploss does not offer full protection. If the price opens much lower than your set stoploss, the selling price will be much lower than your stoploss (and your loss will be greater than what you initially had in mind...).

  • Daily monitoring remains necessary, even though it is much less than with intraday trading.

  • Transaction costs are higher because there is a lot more active trading than in strategies where positions are held in port for as long as possible. This can be quite a disadvantage if you are working with relatively small amounts compared to the minimum fees you have to pay every time. So always keep a close eye on your costs and see what percentage they represent of your total profit/loss result.

WHO IS SWING TRADING SUITABLE FOR?

This way of trading is ideal for those who prefer more active trading but don't feel like following up their positions the whole day long like a daytrader. The relatively short term ensures that new opportunities can be quickly acted upon. Keep a close eye on when the company in question will release important news in order to avoid unpleasant surprises. ChartMill allows you to set up an earnings alert, which will warn you in advance if any of your open positions are going to release important news.

Want to learn more about swing trading? Read our comprehensive step by step swing trading guide to get you started!