What Is swing Trading?

Swing trading is a strategy focusing on accumulating smaller gains by taking advantage of medium-to-short-term trends (minimum one day and no longer than a few weeks) and cutting losses quickly. Compared with other strategies, the gains you could secure by swing trading might be smaller (10% or 5% in volatile markets), yet, added together, they could compound a nice balance for a “rainy day”.

Unlike other traders, swing traders don’t focus on securing hefty profits over weeks or months. They usually hold a trade for anywhere between five and ten days on average. This way, any small wins made within this timeframe will add up to bulkier profits.

However, this does not mean that you don’t have to factor in any losses. Smaller returns only contribute to the growth of your portfolio if losses are kept in check. Instead of the usual 7% – 8% Stop Loss, be prepared to cut losses at 3%-4% as a maximum to maintain a 3:1 profit-to-loss ratio. This is critical to maintaining a balanced portfolio as a substantial loss can sweep away all the small gains.

With swing trading, you can make more substantial gains on individual trades. For example, a stock may have the potential to grow in the longer term, in which case, a long (Buy) position on that stock could be held for an extended period, with an equal potential of making profits. 

Pros & Cons of Swing Trading

Like any trading strategy, swing trading has its pros and cons. Here are some of its advantages and disadvantages to help you make the right decision.

Pros

  • You don’t have to spend hours in front of your computer because you can open trades and hold them for days or weeks
  • You can do it alongside your day job

Cons

  • You can’t ride the trend anymore
  • It comes with overnight risk

Looking for the Best Swing

To identify the best moment to enter or exit a trade, you can either take the Support and Resistance levels as a reference, the trend line or all three. 

As we’ve explained Support and Resistance in our previous article on position trading, we will reveal a practical way of using the trend line to determine your entry and exit points.

The chart above shows an upward trend line represented by the “sloping” area showing an upward buying pressure.

You can enter a trade either when the price reaches a specific area or value, or when it starts showing signs of reversal. Either way will be equally correct with swing trading. For example, the Hammer chart pattern is a good indication that an upward reversal is imminent. In contrast, the Shooting Star formation will signal the downward reversal.

The biggest challenge is setting up the Stop Loss level. To ensure that you capture the “meat” of the trend, you must set up your Stop Loss level at a location that will “destroy” your pattern if reached. 

You can use the Average True Range (AVR) indicator to determine THAT spot with greater accuracy. Here is an example.

Swing Trading vs Day Trading

Swing and day trading may have similarities, but they also have differences, and the most significant difference that sets them apart is the timeframe.

Typically, day traders look at shorter timeframes and never hold positions overnight. As a result, the risk is lower with day trading. But this is not all. To make it easier for you to decide which strategy is best suited for you, we compare day and swing trading and highlight a few of their characteristics below:

Swing TradingDay Trading
Make several trades per week.Make multiple trades per day.
Hold positions for a few weeks.Hold positions for a few hours or days.
You can have a full-time job and swing trade.It requires most of your time and attention. Suitable for part-time workers.
Momentum indicators and trends are the “rulers”.Short-term buy and sell signals play a major role.
You need a brokerage account to swing trade.It is heavily reliant on tools and indicators.
Higher risk, smaller gains, bulkier profits in the long run.Lower risk, greater, yet shorter-term gains.

Final Considerations

When opting for swing or day trading, it is essential to clearly define your short- or long-term financial goals, as well as the amount of risk you can afford to take. Remember, trading is a risky endeavour. So, trade responsibly, do your research and familiarise yourself with the trading platform.

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