What swing trading is, how to use it in trending and range-bound markets, 2 swing trading strategy examples and personality-types it is best suited to.
Swing trading is a trading style which attempts to profit from price changes or “swings” in a market. A swing trader will typically keep a position open for between one day and one to two weeks. However, there is no fixed rule and some swing traders may hold a position open for several weeks in an attempt to capture the short-term trend.
Swing traders don't follow the minute by minute changes in market prices. They are more interested in the bigger picture. A swing trader will typically look at 4-hour chart, daily chart, or weekly chart to identify trading opportunities using one or a variety of technical indicators.
Swing trading is not just for traders who use technical analysis. Traders who base their decisions on fundamentals like earnings and economic data can also be swing traders. That’s because it can take several days or even weeks for predicted changes in fundamentals to come about and impact market prices.
Bull or Bear market?
Swing traders can take advantage of both bull and bear markets, typically working in line with the main trend of the market, be it up or down.
So, in an upward trending chart, the swing trader will usually buy (go long). In a downward trending market the swing trader will typically aim to sell (go short). That said, there are also counter-trend swing trading strategies.
Swing traders are also suited to trading conditions where the market is range bound. This is when a market rises for a few days and then declines for a few days, repeating the pattern. A market could spend several months at roughly the same price. For a position trader, who looks for long term trends, this is a difficult time to trade. The swing trader, however, won’t be holding a position long enough for this to matter.
A swing trader is actually looking for volatility. The more volatile a market, the more short-term swing trading opportunities to take advantage of.
Which markets are best suited to swing trading?
Given that a swing trader is looking for volatility, certain markets are more suited to this style of trading than others. Forex, indices, commodities and large cap stocks tend to exhibit the short term moves that are better suited to this style of trading; more so than small cap stocks.
How to swing trade
Swing traders look to profit from short-to-medium-term price moves. This is a trading style, not a strategy. There are many different indicators that can be used, particularly trend following methods. Let’s look at two of the most popular swing trading strategies:
1. Support and Resistance
Support and resistance levels are formed when a market price stops then reverses and moves in the opposing direction.
Support levels are below the current market price. They are levels where buying interest is strong enough to overcome the sellers. The price will often drop to these levels and then bounce back up again as a result of the increased buying interest.
Resistance is above the current market price. It is the level where selling interest overcomes the buyers. As a result, the price reverses and changes direction moving lower.
Support and resistance can carve out trading ranges. Price action often respects these support and resistance levels, containing the price movement. That is of course until the price breaks through them.
A swing trader will look to enter a long trade after the price bounces off the support line. A sell trade, or a short position would be entered after the price reverses off a resistance line.
The trade can be placed at the support or resistance or the trader can wait for a confirmation candle to move in the expected direction after the price hits either the support or resistance, before opening the trade.
The support and resistance levels can help with the exit strategy. On a long trade a stop could be placed just below the support level. A take profit order could be placed close to the resistance. Conversely, on a short position -a stop loss could be placed just above the resistance line, whilst a take profit order could be placed close to the support level.
2. Channel trading
Swing trading using channel works when you have identified a strong channel on a chart. It can be a bullish channel (ascending) or a bearish channel (descending).
With this strategy it is recommended that you trade the same direction as the trend. So, with a rising channel, the aim is to go long. Your entry point is when the price bounces off the bottom line of the channel. With a bearish channel you are looking to sell to open or go short.
Your entry point would be after the price reverses off the top channel line. The channel can be used to help with the exit strategy in a similar way to support and resistance levels. Here you would use the channel as a guide for stop loss and or take profit placement.
Theses are just two examples of different strategies that you can use to swing trade. There are many other methods that traders adopt to swing trade. Other methods could include using moving averages, Fibonacci retracement or MACD crossovers to name a few.
Who suits swing trading?
Swing trading is less time consuming than other shorter-term trading styles such as scalping and day trading. There will be days when a swing trader has little to no transactions. Positions can be dealt with periodically or using alerts when critical levels are reached.
Swing traders do not need to constantly monitor positions. It is a slower pace of trading. In order to be a swing trader, it is essential that you can walk away from your computer whilst your position is open. This is called ‘Set and Forget’ and requires discipline.
If you are the type of person that always wants to be in and out of trades and wouldn’t sleep if there is a trade running, then swing trading maybe isn’t for you. Those looking for a less time intensive, lower stress way to trade are more likely to be drawn to swing trading over day trading or scalping.