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Swing trading has been described as a type of fundamental trading in which positions are held for longer than a single day. Traders attempt to capture short-term profits by using technical analysis to enter into positions, hold for several days or weeks, and exit soon thereafter.
Most fundamentalists are swing traders since changes in corporate fundamentals generally require a short amount of time to cause sufficient price movement to render a reasonable profit. The style of swing trading lies somewhere between day trading and trend trading:
- Day trading often results in very short-term holding periods of less than a single day. Profit per transaction is often lowest.
- Swing trading often results in short to medium hold periods. Profit per transaction is higher than day trading but lower than trend trading.
- Trend trading often results in the longest hold periods. Due to low transaction volume, profits can be highest per position.
Swing trading is directional trading, where the trader tries to take advantage of short-term price movements.
In swing trading, traders get involved in deals that span over several days or weeks. Unlike day traders, they trade infrequently and don’t close their position at day end. They hold onto their position and wait for a larger profit to emerge. They take a bigger risk for bigger profit and therefore, sometimes swing traders trade also against the market trend. They use market indicators and technical analysis to predict changes. When an asset enters the overbought or oversold area, the swing trader takes the opportunity to plan a trade.
Understanding Swing Trading
Typically, swing trading involves holding a position either long or short for more than one trading session, but usually not longer than several weeks or a couple of months. This is a general time frame, as some trades may last longer than a couple of months, yet the trader may still consider them swing trades. Swing trades can also occur during a trading session, though this is a rare outcome that is brought about by extremely volatile conditions.
The goal of swing trading is to capture a chunk of a potential price move. While some traders seek out volatile stocks with lots of movement, others may prefer more sedate stocks. In either case, swing trading is the process of identifying where an asset’s price is likely to move next, entering a position, and then capturing a chunk of the profit if that move materializes.
Successful swing traders are only looking to capture a chunk of the expected price move, and then move on to the next opportunity.
What is the Objective of Swing Trading?
Swing trading is a trading technique whose main objective is to buy or sell a stock within a short period, ideally within just one day. A swing trader usually tries to find stocks showing some trend and enter into the trade at the beginning of the trend. In most cases, a swing trader would also try to exit the trade at an early stage.
Swing traders seek to hold their positions for an average of 2 days to a few weeks, making swing trading an excellent way to trade in a bear market. Swing traders also take advantage of market momentum. There are two types of swing trades:
1) Counter trend swing trade – selling or buying into resistance or support areas in the direction of the primary trend (for example, selling into support during an uptrend).
2)Trend following swing trade – buying into support or selling into resistance in the direction of the minor trend (for example, buying into support during an uptrend).
How does Swing Trading work?
A swing trader will typically look for high volume (lots of activity) and high volatility (lots of movement) stocks. Volatility is usually measured by how much the price has moved over time (usually one year).
1. Pick a stock
The first step is to find a stock that can deliver good returns in the short term. You can pick any security you want, but you must have good knowledge about the fundamentals of that security.
2. Analyse its chart
Once you have identified security, analyse its chart with various indicators like Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), Volume and Trend Lines etc., to understand how it has been performing historically. You should also read news articles about the company and industry news to understand what could affect its performance in the future.
3. Set up your entry
Place a stop-loss order at 5% below your entry price and set a target price at 20% above your entry price. A stock will typically bounce off its support level and move upwards before dropping after reaching its resistance level. This movement up and down is known as swing. A swing trader takes advantage of this movement by buying at the support level and selling at the resistance level.
Which Asset To Trade in Swing Trading?
You can pick the assets from:
- bonds, and
- currencies and cryptocurrencies.
As a swing trader, you must create a diversified portfolio. You should have at least ten different positions, and they should be in different sectors. And if you can, incorporate other asset classes in your swing trading.
For example, include the following (assuming these securities meet the fundamental and technical criteria of your strategy):
- technology stocks,
- developed market equities,
- emerging market equities,
- ETFs, and
- Physical Gold.
But too much of a good thing can harm you. It’s possible to diversify too much — holding, say 30 or more positions. A swing trader needs concentration to make large profits. The more positions you hold, the closer the returns of the portfolio will be to the market.
All of these positions represent different ways to diversify your portfolio. Holding more than one position reduces idiosyncratic risk (a fancy way of saying the risk attributable to an individual position). And diversification allows your portfolio to withstand market volatility — the gains from a few positions can offset the losses from others.
Which Market To Trade in Swing Trading?
Swing trading can be used in any market as long as there are identifiable swings in the assets’ price graph. But it is seen that swing trading is most beneficial when the market is trending.
Think about it. You might have a long-only swing trading strategy. And you identified a swing low too late and the price already increased by the time you entered the trade. But since you have an idea that the market is trending, the risk of taking a loss is minimized.
5 Parameters to Consider for Swing Trading
For starters, swing trading is a trading style that helps us to capture short to medium-term gains for a period of a few weeks in any stock or financial instruments. Swing traders usually use technical analysis for picking up stocks for swing trading!
But wait! Swing trading shouldn’t be confused with day trading. The main difference between day trading and swing trading is the holding time. Yes! The positions in day trading are closed within the day, whereas the positions in swing trading can be carried forward and held for a few weeks to a month.
Having understood what swing trading means, in today’s blog, we will discuss the five main factors that one should consider for swing trading are:
As discussed above, swing trading refers to trading with the trend. Thus, the breakout from a range, chart pattern, important resistance and support zones, or reversal candlestick patterns are some technical tools that swing traders should pay attention to.
For example, from the weekly chart below of Tata Motors Ltd, one can see a double Bottom formation after a downtrend. Double Bottom is a bullish reversal chart pattern that indicates the stock may reverse to up.
We can see from the above chart that after the breakout from the double bottom chart formation, traders can enter the trade for swing trading and continue until the price objective of the pattern reaches, or the trend ends. However, one should note that the traders should only enter the trader after the breakout, which is confirmed by the volume as shown in the above chart. Thus, swing traders should look out for the breakouts in the stocks for entering a position in the same.
Buy why volume is so crucial for selecting stocks for swing trading. Well, let us discuss this:
Volume is an essential tool for swing traders as it helps them analyze the strength of a new trend. The main reason behind this is that a trend with high volume will be stronger than one with weak volume. In addition, more traders buying or selling gives a better basis for the price action.
The above chart shows that volume is mainly helpful as a part of a breakout strategy. However, breakouts tend to follow a period of consolidation or a chart pattern usually accompanied by low volume; volume spikes when the breakout takes place. Traders can also use volume indicators for analyzing the volume in the stock.
One of the most basic rules for swing trading is that traders should only trade liquid stocks. Of course, the daily minimum you select is arbitrary, but the most helpful example is 500,000 shares per day.
This is because one can exit high liquidity stocks quickly and with less risk of a loss from the bid-ask spread. More liquid stocks generally show lower bid-ask spreads. One should note that recognizing a bad trade or potential loss requires discipline that is one of the main tents of swing trading. Thus, swing traders can quickly exit a trade when stocks are liquid.
4. Relative Strength
One should select those stocks that are relatively stronger than the sector or the index for swing trading. This measure helps us identify both the strongest and the weakest securities or any asset classes within the financial market. Usually, the stocks which display strong or weak RS over a given period tend to continue going forward.
Volatility is one of the major factors for selecting stocks for swing trading. Volatility helps us to measure how much the stock price will move. Traders can use volatility indicators such as Bollinger bands or ATR to gauge how volatile the stock is. Swing traders should select those stocks for trading that are volatile. Large moves are generated by volatile stocks and give us a reasonable window for stops and profits.
Five Strategies for Swing Trading Stocks
We’ve summarised five swing trade strategies below that you can use to identify trading opportunities and manage your trades from start to finish. Apply these swing trading techniques to the stocks you’re most interested in to look for possible trade entry points. You can also use tools such as CMC Markets’ pattern recognition scanner to help you identify stocks that are showing potential technical trading signals. Read more about our trading tools.
1. Fibonacci Retracements
The Fibonacci retracement pattern can be used to help traders identify support and resistance levels, and therefore possible reversal levels on stock charts. Stocks often tend to retrace a certain percentage within a trend before reversing again, and plotting horizontal lines at the classic Fibonacci ratios of 23.6%, 38.2% and 61.8% on a stock chart can reveal potential reversal levels. Traders often look at the 50% level as well, even though it does not fit the Fibonacci pattern, because stocks tend to reverse after retracing half of the previous move.
A stock swing trader could enter a short-term sell position if price in a downtrend retraces to and bounces off the 61.8% retracement level (acting as a resistance level), with the aim to exit the sell position for a profit when price drops down to and bounces off the 23.6% Fibonacci line (acting as a support level).
2. Support and Resistance Triggers
Support and resistance lines represent the cornerstone of technical analysis and you can build a successful stock swing trading strategy around them.
A support level indicates a price level or area on the chart below the current market price where buying is strong enough to overcome selling pressure. As a result, a decline in price is halted and price turns back up again. A stock swing trader would look to enter a buy trade on the bounce off the support line, placing a stop loss below the support line.
Resistance is the opposite of support. It represents a price level or area above the current market price where selling pressure may overcome buying pressure, causing the price to turn back down against an uptrend. In this case a swing trader could enter a sell position on the bounce off the resistance level, placing a stop loss above the resistance line. A key thing to remember when it comes to incorporating support and resistance into your swing trading system is that when price breaches a support or resistance level, they switch roles – what was once a support becomes a resistance, and vice versa.
3. Channel Trading
This swing trading strategy requires that you identify a stock that’s displaying a strong trend and is trading within a channel. If you have plotted a channel around a bearish trend on a stock chart, you would consider opening a sell position when the price bounces down off the top line of the channel. When using channels to swing-trade stocks it’s important to trade with the trend, so in this example where the price is in a downtrend, you would only look for sell positions – unless price breaks out of the channel, moving higher and indicating a reversal and the beginning of an uptrend. Learn more about breakout stocks here.
4. 10- and 20-day SMA
Another of the most popular swing trading strategies involves the use of simple moving averages (SMAs). SMAs smooth out price data by calculating a constantly updating average price which can be taken over a range of specific time periods, or lengths. For example, a 10-day SMA adds up the daily closing prices for the last 10 days and divides by 10 to calculate a new average each day. Each average is connected to the next to create a smooth line which helps to cut out the ‘noise’ on a stock chart. The length used (10 in this case) can be applied to any chart interval, from one minute to weekly. SMAs with short lengths react more quickly to price changes than those with longer timeframes.
With the 10- and 20-day SMA swing trading system you apply two SMAs of these lengths to your stock chart. When the shorter SMA (10) crosses above the longer SMA (20) a buy signal is generated as this indicates that an upswing is in progress. When the shorter SMA crosses below the longer-term SMA, a sell signal is generated as this type of SMA crossover indicates a downwards swing.
5. MACD crossover
The MACD crossover swing trading system provides a simple way to identify opportunities to swing-trade stocks. It’s one of the most popular swing trading indicators used to determine trend direction and reversals. The MACD consists of two moving averages – the MACD line and signal line – and buy and sell signals are generated when these two lines cross. If the MACD line crosses above the signal line a bullish trend is indicated and you would consider entering a buy trade. If the MACD line crosses below the signal line a bearish trend is likely, suggesting a sell trade. A stock swing trader would then wait for the two lines to cross again, creating a signal for a trade in the opposite direction, before they exit the trade.
The MACD oscillates around a zero line and trade signals are also generated when the MACD crosses above the zero line (buy signal) or below it (sell signal).
Pros and Cons of Swing Trading
- Lower Time Commitment – Compared to day trading, swing trading demands a reduced time commitment. Because they primarily utilise technical analysis, swing traders are only required to watch their charts on daily or 4-hour timeframes. They do not need to watch their charts all day or monitor price action on smaller chart timeframes. Swing trading is, therefore, very accommodative even for traders who have daytime job commitments.
- Larger Profits On Single Trades – Swing traders always look to capture a significant chunk of profits on medium-term trends in the market. This involves looking for trades that have attractive risk/reward propositions in the market. This often results in trades that generate huge profits compared to the risks involved while taking them.
- Traders Can Depend Exclusively On Technical Analysis – The strategies applied when swing trading rely heavily on technical analysis. This simplifies the trading process because the required fundamental analysis is very basic so as to exploit the best trading opportunities in the market using the best swing trading strategies.
- Exposure To Overnight And Weekend Price ‘Surprises’ – Swing trades are typically held overnight or over the weekend. This exposes traders to risks, such as price gaps or impactful news and events that may happen during after-hours or weekends. Such events can trigger the stop loss of swing trade positions in the market.
- Can Miss Out On Quality Long Term Trends – Swing traders usually aim to enter a trade when a price swing is on the horizon. But in doing so, they may end up missing out on solid long-term trends in underlying financial assets. For instance, a stock such as Apple has appreciated for a long time and would have been very profitable for a trader that held it all along. But a swing trader would have only booked minimal profits along the way.
- Market Timing Is Difficult – Swing trading heavily relies on technical analysis to forecast medium-term price swings in the market. But market timing is an incredibly difficult endeavour even for experienced traders because price behaviour can be very random and choppy during the short term.
Swing Trading Markets
Swing trading is a versatile strategy that can be applied in a variety of markets. But some markets offer great swing trading opportunities.
Swing Trading Stocks
Stocks are particularly very ideal for swing trading. Large-cap stocks often swing between defined high and low-price points, providing traders with plenty of swing trading opportunities. Stocks usually have psychological price areas that are actively targeted by investors. Traders can ride a trend when the price is moving in a particular direction, and later take opposite trades when there is a reversal in the market. Events such as earnings reports and other company news also provide lucrative swing trading opportunities for investors.
Swing Trading Commodities
Commodities also offer very lucrative swing trading opportunities. Assets such as oil and gold tend to trend strongly during certain periods, and swing traders can take advantage of these opportunities to earn huge profits. Supply and demand news as well as the strength of the US dollar can dictate short to medium-term price action in commodities and provide investors with opportunities for implementing swing trading strategies in the market.
Swing Trading Indices
Indices are statistical measures designed to track the performance of baskets of related stocks. Swing traders tend to watch broad indices, such as the S&P 500, which tracks the performance of top 500 listed companies in the US. Such benchmark indices usually have well-known psychological price levels that are watched keenly by investors. For instance, when the price of a benchmark index is known to hit 10,000 during a recession, swing traders can look to enter sell trades when its price breaks below the 11,000-mark.
Forex Swing Trading
Forex is the largest financial market in the world. This is probably the best market for swing traders as there are usually plenty of swing trading opportunities across major, minor, and exotic currency pairs. Prices of currency pairs are influenced by multiple factors on a daily basis, and this provides numerous opportunities to place swing trades. While many traders prefer major currency pairs such as EURUSD because of lower spreads, swing trading strategies can be applied even on minor and exotic currency pairs because big price targets can offset the impact of relatively higher spreads.
Swing Trading Cryptocurrencies
Although they are a relatively new asset class, cryptocurrencies have proven to be very volatile. But this can be good news for swing traders. Cryptocurrencies, such as Bitcoin, often see their prices fluctuating all year round. There are periods of strong trends and periods of stagnation. In both market conditions, traders can pick out lucrative opportunities for placing swing trades.