Getting Started with Swing Trading

Swing trading aims to capture gains in a stock (or any financial instrument) within a short to medium time frame. Swing trading assumes price action does not move in a straight line during a session; rather, it moves in peaks and troughs.

Swing traders try to forecast if the price of an asset will go up or down and position themselves accordingly. The key to their success is accurately predicting match outcomes, resulting in a good win-loss ratio.

In contrast to long-term strategies that hold on to their investments for years, swing trading seeks short-term opportunities. This type of trading allows swing traders to profit from rapid price moves without taking too much risk or sacrificing too much reward.

Swing Trading vs. Day Trading

Swing traders and day traders share some common traits, but they are still very different.

  • Day traders: Buy and sell securities in the same session, profiting from incremental price changes occurring frequently throughout the day.
  • Swing traders: Keep positions open overnight, even multiple days or weeks, to profit from larger market movements.

Leverage Differences:

  • Day traders may have access to higher leverage (e.g., 4:1), whereas swing traders will generally use less leverage (e.g., 2:1) due to the risks associated with holding positions overnight.

Swing Trading Strategies You May Use

Swing trading strategies must be structured to take proper entries and exit from the market. Some common approaches include:

Breakout Trading

  • Definition: Watching for when an asset breaks out of its trading range (support/resistance).
  • Method:
    • If it breaks resistance, traders expect higher highs and go long.
    • If support breaks, traders anticipate lower lows and short.
  • Tools: Volume-weighted moving averages (VWMA) and other indicators to gauge movement strength.

Trend Trading

  • Definition: Capturing pieces of broader moves without predicting full price cycles.
  • Indicators Used: Moving averages (MA) and relative strength index (RSI).
  • MAs and RSI indicate whether a bullish or bearish trend is likely to continue.

Technical Indicators for Swing Trading

Swing traders analyze technical data to identify entry and exit points. Key indicators include:

Relative Strength Index (RSI)

  • Purpose: Measures whether an asset is overbought (RSI above 70) or oversold (RSI below 30).
  • Benefit: Helps traders predict price corrections.

Moving Averages (MA)

  • Purpose: Graphs an asset’s average closing price over a given period (e.g., 30, 50, or 100 days).
  • Use:
    • A 50-day MA crossing above a 100-day MA shows an upward trend.
    • A downward crossover may indicate a bearish movement.

Stochastic Oscillator

  • Definition: Compares an asset’s closing price over the most recent period to its range over the previous 14-day period.
  • Values:
    • Above 80: Overbought market.
    • Below 20: Oversold market.

Advantages and Disadvantages of Swing Trading

Pros of Swing Trading

  • Flexible for busy schedules: Perfect for those with limited time.
  • Slower pace than day trading: Focuses on significant price movements instead of small, frequent profits.
  • Relies on technical analysis: Utilizes indicators like RSI, MA, and stochastic oscillators.

Cons of Swing Trading

  • Steep learning curve: Reading live price charts takes time to master, especially for beginners.
  • Exposure to market gaps: Overnight positions are subject to sudden price gaps caused by market news.
  • Leverage risks: While it boosts profit potential, leverage can also amplify losses without proper risk management.

How You Can Benefit from Swing Trading

For those who cannot devote their full-time attention to markets, swing trading is an easy option. If a trader is adept at charting trends and analyzing financial data, they can use swing trading techniques in nearly every market, gaining short-term profits without the intensity of day trading.