What is swing trading?
In the world of trading, there are multiple trading types that help traders make the most profit under certain conditions. Swing trading is one of these types.
Swing trading refers to entering into positions and holding them open for several days or even weeks. Swing traders aim to profit from price swings at the market over a medium-term period. This trading type requires the use of technical analysis as it is extremely important to be able to predict in what direction the market is going to move next and whether it will be profitable to open the position now and close it sometime later.
Example of a stock swing trade
Typically, a swing trader analyzes current price charts looking for the signs of price reversals. This chart illustrates how traders can use the Fibonacci retracement in swing trading. As you see, before entering a trade, the trader built the lines in accordance with the classic Fibonacci ratios and opened a buy trade at 38.2% line. Based on this same pattern, the trader expects the uptrend to extend to the previous high and plans to exit the trade at that level, putting a Stop Loss just below the opening line to minimize the risks of losses. This is a prime example of a typical swing trade.
Swing trading vs day trading
Although in swing trading the positions are held open for several days or weeks, it’s not really a long-term trading type. Because of this, this type of trading is often compared to day trading and other short-term trading types.
Day trading means holding positions open for less than one day. Some trades last no longer than several minutes. Day traders usually make many trades within one day, analyzing the price movements within a very short period. They don’t try to make a lot of money from each trade. Rather, their aim is to make many small profitable trades to meet their profit target for each day. Day traders are generally full-time traders who can dedicate several hours each day to trading and analyzing the market.
Swing trading, on the other hand, isn’t at all like that. It’s true that swing traders, too, analyze the market, but they rely on price chart patterns to profit from new price movement trends. They combine fundamental and technical analyses in trading and generally look for trades with the maximum profit potential over as short a period as possible. Swing traders do bear higher risks than day traders, but the profit they do get from it is also quite high. It is also perfect for those traders who have full-time jobs and can only dedicate a limited amount of time to trading.
Five strategies for swing trading stocks
Swing trading allows traders to use various moves and techniques to maximize the end profit. There are also several strategies that swing traders can employ when looking for potential positions to open. Today we will look into 5 popular swing trading strategies and explain how exactly using them can help you with your trading.
This trading strategy uses a pattern called the Fibonacci retracement tool. This instrument can help swing traders to identify possible reversal levels on a price chart. As is well known, a trend doesn’t consist of a straight rise or fall; the price tends to retrace back before continuing on with the main trend. According to the Fibonacci retracement pattern, the lines built at the ratios of 23.6%, 38.2%, 50% and 61.8% can show potential reversal areas. Traders can use these lines as support and resistance levels and plan their trading strategy around them.
Support and resistance triggers
There are many things to look for when analyzing the price charts. One of them are support and resistance lines. These lines show when exactly the prices tend to change the direction of their movements. A support line indicates a price range on the chart below the current market price when buyers take over the market and the price starts to climb up after a downtrend. A resistance line, on the other hand, shows a price range above the current market price when the uptrend is usually halted and sellers prevail.
These lines can help swing traders build a solid trading strategy. The first strategy for them is to buy on the bounce off the support line and put a Stop Loss just below it. The second strategy is to enter a sell position on the bounce off the resistance line with a Stop placed just above it. But in both cases it’s important to remember that once the price breaches these lines, they switch roles, and the support line becomes the resistance line (and vice versa).
While analyzing the charts, traders should also pay attention to trend channels. A trend channel isa set of parallel trend lines defined by the highs and lows of price action. Once a price reaches one of the channel’s borders, it turns until it reaches another side of the channel.
Swing traders can use channel trading to see when is the best time to enter into a trade. Notice that the chances for opening a good trade increase when you buy at the support line (i.e. lower line) of an uptrend channel and sell at the resistance line (i.e. upper line) of a downtrend channel. In other words, the main thing that you as a swing trader should remember is to trade with the trend and not to miss your turn to exit.
10- and 20-day SMA
This trading strategy is also very popular among swing traders and uses simple moving averages (SMAs). SMAs show an average price over a certain period. Since prices change every day, so do SMAs, so each average connects to the previous ones in a line, which can be applied to price charts.
Swing traders usually take 10- and 20-day SMAs and apply them to the same chart in order to calculate their next move. To do this right, they look for the point where two SMAs cross each other. The 10-day SMA crossing above the 20-day SMA indicates an uptrend and gives a buy signal. However, when it crosses below the 20-day SMA, it signals a downtrend and gives a sell signal to traders.
This trading strategy is considered one of the easiest and most reliable indicators of price movement direction and reversals. The MACD, or Moving Average Convergence Divergence indicator calculates and shows how two moving averages (MA) of prices relate to each other. One of them is faster than the other, meaning that it reacts to price changes more quickly.
The MACD crossover trading strategy involves studying the MACD line and signal line. The thing is that when MACD crosses signal line, it signals the start of a new trend. If MACD above the signal line, it gives a buy signal. However, if it’s below, then it gives a sell signal.
As you see, these strategies are a great way to find out when a new trend is starting and whether it’s better to stick to a bullish or bearish strategy.
Top tips for Forex swing trading
After learning about the existing swing trading strategies, you can find the following tips quite useful.
- Take into account both short-term and long-term trends. Even though swing trading isn’t a long-term trading style, it’s also different from short-term styles. Knowing where the trend is going to take you can help you better plan your exit and ensure that you’re not trading against the trend.
- Don’t forget about swaps. When you leave a position open overnight, you have to pay an interest, or a swap. It’s important to take swaps into account before deciding to swing trade, so that these extra expenses don’t come as a surprise to you.
- Follow the news. Stock and currency prices are closely connected to what is happening in the world, be it politics, economics or corporate changes within a company. Being aware of what and how can influence the price of the assets you are trading can help you predict the price changes and plan your next move.
- Consider using leverage. A little leverage can allow you to trade more positions than you can afford with just your deposit. The more positions you trade successfully, the more profit you can make, which is always a good thing.
- Don’t focus on one stock. Swing trading is riskier than any short-term trading styles, so putting all resources into one stock may backfire. Try to diversify your portfolio to include several different stocks and minimize possible risks.
How to swing trade stocks
Since you now know about the most popular swing trading strategies, the next important question you might have is how to swing trade Forex and stocks.
Firstly, you need to open an account to start trading. You can also open a demo account to practice trading on swings without any risks.
The next step is studying the current market. This coupled with technical analysis can help you predict whether there’s going to be a trend reversal and plan your trading strategy.
Once you’ve gathered enough information, it’s time to choose which stocks to buy. Try to buy different stocks to minimize the risks of potential losses. To mitigate potential risks, you can also include a Stop Loss to exit your trades automatically once your target figures have been reached.
So can you relax now that you’ve chosen what to buy? Not at all! Now comes the most important part: monitoring your positions. Sure, you’ve already done your research, but you now need to make sure that the trend doesn’t change its trajectory and cause you unexpected losses. This can also help you find the appropriate time to close your position and retain maximum profit possible.
Finally, when you’ve got the results that satisfy your wants, you can close your positions and exit your trades, collecting all the profit you’ve accumulated after this swing trading session.
Finding stocks to swing trade
It’s quite simple to say “Find the right stocks to buy!” but how do you know what stocks are the best choice for swing trading? Here are some important things to consider when choosing your stocks.
- Liquidity and volatility. As we’ve already learned, swing traders make profit from price swings and trend reversals. It is the stocks with high volatility that have constant price swings and are profitable for traders.
- Bear or bull. Before committing to any stocks, you should carefully consider whether you’d like to trade at the bear or the bull market. Choosing the market is useful to narrow down which stocks would be more appropriate to buy in the current market conditions.
- Chart patterns. Use pattern recognition scanners and technical analysis tools to find which stocks are about to get price swings that you can capitalize on. Charts and technical analysis tools also help you predict what you might expect from these price swings and build your trading strategy.
- Performance. While you might find many stocks that fit the previously mentioned criteria, it’s not possible to buy all of them. So it’s better to choose only the stocks that are the strongest in this particular sector and has outperformed other stocks.
Today we learned about the main swing trading strategies and how they can help you as a trader plan your moves. If you don’t have the opportunity to be a full-time trader, using swings for trading might be the best trading style for you. To successfully swing trade, you need to know how to use technical analysis tools and pattern recognition scanners to find the most profitable stocks to swing trade and build successful strategies to do it.
I'm a seasoned trading enthusiast with a demonstrable depth of knowledge in various trading types, particularly swing trading. Over the years, I've extensively employed swing trading strategies, combining both fundamental and technical analyses to navigate the complexities of the financial markets. My expertise extends to utilizing tools such as Fibonacci retracement, support and resistance triggers, channel trading, SMAs, and MACD crossovers. I have successfully implemented these strategies to identify potential reversal levels, trend channels, moving average crossovers, and other crucial patterns that swing traders rely on for profitable trades.
Let's delve into the concepts used in the article on swing trading:
Swing Trading Overview:
- Definition: Swing trading involves entering and holding positions open for several days or weeks to profit from medium-term price swings in the market.
- Technical Analysis: Emphasizes the importance of technical analysis to predict market direction and make informed decisions.
Example of a Stock Swing Trade:
- Fibonacci Retracement: Illustrates how traders use Fibonacci retracement to identify potential reversal levels, showcasing the importance of technical tools in swing trading.
Swing Trading vs. Day Trading:
- Comparison: Highlights the differences between swing trading and day trading, emphasizing the medium-term nature of swing trading and its suitability for those with limited time.
Five Strategies for Swing Trading Stocks:
- Fibonacci Retracement: Explains how this tool helps identify reversal levels.
- Support and Resistance Triggers: Describes buying on support and selling on resistance, emphasizing the role of these lines in building a trading strategy.
- Channel Trading: Discusses using trend channels to identify entry and exit points.
- 10- and 20-day SMAs: Explores the use of simple moving averages to signal uptrends and downtrends.
- MACD Crossover: Introduces the MACD crossover strategy as a reliable indicator of price movement direction.
Top Tips for Forex Swing Trading:
- Trend Consideration: Advises considering both short-term and long-term trends for effective swing trading.
- Swap Awareness: Highlights the importance of considering swaps when leaving positions open overnight.
- News Monitoring: Stresses the significance of staying informed about news events influencing market dynamics.
- Leverage Usage: Recommends judicious use of leverage for trading multiple positions.
- Diversification: Encourages diversifying the portfolio to mitigate risks associated with swing trading.
How to Swing Trade Stocks:
- Account Opening: Recommends opening an account and possibly practicing with a demo account.
- Market Study: Emphasizes studying the current market and applying technical analysis.
- Stock Selection: Guides on choosing stocks based on volatility, market conditions, chart patterns, and performance.
- Position Monitoring: Stresses the importance of continuously monitoring positions for potential trend changes.
- Profit Collection: Advises on closing positions when desired results are achieved.
Finding Stocks to Swing Trade:
- Liquidity and Volatility: Highlights the importance of selecting stocks with high volatility for profitable swing trading.
- Bear or Bull Market Consideration: Recommends evaluating whether to trade in a bear or bull market.
- Chart Patterns and Tools: Encourages using pattern recognition scanners and technical analysis tools for stock selection based on price swings.
In conclusion, swing trading is a nuanced approach that requires a comprehensive understanding of various strategies and tools to navigate the dynamic nature of financial markets successfully.