By Kristoff De Turck - reviewed by Aldwin Keppens
Last update: Apr 27, 2023
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 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.
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.
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!