Swing Trading in the Markets: How to Do It + Strategies

swing trading explained
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There are several types of traders in the financial market. There are scalpers, who open trades and close them within seconds.

On the other hand, there are day traders who specialize in opening and closing trades within a day. There are long-term traders who open trades and leave them for weeks or months.

In this report, we will look at swing trading, what it is and how to trade it in the market.

Related » What type of trader are you?

What is Swing Trading?

Swing trading is a method of trading in which traders initiate trades and leave them open for a day or two.

Unlike day traders and scalpers, these traders aim to identify themes in the market and follow them for a few days. They also use different methods of analysis than short term traders.

For example, while most day traders focus mostly on technical analysis, these traders focus on indicators, fundamental analysis, and chart patterns among others.

Swing trading vs investing

Swing trading is often confused with investing but the two are different. As mentioned, swing trading is the process of buying or selling an asset and then holding it for a few days.

On the other hand, investing is a process where people buy assets and then hold them for a long time. For example, you can buy a certain stock today with the goal of holding it for a long time. A good example of this is when Warren Buffett bought Coca-Cola stock and held it for decades.

Swing traders use shorter-term charts like hourly or a 30-minute chart. On the other hand, investors use longer-term charts like daily or weekly.

different timeframes

Swing Trading vs Day Trading

In another article, we compared the pros and cons of swing trading and day trading. Basically, there are advantages and disadvantages of both strategies.

Overnight Risks

First, day traders avoid overnight risks. These are risks that happen when you leave a trade open overnight.

A good example is what happened a few years ago when Switzerland decided to unpeg its currency from the euro.

In response, currencies in the market saw huge movements, leading to significant losses in the market. Swing traders who were not in the market lost a significant amount of money.

The amount of profits

Second, swing trading allows the traders to make more money if their trades go right.

For example, assume that the EUR/USD pair is trading at 1.1200 and you believe that it will drop to 1.1100. If you are right and you short it, you will make more money than a day trader who shorted it and exited the trade at 1.1180.

Better still, if you use a trailing stop loss, it means that you will protect your profits as the price moves up.

Still, there are traders on both sides of the argument. There are those who believe in swing trading and those who strongly believe in day trading.

How Swing Trading Works

Traders use different strategies to swing trade. Broadly, there are few key strategies you need to understand properly.

Trend Following

First, there is trend following. This is a strategy in which a trader identifies an existing trend and then decides to follow it.

They apply Newton’s law of motion, which states that an item in motion will remain in the same direction unless it meets an equal force in the opposite direction.

After they identify the trend, they put in place a stop loss in order to limit their losses.

Reversal Strategy

Second, there is a trend reversal strategy. This is a strategy where they identify a trend and use several strategies to identify when the price is about to reverse.

After this, they initiate the trade and set a take profit and a stop loss. A good way to identify reversals is to use the double exponential moving average strategy that we looked before.

Other tools or strategies that can help you identify these reversals are the Elliott Wave, pivot points, harmonic patterns, candlestick patterns, and pennant patterns among others.

Using stops in swing trading

An important part of swing trading is to use stops in a bid to capture profits and mitigate losses. A stop-loss is a tool that stops trade when it moves to a certain predetermined level. For example, if you buy a stock at $12, you could set a stop-loss at $10.

A take-profit, on the other hand, is a tool that stops a trade automatically when it moves to a certain profit level. In the example above, a trader could place a take-profit at $14. 

Therefore, in swing trading, a trader can place a buy trade at $100 and place a stop-loss at $95 and a take-profit at $110.

A trailing stop loss, on the other hand, is similar to a stop-loss, with the main difference being that it moves with the asset in a bid to capture profits.

Retracement trading

Another swing trading strategy is one that involves using the Fibonacci Retracement to identify pullbacks. The retracement tool is drawn by joining the upper and lower swings in an asset.

In this case, a trader can wait for a pullback and then resume the bullish trend. A good example of this is shown in the chart below.

Best swing trading indicators

Technical indicators are important tools that help swing traders to identify trades and know when to exit. Some of the most popular ones are:

  • Moving average – There are numerous types of moving averages, including the exponential, smooth, simple, and volume-weighted among others. These indicators are mostly used in trend-following.
  • Relative Strength Index (RSI) – The RSI is an indicator that looks at the overbought and oversold levels. It is also used to trade divergences.
  • Bollinger Bands – This is an indicator made up of a moving average and two standard deviations. It is mostly used in trend-following.

How to find the right stock to trade

There are several things that can help you find the right stock to day trade. First, you could use the economic calendar to identify companies that will publish their financial results. In most cases, these companies tend to be the most active in the financial market. 

Second, you can look at the companies making headlines in the market. Some of these companies tend to have the most market actions. For example, if there is a merger and acquisition, these companies usually make moves that swing traders can take advantage of.

Third, you can look at charts to identify the overall trends. In swing trading, you want companies whose shares are either rising or falling.

That’s because you want to buy or short and hold trending assets for a while. In this case, you want to avoid companies that are either so volatile or range-bound. For example, in the chart below, we see that buying and holding Apple made sense for swing traders.

Bull or bear market in trading

One of the best approaches to swing trading is identifying a bull or a bear market. An asset is said to be in a bull market when it rises by over 20% from its lowest level in a session. On the other hand, a bear market happens when it drops by over 20% from the highest point.

However, in reality, bull and bear markets happen when stocks are rising or falling in a certain period. Therefore, in bull market swing trading, people tend to identify a stock that is rising and then hold it for a while.

In bear market swing trading, people tend to short stocks or other assets and hold them for a few days.

Advantages of swing trading

There are several benefits of using this strategy. These are:

  • More profits – As mentioned above, the potential profit when using swing trading is relatively higher than when day trading.
  • Less trades – Swing traders open fewer trades than day traders and scalpers. This helps them limit their losses.
  • Cheaper – By implementing fewer trades, swing trading is cheaper than day trading.
  • Saves time – Swing trading works for traders who don’t have a lot of time to trade. For example, if you have a day job, you can open a trade and leave it running for a while.

Risks of swing trading

The main risks are:

  • Overnight and weekend risks – There is always a risk when you leave a trade open at night and during the weekend.
  • Stock splits – There is a risk that a company will decide to split its stock during your holding period.
  • It takes more nerves – That is because financial assets rarely move in a straight line. So, you have to withstand huge swings.

Final thoughts

Swing is the most common type of trading in the market today. It is what most people use to trade the financial market.

If you are just starting, we recommend that you take time to come up with a good strategy to use.

External Useful Resources

  • Strategies for becoming a successful swing trader – Investors
  • Forex Swing Trading – Babypips