What is Swing Trading?

By Louis H-P on October 3, 2018

Swing trading is sometimes compared to fundamental trading, as positions are opened and closed over a longer period than a typical technical trade. Most fundamental traders are copying swing traders. This is because market changing news, such as a change in economic policy will take a few days to create the profit a swing or fundamental trader is looking for. But this description of swing trading is a simplification. Swing trading is a style of trading that sits between day trading and trend trading.

What is a swing trade?

Swing trading are short term strategies designed to take advantage of price swings in financial markets and is also known as momentum trading. It’s a strategy that focuses on taking smaller gains in positive short term trends and cutting losses quicker. Swing trading positions are usually held for a few days to a couple of weeks, but can be held longer. The goal is to capture a larger price move than is possible in a day trade. By examining technical indicators, day traders look for currency pairs whose price movements show a trend – signalling the time to buy or sell. If trading stocks, swing traders are not interested by the long-term value of a given stock.

What is a swing trading strategy?

Let’s start with the basics of a swing trading strategy. Instead of targeting 20% to 25% profit per trade, the target should be 10%, or even just 5% per trade. The swing trader’s focus isn’t on gains developing over months or years; the average trade is over a couple of days and weeks. In this way, you accumulate a lot of small wins and benefit from the effect of compounding. Regular 5% to 10% gains can add up to significant profits.

What are the right stocks for swing trading?

When trading stocks, the key to success is picking the right kind of stocks. Picking the most liquid stocks such as large caps will be most helpful as there is always a buyer and seller. In a live market, these stocks will usually be range-bound, swinging between a high and a low. The swing trader will jump onto the trend in one direction for a period of time, only to switch to cash in and join the new trend when this develops. This can easily be applied to various currency pairs such as USD/EUR and EUR/GBR which are very liquid.

The right market

The swing trader prefers when markets are going nowhere. The ideal trading opportunity is when stock or FX markets rise for a couple of days, then decline for the next few days. These market trends will repeat the same general pattern regularly giving plenty of chances to profit. A couple of months might pass with markets having traded within a range, but the swing trader has had many opportunities to trade the day to day moves,  be it up or down.

When traders play the uptrend

An upward trending stock or currency rarely moves in a straight line, but instead in an upward zig-zag pattern. A security might go up for several days, followed by going down for a few days, before going back up again. This upward zig-zag would suggest some sort of predictability, namely that the security is said to be in an uptrend. As a long-focused swing trader, you should look for an initial movement upward as the time to enter a trade. Candlestick patterns can help you work this out.

Capture gains on the upside

Since it is unknown how long a correction may last, you should enter a swing trade only after it appears that the security is showing an upside move. When analysing a trading opportunity, consider using a favourable risk-to-reward ratio. Your potential profit should be at least twice as much as your potential loss. If the ratio is higher than that, the risk reward is considered attractive; if it’s lower then it is not worth the risk.

Focus your mind

Unlike a lot of long-term investors, swing traders’ focus is not the fundamentals of a stock or economic policy, although they need to stay abreast of developments. Knowing which central bank is raising or lowering rates, which government is changing its economic policy is useful for all technical traders. More important is finding a trend and trading accordingly.

Swing trading has its risks

Though based on common sense, swing trading is risky. The successful private trader is focused only on generating consistent gains in short time spans, making the strategy at risk of unexpected economic news. Meanwhile, swing traders have to be aware that a stock could open significantly differently from the day before.

Conclusion

Swing trading is one of the best trading styles for a new trader to get started. As Swing trades normally take a while to deliver, a trader has to develop an ability to detach themselves whilst also getting regular feedback on the quality of their trades. A trader looking to trade a trend has significant profit potential if they are able to identify a trend which will last for a couple of weeks. Here the experienced and disciplined trader has the advantage over new traders. Learning the discipline to let trades play out will turn you into a consistently profitable trader.

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Louis H-P

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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