Swing trading is a trading style that involves medium-term holding of positions, usually for a few days to a few weeks. Traders who practice this approach seek to profit from “swings”—price fluctuations within more significant market trends. Swing traders capitalize on movements lasting a few days or weeks, holding positions longer than intraday traders but shorter than long-term investors.
How swing trading works
Swing trading is all about identifying longer trends and following them for days or weeks in a row. Common significant trends a trader can identify and follow on the market include:
Uptrend — a series of higher highs and lows.
Downtrend — a series of lower highs and lows.
Flat or consolidation — a period of sideways price movement before a possible breakout.
These trends are further analyzed to make a trading decision. Swing traders rely on fundamental and technical analysis to determine the probability of a particular asset's upcoming price growth or decline.
Often, the first step involves fundamental information, which is used to make assumptions about an asset.
For example, an OPEC meeting may impact oil prices, so traders often rely on expert forecasts regarding the decisions that will be made at the meeting. This fundamental information serves to identify possibilities for long-term changes.
The assets are then further analyzed with technical indicators (MACD, RSI, MA/EMA/SMA, etc.) to select those with good price movement potential and find the best entry points.
Advantages and disadvantages
As with any trading style, swing trading is imperfect and may not work for everyone. To figure out if swing trading is for you or if you should stick to other styles, start by understanding the pros and cons of the approach.
Advantages of swing trading
Flexibility
Since swing trading does not require you to constantly monitor the market and stay online to make prompt decisions and close your positions, it works well for really busy people or those with a full-time job. Swing trading may be considered your source of passive income: you only invest a few hours in analyzing the markets and opening your positions, and then you simply wait for your positions to close with a profit.
Less stress
Swing trading causes much less stress to traders than day trading. That’s because a trader generally opens fewer trades and has more time to make decisions, so they are free of the pressure that is natural for short-term trading. Of course, any decision you make may need more effort and concentration per trade, but a slower pace still reduces the stress level.
Potentially higher profits
Since swing trading takes advantage of large price movements, it may result in higher profits. When a market trend is identified and a trader notices possible movements, they may open a position that will bring significant profit in a few days or weeks.
Disadvantages of swing trading
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Overnight event risks
If your positions are left open overnight, there may be unexpected news and gaps that will impact the price of your asset. You may miss the news and fail to respond appropriately. Or the news will cause the price to go opposite what you expected.
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Discipline required
You need to develop and follow your trading plan with only minor adaptations. Sticking to your predefined profit goals and risk levels may be a real challenge, so this approach is only for disciplined traders. If you tend to be tempted by short-term market movements and are prone to doubts, you may find swing trading too difficult.
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Skills and experience required
If you want to succeed in swing trading, you must know and apply technical and fundamental analysis. This comprehensive skill set is something traders accumulate with years of experience. So, while in other approaches it may be sufficient to follow expert advice and open a short trade, swing trading requires you to utilize your own skills and market knowledge.
Managing risk in swing trading
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Risk management is essential for traders practicing any style, and swing trading is no exception. Moreover, since swing traders tend to open larger positions, risk management may be even more critical.
So swing traders strictly limit risk, usually risking no more than 1—2% of their capital in a single trade. Naturally, the use of Stop Loss is mandatory for such longer trades.
Summary
Swing trading is perfect for those who want to conquer the financial markets without dedicating their entire day. You can just spend some time occasionally opening your positions, and then just wait for them to close automatically.
The good part is that swing trading combines moderate risks with the possibility of consistent profit. But you need to remember it may be more complicated than it sounds. While it may take less time, it requires a serious and disciplined approach, technical and fundamental analysis skills, and a clear strategy.
FAQ
What is swing trading?
Swing trading is an approach that focuses on opening and holding positions for a few days or weeks in a row. It involves identifying longer market trends, such as uptrends, downtrends, and consolidation and possible movements within such trends.
What is a swing trader?
A swing trader is a person who attempts to profit from “swings”—price fluctuations within more significant market trends. Swing traders hold positions longer than intraday traders but shorter than long-term investors.
Is swing trading profitable?
Swing trading is an approach that depends heavily on your skills and dedication. If you understand longer market trends, know and utilize fundamental and technical analysis, and manage your risks appropriately, you can expect your positions to bring consistent profit. However, it may sound more straightforward than it actually is because there is always the chance of unexpected overnight events that may damage your carefully planned positions.
