What Is Swing Trading?

Swing trading is a style of trading that attempts to capture gains in a stock (or any financial instrument) over a period of a few days to several weeks. Swing traders primarily use technical analysis to look for trading opportunities. These traders may utilize fundamental analysis in addition to analyzing price trends and patterns.

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What is Swing Trading?

Understanding Swing Trading

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 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.

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 from that move.

Successful swing traders are only looking to capture a chunk of the expected price move, and then move on to the next opportunity.

Key Takeaways

  • Swing trading involves taking trades that last a couple of days up to several months in order to profit from an anticipated price move.
  • Swing trading exposes a trader to overnight and weekend risk, where the price could gap and open the following the session at a substantially different price.
  • Swing traders can take profits utilizing an established risk/reward ratio based on a stop loss and profit target, or they can take profits or losses based on a technical indicator or price action movements.

Swing trading is one of the most popular forms of active trading, where traders look for intermediate-term opportunities using various forms of technical analysis. If you're interested in swing trading, you should be intimately familiar with technical analysis. Investopedia's Technical Analysis Course provides a comprehensive overview of the subject with over five hours of on-demand video, exercises, and interactive content cover both basic and advanced techniques.

Many swing traders assess trades on a risk/reward basis. By analyzing the chart of an asset they determine where they will enter, where they will place a stop loss, and then anticipate where they can get out with a profit. If they are risking $1 per share on a setup that could reasonably produce a $3 gain, that is a favorable risk/reward. On the other hand, risking $1 to make $1 or only make $0.75 isn't as favorable.

Swing traders primarily use technical analysis, due to the short-term nature of the trades. That said, fundamental analysis can be used to enhance the analysis. For example, if a swing trader sees a bullish setup in a stock, they may want to verify that the fundamentals of the asset look favorable or are improving also.

Swing traders will often look for opportunities on the daily charts, and may watch 1-hour or 15-minute charts to find precise entry and stop loss points.

Pros

  • Requires less time to trade than day trading

  • Maximizes short-term profit potential by capturing the bulk of market swings

  • Traders can rely exclusively on technical analysis, simplifying the trading process

Cons

  • Trade positions are subject to overnight and weekend market risk

  • Abrupt market reversals can result in substantial losses

  • Swing traders often miss longer-term trends in favor of short-term market moves

Day Trading vs. Swing Trading

The distinction between swing trading and day trading is the holding time for positions. Swing trading involves at least an overnight hold, whereas day traders closes out positions before the market closes. Day trading positions are limited to a single day. Swing trading involves holding for several days to weeks.

By holding overnight, the swing trader incurs the unpredictability of overnight risk such as gaps up or down against the position. By taking on the overnight risk, swing trades are usually done with a smaller position size compared to day trading (assuming the two traders have similarly sized accounts). Day traders typically utilize larger position sizes and may use day trading margin of 25%.

Swing traders also have access to margin or leverage of 50%. This means that if the trader is approved for margin trading, they only need to put up $25,000 in capital for a trade with a current value of $50,000, for example.

Swing Trading Tactics

A swing trader tends to look for multi-day chart patterns. Some of the more common patterns involve moving average crossovers, cup-and-handle patterns, head and shoulders patterns, flags, and triangles. Key reversal candlesticks may be used in addition to other indicators to devise a solid trading plan.

Ultimately, each swing trader devises a plan and strategy that gives them an edge over many trades. This involves looking for trade setups that tend to lead to predictable movements in the asset's price. This isn't easy, and no strategy or setup works every time. With a favorable risk/reward, winning every time isn't required. The more favorable the risk/reward of a trading strategy, the fewer times it needs to win in order to produce an overall profit over many trades.

Real World Example of Swing Trade in Apple

AAPL's stock price from May 2018 through December 2018 exhibiting a number of technical patterns potentially suitable for swing trading.
Real world example of potential AAPL swing trading opportunities.  Investopedia

The chart above shows a period where Apple (AAPL) had a strong price move higher. This was followed by a small cup and handle pattern which often signals a continuation of the price rise if the stock moves above the high of the handle.

In this case, the price does rise above the handle, triggering a possible buy near $192.70.

One possible place to put a stop loss is below the handle, marked by the rectangle, near $187.50.

Based on the entry and stop loss, the estimated risk for the trade is $5.20 per share ($192.70 - $187.50).

If looking for a potential reward that is at least twice the risk, any price above $203.10 ($192.70 +(2 *$5.20)) will provide this.

Aside from a risk/reward, the trader could also utilize other exit methods, such as waiting for the price to make a new low. With this method, an exit signal wasn't given until $216.46, when the price dropped below the prior pullback low. This method would have resulted in a profit of $23.76 per share. Thought of another way: a 12% profit in exchange for less than 3% risk. This swing trade took approximately two months.

Other exit methods could be when the price crosses below a moving average (not shown), or when an indicator such as the stochastic oscillator crosses its signal line.