What is Swing Trading?
Swing trading is a trading technique that traders use to buy and sell stocks whose indicators point to an upward (positive) or downward (negative) trend in the future, which can range from overnight to a few weeks. The traders use technical indicators to determine if specific stocks possess momentum and the best time to buy or sell. To exploit the opportunities, the traders must act quickly to increase their chances of making a profit in the short-term.
How Swing Trading Works
Swing trading seeks to capitalize on a swing/movement in the prices of specific stocks. Ideally, traders hope to endure “small moves” in the short term and exit the market before larger moves occur. Swing traders target the 5% to 10% profits for specific stocks rather than waiting in the long-term to make the 20% to 30% profits. While small gains may not be as rewarding as those made by day traders, swing traders aim is to make a lot of small wins within a short time frame that adds up to even bigger overall returns. For example, other traders may wait five months to earn a 25% profit, while swing traders can earn 5% gains weekly and exceed the other trader’s gains in the long run.
Swing traders not only target the small gains but also keep an eye on the losses to avoid eating too much into the short-term gains. Most traders maintain a 3-to-1 profit-to-loss ratio that ensures they still retain some gains. For example, if the short-term gains are in the 5% to 10% range, the short-term losses are at a maximum of 2% to 3%. Most swing traders use daily charts while others use short timeframe charts (like 60 minutes, 24 hours, 48 hours, etc.) to choose the best entry or exit point.
Swing Trading vs. Day Trading
Swing trading and day trading may appear similar, but the main factor setting the two techniques apart is the holding position time. While swing traders may hold stocks overnight to several days or weeks, day trading closes within minutes or before the close of the market.
Day traders do not hold their positions overnight, meaning they do not subject their positions to risks resulting from news announcements. The shorter time frames subject the traders to a wide spread between the bid, ask, and commission, which may eat into the profits and result in meager earnings for the day. To compensate for the associated risks, day traders are given an opportunity to leverage their positions with more margins that increase the percentage gains to offset costs. However, a string of bad trades and lack of focus may blow up the account if the amount of losses exceeds the gains, making it difficult to recover the positions.
On the other hand, swing traders are subjected to the unpredictability of overnight risks that may result in significant movements in the prices of stocks. Major announcements coming in during primetime news may affect certain segments of the markets, which may lead to upward and downward trends in stock prices. Swing traders can check their positions periodically and take action when critical points are reached. Unlike day trading, swing trading does not require constant monitoring since the trades last for several days or weeks.
Swing Trading Strategies
Swing traders can use the following strategies to look for actionable trading opportunities and decide when to enter and exit a trade:
#1 Fibonacci retracement
Traders can use Fibonacci retracement to look for support and resistance levels and based on this indicator find reversal opportunities, as stock positions tend to have a retracement within a trend before making a reversal. The following Fibonacci ratios of61.8%, 38.2%, and 23.6% on a stock chart are believed to reveal possible reversal levels. A trader can enter a trade when the price is in a downward trend and bounces off at the 61.8% retracement levels and sell the stock position for a profit when the price drops and bounces off at the 23.6% support level.
#2 T-line trading
Traders use the T-line on the stock chart to make a decision on the best time to enter or exit the trade. When the stock closes above the T-line, it is an indication that the stock price will continue to rise. On the other hand, when the stock closes below the T-line, it is an indication that the price will continue to fall, and the trader can exit the trade before the trade declines to extreme levels.
#3 Japanese candlestick
Most traders prefer using the Japanese candlestick charts since they are easier to understand and interpret. Traders use it to identify areas on the chart where there is buying and selling pressure and incorporate that information into their trade.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: