In trading terminology, the phrase ‘swing trading’ denotes a variety of ‘buy and hold’ strategy whereby traders plan to hold their positions open for longer than a single day at a time — as opposed to scalping or day trading, where positions are opened and closed in the same trading session.
Swing trading is classed as a type of fundamentals trading, meaning investors chiefly rely on examining product or company specific events — known as ‘fundamental analysis’ — as their primary method of choosing which instruments to focus on.
Indeed, most fundamentals traders are regarded as swing traders by their very nature, as many business timelines mean that several days to a week are required to notice a sufficient price movement in response to corporate decisions.
As a general rule, swing traders will hold their positions open for anywhere from a few days to a two or three week period, whilst looking to capitalise on intra-week or intra-month fluctuations in sentiment around the relevant market.
The Basic Principles of Swing Trading
The overarching swing trading principles can be applied across a wide range of products and markets, including but not limited to forex, commodities, futures contracts, stocks and options exchange-traded funds (ETFs).
Traders engaging in swing trading will seek to identify ‘swings’ — i.e. detectable directional shifts in the short and medium term — and enter in and out of trades as appropriate once they’re sure there’s a reasonable chance of making a profit.
In uptrends, swing traders will look to buy (or ‘go long’) at ‘swing lows’ so they can purchase cheap securities and make a profit once the price returns to a higher level, whilst selling (or ‘going short’) at ‘swing highs’ to capitalise on the newly inflated asking prices.
Essentially, you’re trying to catch points when the product is either overbought or oversold.
Because of this, swing traders will often rely on technical indicators to alert them to emerging trends — these include moving averages, stochastic oscillators and relative strength indexes, which we’ll cover in more detail in a future article.
What Makes Swing Trading Unique?
A slower paced endeavour than day trading or scalping, the swing trading style is more well-suited for individuals (as opposed to larger institutions) who perhaps don’t have the time or means to continuously monitor market charts throughout the day.
With swing trading, you can simply spend some time picking your target instruments with a ‘less is more’ approach and assess daily movements in their markets on an evening by looking online or watching the news. For this reason, it’s ideal for those hobby traders who have other full-time commitments such as university students or 9–5 workers.
However, it’s important to consider the other side of the coin, which is you’re effectively playing the long game; patience and an ability to hold your nerve are therefore vital if you’re to succeed at this type of trading, as the market may well move against you before it moves in your desired direction.
Swap charges also need to be taken into account more carefully when swing trading, as if you’re going to be holding positions open for several days (or even weeks) on end they can have a considerable impact on your profit margins; larger stop losses are also a must in order to help you weather volatility within the market!
Swing trading may not be suited to those who like more frequent, rapid-fire trading techniques, or those who don’t fancy spending hours at a time making sure they’re up to speed with current events. Nevertheless, it’s often considered an ideal way for newcomers to familiarise themselves with the trading process, as it will usually only take a few days to see if your instincts have paid off.
It’s also worth noting that within the swing trading discipline, there are two distinct schools of thought that employ different aims and tactics, which we’ll examine below.
What is Breakout Trading?
As the name suggests, ‘breakout trading’ is a strategy that involves identifying changing sentiments in the market as early as possible, then quickly opening a position with the view of capitalising on the swing and profiting off the price differential by respectively buying and selling (or vice-versa) at the trend period’s widest gap.
Breakout traders aim to pre-empt points where the market is poised to ‘break out’ from its current trading range; these milestones often follow a break in either its support or resistance line.
Because breakout trading is based on educated guesswork regarding near-future movements, it necessitates some prior knowledge of the overall momentum of the relevant market — which, in turn, can be identified by looking at the volume of trades currently being carried out involving the chosen instrument.
For this reason, volume-weighted moving averages are the technical analysis tool of choice for many breakout-favouring swing traders.
Further reading: https://www.investopedia.com/articles/trading/08/trading-breakouts.asp
What is Trend Trading?
Similar to the above, ‘trend trading’ advocates typically use a number of technical indicators to pinpoint shifts in market momentum and ‘jump in’ with an open position once a clear trend has been established.
The primary difference with breakout trading, however, is it tends to be longer-term focused and less pre-emptive in nature; here, your aim is to exploit existing movements instead of jumping on emerging ones.
Put simply, trend traders will buy when they have reason to believe the market will continue to climb in value, whilst looking to sell at times when they think the market will depreciate further. In both cases, the key is to then successfully exit the trade when their analyses indicate a reversal in sentiment is imminent.
As a result, trend traders make use of a wide array of analysis systems to enable them ride these swings effectively (and help them to withdraw before their fortunes change); moving averages, average directional indexes (ADXs) and relative strength indexes (RSIs) are some such examples.
Further reading: https://2ndskiesforex.com/trading-strategies/forex-strategies/how-to-trade-price-action-trends-in-forex-what-youve-been-missing/
Bull or Bear Markets: Which Sentiment is Better for Swing Traders?
Unlike some other types of trading strategies, swing traders tend to view either market extreme — a steadily upwards-moving bull market or a consistently depreciating bear market — as unhelpful to their cause, instead preferring economic conditions to land somewhere in the middle of the spectrum.
This is because clearly appreciating or devaluing markets move in a clearer, smoother trajectory, and so are unlikely to present the same degree of up-and-down oscillation over the course of days, weeks or months for swing traders to make a significant profit.
When the markets are behaving erratically or without clear direction — for instance, rising for a few days then falling back down and so on — that’s when medium-term tactic traders are best poised to benefit!
The beauty of this tactic is that even if the value of a security ends up right back where it was a few weeks or months down the line, swing traders will still have had opportunities to make money from any short-term fluctuations along the way.
