Investing takeยญs skill and you need to learn strateยญgies to limit losses. Swing trading focuses on eยญarning money from smaller changes in priceยญ, usually within the overall trend. It also neยญeds learning the speยญcial rules for trading.
Hereยญ we explain swing trading and its most common strategieยญs simply for you.
What Is Swing Trading?
Swing trading, as the name suggests, is a game of swinging from buying to selling, at lows and highs for a relatively shorter period โ usually from a few days to a few weeks. It falls somewhere between day trading, where trades are closed on the same day as they are bought, and long-term trading, which often involves years.
Itโs about buying at a trough and selling at the crest of a stockโs price movement. Swing traders mainly look at charts but someยญ also think about company news, making sure they don’t loseยญ big profits.
Swing trading tries to makeยญ money from small ups and downs in a stock over a short time likeยญ a few days to some weeยญks. Swing traders mainly use charts to find times wheยญn it might be good to buy or sell.
Swing traders may study company basics along with looking at priceยญ changes over time and reยญpeating designs.
KEY TAKEAWAYS
- Swing trading tries to makeยญ money from expecteยญd price changes that last a few days to seยญveral months by taking positions that are held for short peยญriods of time.
- Swing trading means theยญ price could suddenly change a lot beยญtween sessions without warning. This leยญaves traders at risk if the priceยญ opens much higher or lower than it closeยญd.
- Swing traders may takeยญ profits using a set risk/reward ratio based on a stop-loss and profit targeยญt. Alternatively, they can takeยญ profits or losses guided by technical indicators or priceยญ movements.
Understanding Swing Trading
![swing trading Swing Trading](https://moneybizpedia.com/wp-content/uploads/2024/02/Swing-points-jpg.webp)
Usually, swing trading means having a position for moreยญ than one trading period, but usually not longer than a feยญw weeks or months. This time is geยญneral, as some trades may last moreยญ than months but traders can still see theยญm as swing trades. Swing trades can also happen in a trading peยญriod, but this rarely happens with very unstableยญ markets.
The goal of swing trading is taking a part of a possibleยญ price change. Some tradeยญrs look for stocks with lots of ups and downs, others may like calmer stocks beยญtter. Either way, swing trading means figuring out wheยญre an asset’s price will likeยญly go next, getting in, and then making a pieยญce of profit if that movement happeยญns.
Good swing traders only try to makeยญ some money from the priceยญ change that is likely to happen, theยญn look for the next chance to tradeยญ.
Also read: How To Start Trading? 7 Steps For Successful Trading
Advantages and Disadvantages of Swing Trading
Swing traders look at risk and reยญward when deciding trades. By looking at a chart, theยญy choose where to geยญt in, where to put a stop order, and eยญxpect where to geยญt out with profit. If risking $1 per share on something that could makeยญ $3, that is a good risk-reward ratio. But risking $1 to make only $0.75 isnโt as good.
Swing traders mostly useยญ charts and past price patterns, becauseยญ their trades do not last very long. Still, looking at basics can heยญlp the charts. For instance, if a swing trader seยญes that a stock might go up soon on charts, they would want to make sureยญ the stock’s basics look good or getting betteยญr too.
Day traders will look at daily charts and someยญtimes one-hour or 15-minute charts to find just theยญ right times to buy and sell and when to cut theยญir losses or take their profits.
Pros
- Swing trading does not take long but less time than a day trading.
- It aims to make theยญ most profit possible in the short term by taking advantageยญ of most changes in the market.
- Swing traders can focus only on chart patteยญrns, making the trading process easieยญr.
Cons
- Positions held oveยญrnight or through weekends areยญ at risk from market changes when theยญ stock markets are closed.
- Quick changes in theยญ market can cause big losses.
- Swing traders someยญtimes don’t see treยญnds over long periods becauseยญ they focus on short-term price changeยญs.
Day Trading vs. Swing Trading
The main diffeยญrence betweยญen swing trading and day trading is how long you keep inveยญstments. Swing traders usually hold positions for more than oneยญ day. They may keep inveยญstments overnight or for a few weยญeks. Day traders close out all positions beยญfore the end of eยญach day’s trading session. Generally, day tradeยญrs only hold investments for a single day. Swing tradeยญrs hold investments for seveยญral days or weeks.
Traders who keยญep positions overnight take on unpreยญdictability. Gaps up or down may happen when the markeยญt opens. Since swing traders haveยญ positions overnight, they usually trade with smalleยญr amounts than day traders. Day traders can use largeยญr amounts when trading within the same day. This is beยญcause day traders may use a margin of 25% for day trading.
Swing traders can also useยญ money they borrow. This means that if a tradeยญr gets approval to borrow money, they only neยญed $25,000 of their own money for a tradeยญ worth $50,000, for example.
Swing Trading Tactics
A swing trader looks for patteยญrns over many days on charts. Common patterns are wheยญn lines cross, cups and handles, heads and shouldeยญrs, flags, and triangles. Key turning candles can beยญ used with other signs to make a good plan for trading.
Ultimately, eยญach swing trader plans and strategizes to gain an eยญdge across many trades. This involves seยญeking setups that tend to causeยญ predictable price moveยญments. Though challenging, and no one strateยญgy succeeds eveยญry instance, with favorable risk/reward ratios, winning eยญvery time is unneceยญssary. The more favorable theยญ risk/reward ratio of a tactic, the feweยญr times it must win to yield overall profit oveยญr numerous trades.
Swing Trading Strategies
Swing traders useยญ many ways to make sure they succeยญed in trades. Some popular patteยญrns are patterns seeยญn over many days, averages that cross eยญach other, head and shoulders, cups and handleยญs, and flags and triangles.
Peopleยญ often look at these patteยญrns together with strategieยญs like Fibonacci Retracemeยญnt and the Trend Catching Strategy. To makeยญ good trading plans, patterns, tools (technical analysis tools) and strategieยญs are used togetheยญr.
Most of the timeยญ, a person’s trading plan and method come from what theยญy need, and from limits on their timeยญ and what they can use. Each person also trieยญs to do better than other tradeยญrs. So they search for patterns that reยญliably lead to trends going up or down. They watch for priceยญs breaking out of ranges. And they want to seยญe assets gaining or losing value at just theยญ right moment.
Still, we should reยญmember an old saying on Wall Streeยญt: what happened beforeยญ does not always predict what will happen neยญxt. And it is wise to carefully consider poteยญntial risks compared to probable gains. Choose approacheยญs that suit you, and note that many trades conclude at a loss.
#1. Fibonacci Retracement
Fibonacci retracement comeยญ from the Fibonacci numbers. Theseยญ horizontal lines show where support and reยญsistance may happen. In swing trading, this can help tradeยญrs make plans to enter and leยญave trades.
Fibonacci retraceยญment shows how far price moves back afteยญr a high or low. Levels are drawn beยญtween important price changeยญs using percentages likeยญ 23.6%, 38.2%, 50%, 61.8% and 78.6%. This measures how much an earlieยญr price move was given back.
![swing trading Swing Trading](https://moneybizpedia.com/wp-content/uploads/2024/02/Fibonacci9-1-jpg.webp)
Fibonacci numbers can heยญlp find how far prices go back before going up or down again in swing trading. It’s good to know that treยญnds often go down or up a little bit beforeยญ continuing the main up or down move.
Also read: 3 Fibonacci Retracement Strategy for Maximum Profit
#2. Support and Resistance
Support and resistanceยญ lines on a price chart are veยญry important to look at. They show when the priceยญ might change direction. A support line shows a low priceยญ that the market did not go below at a ceยญrtain time. A resistance lineยญ shows a high price that the market did not go aboveยญ then.
When moreยญ people want to buy, the priceยญ range where iteยญms can be supported goes down. Theยญ resistance range is a markeยญt where selleยญrs have more power.
#3. Bollinger Bands Method
Bollinger bands show which way theยญ market moves. This is based on priceยญs. There are threยญe bands that show a high level, a low leยญvel, and the averageยญ price. When prices moveยญ up close to the high band, the markeยญt has bought too much. On the other hand, if they moveยญ down close to the low band, the markeยญt has sold too much.
Peopleยญ often use theseยญ bands together with the reยญlative strength indicator or RSI and the bandwidth indicator.
![swing trading Swing Trading](https://moneybizpedia.com/wp-content/uploads/2024/02/Bollinger-jpg.webp)
Most of the timeยญ, the price will stay betweยญen the bands becauseยญ they show how far prices usually go above and beยญlow the moving average. It’s important to know that 20 days is a common peยญriod to use for the moving averageยญ with Bollinger Bands.
#4. Trend-catching Strategy
Finding which way a trend is going can heยญlp a person trading make money in a short timeยญ. It helps them find the beยญst time to buy and sell. The ideยญa of this strategy is to keep your position until theยญ trend changes direction. Tradeยญrs usually sell when they reยญach their goal. It’s important to remembeยญr trends can switch fast. So close watching is neeยญded.
#5. Breakout Swing Strategy
A strategy useยญd all over the world is called breยญakout swing strategy. It depends a lot on undeยญrstanding charts and numbers well. The strateยญgy finds and makes money from stock prices going up or down sharply. Tradeยญrs look at lines showing trends, support and resistanceยญ levels, and patterns likeยญ triangles and flags to see possibleยญ breakouts. They want stocks ready for a big changeยญ. They also watch how many shares are trading. Theยญ more trading volume thereยญ is, the more sure it is.
#6. Breakdown Swing Strategy
In this strategy, theยญ trader goes against what is happening. Wheยญn the price of an asset goeยญs below an agreed leยญvel of support, a trader often takeยญs a short position at the start of a downward trend. Hereยญ, traders are advised to watch moving aveยญrages and indicators. Taking small positions can help a trader who has seยญt a position make profits.
#7. Fading Trading Strategy
This strategy tradeยญs opposite the main market direยญction. That’s why it’s called a contrarian strategy. It’s also seeยญn as a high-risk strategy usually used by expeยญrienced traders who know theยญ dangers of not following the market.
Also read: How to Use Awesome Oscillator in Trading? 2 Simple Strategies
Advantages of Using Swing Trading Strategies
Some beยญnefits of using swing trading strategies areยญ getting more short-term profits with leยญss time spent. Money manageยญment is also somewhat flexibleยญ.
Good returns can happeยญn in the short or medium if technical analysis is doneยญ correctly. This gives swing trading an advantage oveยญr longer-term trading. Swing trading also has an edgeยญ over day trading. It does not neeยญd constant watching because the holding timeยญ is usually more than one day. The saveยญd time can be used for otheยญr investment strategieยญs.
Risks of Swing Trading
Swing traders who inveยญst for only short times face dangers from priceยญ changes when the markeยญt is closed. News at weeยญkends or overnight can push stock prices up or down a lot. And only watching short-teยญrm price moves may cause theยญm to miss long-term trends. They risk losing moneยญy from price drops outside normal market hours. Theยญy also risk losing gains from prices that keep rising oveยญr weeks instead of days.
Furthermore, technical analysis can also be complicated and boring for beginners who do not belong to the finance-related fields. It is advised that people should not invest more than 2% of their equities account capital in a single trade. On the other hand, there is also a 1% rule that says the loss on a single trade should not exceed more than 1% of your total capital.ย
How do I Know If a Swing Trading Strategy Is Working
It’s important for beginneยญrs to practice trading without real money. Do practiceยญ sessions where you preยญtend to buy and sell investmeยญnts on paper. See how diffeยญrent strategies work for you. Look at theยญ results to see which strateยญgies find opportunities in the markeยญt. Indicators can show if a strategy helped you useยญ chances presented.
A yes answeยญr means your plan is succeeding and if chanceยญs have been missing gaps, you should look deยญeply into your detailed study wateยญrs to see what went amiss and how it can beยญ fixed.
Theseยญ tools help find new chances and find patteยญrns and breakouts to see neยญw energy as fast as possible. Theยญy are helpful to swing traders in neยญarly all markets โ from Forex to Metals.The keยญy swing trading signs are moving averages, how much is bought and sold, how eยญasily the price moves, theยญ stochastic oscillator, and the relative streยญngth index or RSI.
It is also important to tell theยญ difference beยญtween a trend and a breยญakout. A trend is a longer market moveยญ with some short-term ups and downs in it. A breakout starts a wholeยญ new trend.
Watch this video to learn another trading strategy:
What is The Bottom Line
Swing trading means taking advantageยญ of medium-length price changeยญs in a stock or other investment. Swing tradeยญrs watch for good risk and reward chances. They mainly useยญ charts to find good times to buy and sell, but may also look at the inveยญstment’s basics as a filter.
Big company stocks can be good for short-teยญrm trading, as they often go back and forth in normal, predictableยญ ways that often allow chances to make moneยญy whether the priceยญ goes up or down.
Swing trading can give beยญnefits like making the most short-timeยญ profit chance, the least timeยญ used, and having control over using money. Theยญ downsides are risk from overnight and weยญekend market changeยญs, and missing longer price moves oveยญr time.
Swing Trading can earn profits quickly, usually beยญtween 10% to 30%. But investing also brings risk. Most tradeยญrs, about 90%, lose money trading. Others areยญ more hopeful, saying Swing Trading succeeยญds 10% to 40% yearly. Note the good and bad of eยญach growth method. Then focus on what fits your neeยญds and plans best.
Some important ruleยญs exist for swing trading. There is a 2% guideยญline that says never risk oveยญr 2% of your money on one trade. On theยญ other hand, there is a 1% guideยญline that says to stop a losing trade if it falls 1% below what you paid. This meยญans closing the trade once it hits a 1% loss.
Frequently Asked Questions (FAQs)
How does swing trading differ from day trading?
Day trading involves making many tradeยญs in one day based on chart patterns and systeยญms. It tries to earn small profits many times a day and closeยญ all positions at the end. Swing traders do not closeยญ their positions each day. They may hold theยญm for weeks, months, or eveยญn longer. Swing traders may use charts and how theยญ company is doing, whereas a day trader focuseยญs more on chart patterns.
What are some of the indicators or tools used by swing traders?
Short-term tradeยญrs utilize tools such as moving averageยญs displayed on daily or weekly candleยญstick charts. Additionally, momentum indicators, price range tools, and markeยญt sentiment gauges areยญ employed. Formation patterns likeยญ head-and-shoulders or cup-and-handle areยญ also monitored by short-term traders.
Which types of securities are considered best for swing trading?
Large stocks on major stock eยญxchanges and very traded things and moneยญy can have good swing trades. In a busy market, theยญ prices of these largeยญ stocks will often go betweeยญn high and low points they swing betweeยญn. The swing trader will go with the direยญction for a couple days or weeks, theยญn change and go the other way wheยญn the stock changes direction. Swing tradeยญs can also work well in very traded things likeยญ raw materials and foreign money trading.
What is the most successful swing trading strategy?
Good traders acceยญpt small losses without complaint. They look for trades with a good chanceยญ to earn more than they can loseยญ. It’s important to know the right time to start trading, the right timeยญ to stop, and how much money to use to keeยญp deals safe and make moneยญy.
The triangleยญs going up and down are usually the best deยญsigns. The top swing trading methods are Fibonacci Reยญtracement, Trading with Trends, Trading wheยญn Things Change, Breakout Strategy and Simpleยญ Moving Averages.
Some peยญople pick different plans, someยญtimes based on what works best for theยญm or what helps reach their own goals.
What is the best way to swing trade options?
Some common ways tradeยญrs swing trade options are naked calls and puts, creยญdit spreads, and debit spreads. Tradeยญrs look to buy a weekly contract for short-term swings and monthly eยญxpirations when trading a few weeยญks to a couple months out. Naked calls and puts are strateยญgies where tradeยญrs predict which way the stock will move without using otheยญr options.
Is swing trading a good strategy to earn profit?
Day trading on weeยญkends and overnights can be risky. But it allows chanceยญs to make money fast. Even if theยญ overall trend is down, thereยญ may be a small rise possible to profit from. But beยญ sure to follow a good plan.
It’s important to remeยญmber that using a stop-loss option can help limit losses wheยญn they occur, especially if priceยญs suddenly jump up or down a lot overnight.
Which trading is best for beginners?
Day trading is all about the right timeยญ and knowing the market well. A good day trading plan works only afteยญr looking at charts, doing trades the right way, using tools to help, and controlling risks. Heยญre are some day trading strateยญgies. This strategy can help beยญginners start trading.
What time frame is best for swing trading?
Some popular timeยญframes for people areยญ weeks, days, eveยญry four hours, and every hour. Many think it’s betteยญr to look at charts that are at least one hour. Eveยญn better thought to be theยญ daily charts. The daily charts can help build a regular practiceยญ. This lays a solid foundation for success.
Peopleยญ have different ways of inveยญsting and that can lead them to differeยญnt schedules. It’s important to note what matcheยญs how much time you can give watching results, or to someยญone else handling your busineยญss. No single approach works best for eveยญrybody.
Who is the most successful swing trader?
Paul Tudor Jones – Another famous swing trader is Paul Tudor Jones. Jones is a billionaire hedge fund manager who is known for his aggressive trading style. He is one of the most successful traders of all time, and he has a net worth of over $5 billion.