Swing trading is a fundamental type of short-term market speculation where positions are held for longer than a single day. It can be used to trade in forex, futures, stocks, options, ETFs and cryptocurrency. This page will take an in-depth look at the meaning of swing trading, plus some top strategy techniques and tips. The benefits and dangers of being a swing trader will also be examined, along with indicators and daily charts, before wrapping up with some key take away points.
What is a Swing Trader?
The straightforward definition for beginners is that a swing trader seeks to capture gains by holding an instrument anywhere from overnight to several weeks. As training guides highlight, the objective is to capitalise on a greater price shift than is possible in an intraday time frame. But because you follow a larger price range and shift, you need calculated position sizing so you can decrease downside risk.
To do this, individuals call on technical analysis to identify instruments with short-term price momentum. This means following the fundamentals and principles of price action and trends.
A swing trader’s setups and methods are usually undertaken by individuals rather than big institutions. This is because large enterprises usually trade in sizes too great to enter and exit securities swiftly. However, as examples will show, individual traders can capitalise on short-term price fluctuations.
Swing Trading Benefits
As forums and blogs will quickly point out, there are several advantages of swing trading, including:
- Application – Swing trading can be effective in a long list of markets and instruments. For example, you can speculate on the latest altcoins, such as a bitcoin (BTC), ethereum (ETH) and litecoin (LTC). Alternatively, you can stick to swing trading with standard options.
- Resources – There is a wealth of online resources to help you become one of the success stories. You have Ebooks, video training courses, PDFs, apps, tutorial classes and a whole host of websites. All can provide ideas for forex strategies, general trade plans and top tips for identifying patterns. In addition, join the Discord chat to take part in an active swing trading group.
- Tools – You can swing trade using candlesticks and other techniques on any number of platforms, from Robinhood to MetaTrader. There is also the option of employing automated bots and expert advisor software (EAs). Used correctly, these can allow you to execute far more swing trades than you ever could manually.
- Mindset – As success stories show, if you have the attributes needed to effectively day trade, you may well have those required to swing trade. For example, are you patient? Do you mind having big stop losses? Are you happy to take fewer trades while being meticulous with the few setups you do make? If yes, you may already have the qualities and discipline of a successful swing trader.
Before you give up your job and start swing trading for a living, there are certain disadvantages, including:
- Market risk – Rule 101 – you can definitely lose money. Although some have made it look easy, any mistakes will be felt where it hurts the most, your income. And unfortunately, as is the nature of market speculation, lessons are often only learnt the hard way. In addition, trading on margin and using leverage could see you lose more than your initial investment.
- Time – Swing trading isn’t one of the types of trading where you can enter your position and just check it a week or so later. It is live trading and the strategies that work require consistent monitoring. This means juggling swing trading with a full-time job may be challenging.
- Taxes – Swing trading does not necessarily exempt you from taxes. In fact, in the US, for example, you may get caught up in pattern day trader laws. So check you can meet any obligations in your financial system first.
- Risk management – Whether you’re interested in penny stocks or using an algorithm service, failure to implement an effective risk and money management strategy could cost you dearly. As successful trader Harry Lite said, “Throughout my financial career, I have continually witnessed examples of other people that I have known being ruined by a failure to respect risk. If you don’t take a hard look at risk, it will take you.”
- Psychology – Do you like a dynamic, fast-moving trade environment? Are you impatient with a need to know whether you’re right or wrong straight away? If so, you may not have the mindset needed to become a millionaire and master of swing trading.
These are by no means the set rules of swing trading. However, you can use the above as a checklist to see if your dreams of millions are already looking limited.
Day Trading vs Swing Trading
The main difference is the holding time of a position. Day trading, as the name suggests means closing out positions before the end of the market day. However, as chart patterns will show when you swing trade you take on the risk of overnight gaps emerging up or down against your position. As a result, when swing trading, you often take a smaller position size than if you were day trading, as intraday traders frequently utilise leverage to take larger position sizes.
Having said that, swing traders can capitalise on up to 50% overnight margin. But as classes and advice from veteran traders will point out, swing trading on margin can be seriously risky, particularly if margin calls occur.
So swing trading or day trading isn’t so much about what you want to trade, be it commodities, such as oil futures or stocks from the Cac 40. Instead, it’s simply the time. So while day traders will look at 4 hourly and daily charts, the swing trader will be more concerned with multi-day charts and candlestick patterns. In fact, some of the most popular include:
- Moving average crossovers
- Head and shoulders patterns
- Cup-and-handle patterns
- Double bottoms
- Shooting stars
One final day difference in swing trading vs scalping and day trading is the use of stop-loss strategies. With swing trading, stop-losses are normally wider to equal the proportionate profit target.
What Stocks to Swing Trade
One of the first things you will learn from training videos, podcasts and user guides is that you need to pick the right securities. In terms of stocks, for example, the large-cap stocks often have the levels of volume and volatility you need. These stocks will usually swing between higher highs and serious lows. This means you can swing in one direction for a few days and then when you spot reversal patterns you can swap to the opposite side of the trade.
Finding the right stock picks is one of the basics of a swing strategy. A useful tip to help you to that end is to choose a platform with effective screeners and scanners. There’s simply no use having the best strategy if you’re speculating on the wrong low-priced stocks.
The Right Market
Swing trading can be particularly challenging in the two market extremes, the bear market environment or raging bull market. Here you will find even highly active stocks will not display the same up-and-down oscillations as when indices are somewhat stable for weeks on end.
Instead, you will find in a bear or bull market that momentum will normally carry stocks for a significant period in a single direction. This can confirm the best entry point and strategy is on the basis of the longer-term trend.
Essentially then, it is when the markets aren’t heading anywhere that you have the ideal swing trading environment. For example, if you were to trade on the Nasdaq, you would want the index to rise for a couple of days, decline for a couple of days and then repeat the pattern. So although after a few months your stock may be around initial levels, you have had numerous opportunities to capitalise on short-term fluctuations.
Using the Exponential Moving Average
A swing trading academy will run you through alerts, gaps, pivot points and technical indicators. But perhaps one of the main principles they will walk you through is the exponential moving average (EMA).
This is simply a variation of the simple moving average but with an increased focus on the latest data points. Used correctly it can help you identify trend signals as well as entry and exit points much faster than a simple moving average can. Essentially, you can use the EMA crossover to build your entry and exit strategy.
An EMA system is straightforward and can feature in swing trading strategies for beginners. You can use the nine-, 13- and 50-period EMAs. Your bullish crossover will appear at the point the price breaches above the moving averages after starting below.
This tells you a reversal and an uptrend may be about to come into play. Then if your nine-period EMA exceeds the 13-period EMA, this alerts you to a long entry. Having said that, the 13-period EMA must be above the 50-period EMA or actually cross above it.
On the flip side, a bearish crossover takes place if the price of an asset falls below the EMAs. This tells you there could be a potential reversal of a trend. You can then use this to time your exit from a long position.
So if the nine-period EMA breaches the 13-period EMA, this alerts you to a short entry or the need to exit a long position. Having said that, the 13-period EMA must be below the 50-period EMA or cross below.
Utilise the EMA correctly, with the right time frames and the right security in your crosshairs and you have all the fundamentals of an effective swing strategy.
Psychology of Swing Trading
It is true you can download a whole host of podcasts, audiobooks and PDFs that will give you examples of swing trading, rules to follow and Heiken-Ashi charts to build. However, what they often won’t tell you is how to mentally react when your swing trading strategy doesn’t work.
With that said, you should consider the following three tips:
- Have a plan and stick to it – There will be highs and lows, that is the very nature of buying and selling in the markets. However, let the maths dictate those ups and downs, do not let your emotions get in the way. Deciding when to sell can quickly become an emotional decision when you have your whole weeks returns on the line. So, formulate a strategy and then stick to it religiously.
- Combat fear by reducing risk – Everyone’s appetite for risk is different. So find risk parameters that suit. For example, you may want to start by not risking more than 2% of your account size on a single trade. This is something no mentor can teach you. Only through hours of practice will you learn where your personal limits are.
- Think long-term – Too many swing traders obsesses over the last trade or the next. Don’t worry if you just lost on gold futures. Instead, think about your long-term profit percentage and calculator. As Bruce Kovner aptly pointed out, “If you personalize losses, you can’t trade.”
Swing Trading Top Tips
Even some of the best forex books leave out some of the top tips and secrets of swing trading, including:
- Utilise the news – Markets are constantly moving in reaction to news events. Many resources, such as Yahoo Finance and CNBC will provide market analysis and commentary, using volume, price action and weekly charts. Therefore, used correctly, the news could help you highlight potential options and dividend stocks to keep an eye on, for example. It could also help you plan your entries and exits.
- Never stop learning – As Paul Tudor Jones famously said: “The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge.” There is a wealth of information available to help you develop effective cryptocurrency and forex strategies. Video tutorials, for example, can help teach you Gann techniques and how to start using weekly deep in the money options. They can also run you through indicators for your MT4 platform and the setting up of daily stock alerts.
- Find the right broker & exchange – Everyone has different needs and priorities, so while one crypto swing trader may be best off on Gdax or Binance, a highly active forex swing trader may want to consider Dailyfx. Note they are also more than a place to consider quotes and exchange securities. They can help you build a diverse watchlist, portfolio, and so much more.
- Keep a Journal – Keeping an Excel journal can prove invaluable. Simply note down price, date, position size and a reason for entry and exit points. This could help you see why your breakouts plan for currency pairs does not work on weekly charts, for example.
How Much Money Can You Make?
Swing trading returns depend entirely on the trader. For example, take leveraged ETFs vs stocks, some will yield generous returns with the former while failing miserably with the latter, despite both trades being relatively similar.
It will also partly depend on the approach you take. Some swing traders will praise MACD indicators while others utilise an NMA system. Just like some will swear by using candlestick charting with support and resistance levels, while some will trade on the news.
The key is to find a strategy that works for you and around your schedule. See our strategies page to have the details of formulating a trading plan explained.
Best Swing Trading Books
There are few books based specifically on swing trading, but they do exist – and equally importantly, some of the best trading books apply to all trading, including swing trading:
- Mastering The Trade (John F Carter). Nothing beats experience, and John F Carter provides insights as a genuine swing trader. Learn from his experience via this excellent book.
- Come Into My Trading Room (Dr Alexander Elder). This is one of those books that is not about swing trading per se, but it introduces some fundamental trading principles that every trader should apply – including swing traders.
- Trade Your Way To Financial Freedom (Dr Van K Tharp). Again, not about swing trading specifically – but about managing risk, and viewing your whole trading activity through the perspective of managed risk. This guidance is particularly important for shorter term, high frequency trade styles, such as trading swings.
Although being different to day trading, reviews and results suggest swing trading may be a nifty system for beginners to start with. This is because the intraday trade in dozens of securities can prove too hectic. Whereas a swing trader will see their returns within a couple of days, keeping motivation levels high. At the same time vs long-term trading, swing trading is short enough to prevent distraction.
On top of that, requirements are low. You need a brokerage account and some capital, but after that, you can find all the help you need from online gurus to try and yield profits. Furthermore, swing trading can be effective in a huge number of markets.
But although learning how to start becoming a swing trader as a part-time or full-time job may be relatively straightforward, your capital is at risk. Therefore, caution must be taken at all times.