Swing Trading Explained

7 Jun 2023

Swing trading refers to the medium-term trading strategy that involves taking a position in a security for a few days to a few weeks, aiming to profit from price swings. Swing trading strategies employ fundamental or technical analysis to determine whether a particular security could go up or down in price soon.

Fundamental analysis for swing trading

Fundamental analysis is a method of analysing securities by examining the underlying economic, financial and other qualitative and quantitative factors that could influence their value.

This may involve keeping aware of the state of the economy, news releases regarding a particular security, analysing a company’s financial statements such as its quarterly earnings reports, and studying market conditions to determine its intrinsic value and potential for future growth.

Technical analysis for swing trading

Technical analysis is a method of analysing price and volume data over specific time frames to identify trends and forecast future price movements. It is a form of chart analysis that uses historical price data and various chart patterns to identify trends and make predictions about the future direction of markets.

Technical indicators are mathematical calculations that use historical price data and volume data to provide insight into the potential direction of a security. Traders can use these indicators to identify trends, gauge market sentiment, and determine support and resistance levels.
Examples of technical indicators include moving averages (MAs), the Relative Strength Index (RSI), Bollinger Bands and stochastic oscillators.

Building a swing trading strategy

There are several steps a trader could take if they hope to build an effective swing trading strategy.

• Identifying their market. As a first step, traders could identify which market they wish to trade in. This could be stocks, futures, foreign exchange (forex), commodities, etc.
  Utilising fundamental and technical analyses. These analyses could help traders determine when to enter and exit trades.

• Setting risk parameters. This could include setting stop losses – or guaranteed stop losses, which have no risk of slippage but incur a fee if triggered – profit targets and position sizing.
  

• Developing an entry and exit strategy. An entry and exit strategy could include criteria for entering and exiting trades and any trailing stops, or profit targets traders may choose to utilise.

• Backtesting the strategy. Traders may find it helpful to test their strategy before risking any funds to help identify potential weaknesses and improve their strategy over time.

• Executing the trades. Once traders have developed and tested their system, they may begin executing trades. However, it’s important to remember that even with a carefully thought-out strategy, there is always the risk of making a loss. Before making any decision, traders should consider how comfortable they are losing money, their expertise in the market and the diversity of their portfolio, among other factors. They should also never trade money they can’t afford to lose.

Swing trading strategies and techniques

How do you swing trade? There are several different swing trading strategies often implemented by traders. Below are some of the most popular.

Breakout

A breakout technique is an approach where a trader takes a position on the early side of the uptrend, looking for a market or stock that is most likely to ‘break out’. The trader gets into the trade when they see the desired level of volatility and movement of a market that breaks a vital point of the market’s support or resistance.

Breakdown

A breakdown strategy is the opposite of a breakout. First, the market price goes lower than a defined support level, and the chart points toward lower prices. Then, traders monitor the same fundamentals as with breakouts.

Reversal

This swing trading technique uses price-changing momentum when its growth or fall slows down before having a complete reversal.

Retracement

A retracement is a concept quite similar to reversal, and it is applied when the price reverses within a more significant trend but not to its high or for any length of time. For example, a stock temporarily retraces to an earlier price point. Then it continues to move in the same direction later.

Swing trading vs day trading

Like swing trading, day trading involves holding an asset briefly. However, with day trading, traders hold the assets for less than a day, sometimes just a few hours or even minutes.

Day trading is considered one of the most speculative strategies as traders attempt to profit from very short-term movements in the stock market, selling at a predetermined price to hedge against the risk of any counter moves that might happen during out-of-hours trade.

Each trading strategy has its advantages and disadvantages. For example, on a surface level, day trading could have a higher chance for gains as day traders would make more trades in the same time frame as swing traders. However, in actuality, factors such as the strength of a trader’s strategy, their knowledge of the market and the depth of their research may have a much more significant effect on the gains or losses they make.

Conclusion

Understanding swing trading could help traders make more informed decisions about whether the strategy suits them. In addition, swing trading can help traders to diversify their portfolios. Yet, it is essential to remember that every trading method has pros and cons, and it is up to the trader which one they will choose.

It’s important that each trader does their research and remembers that the decision to trade and which strategy to choose depends on their attitude to risk, expertise in the market, the diversity of their portfolio and how comfortable they feel about losing money. They should also never trade more than they can afford to lose.