What is swing trading? It’s the middle ground between buy-and-hold investing and fast-paced day trading. Traders hold stocks from a few days to weeks, aiming to profit from price swings during that time.
Swing trading involves spotting patterns, timing entries, and holding stocks until signs of a pullback. Swing traders aren’t glued to screens like day traders but are more active than long-term investors. Like other investment methods, swing trading has its own unique trading strategies and risk management approaches.
In this post, Gorilla Trades answers “What is swing trading?” by explaining swing trading basics, tactics, and guidelines for beginners.
What Is Swing Trading?
In swing trading, investors seek out short-term price trends and enter trades to earn a profit from them. Swing traders hold onto their commodities for anywhere between a couple of days and a few weeks, depending on the price action of the asset.
Swing traders use technical analysis to assess price patterns, momentum, and volume. While fundamentals matter less, swing trading focuses on how the asset moves. Traders enter at the start of a move and exit before it reverses.
This kind of trading isn’t quite as labor-intensive as day trading, in which stocks are bought and sold within the same day. You don’t need to hover over a computer to find every micro-movement in value. At the same time, it’s more active than buy-and-hold investing. It appeals to traders who want to be a little more engaged with their portfolios.
Popular Trading Strategies for Swing Traders
Swing traders have some strategies in their arsenal for finding opportunities and managing risks. Here are a few.
Trend Following
What is swing trading trend following? It’s when investors seek trends in price movement, looking for evidence of uptrends and downtrends to find logical entry and exit points. If a stock shows higher highs and lows, a swing trader might “buy the dip” and hold until the trend reverses. They could short stocks with weakening levels.
Momentum Trading
Momentum trading is all about velocity. Swing traders seek stocks that are taking off quickly in one direction. This movement is often the result of new product launches or fresh earnings reports. The goal is to enter trades at the first sign of momentum and exit before it diminishes. Trading volume and acceleration are key indicators in momentum trading.
Pullback Trading
In pullback trading, investors look for a temporary reversal in the context of a larger trend.
For example, say a stock has been uptrending for some time but enters a period of brief decline. Swing traders might wait until the downturn slows and the stock price hits a support level, where the impetus to buy outweighs the risk. They’ll “buy the dip” at a discount and watch the price resume its upward movement.
Breakout Trading
Breakout trading is the closest swing trading gets to day trading. It involves entering a trade at the precise moment the price breaks above resistance or below support. This could mark the start of a significant price movement.
For example, suppose that a stock that’s been trading between $35 and $38 for weeks suddenly breaks to $39. A breakout trader may expect that price to bolt up even further, so they buy in at $39 and hope for another surge to, say, $44. While pullback traders wait for price movements to pause, breakout traders look for a spike.
Technical Analysis and Indicators
Like day traders, successful swing traders rely on technical analysis. They have tools that help them recognize price action, trading patterns, and volume to make better decisions. Here are some of the tools and indicators they use the most.
Moving Averages
Swing traders follow moving averages over varying time frames to clarify price trends. For example, a swing trader might compare a 50-day simple moving average (SMA) to a 200-day moving average to find long-term trends, separate from transient moves and market noise. For short-term trends, they may refer to 9-day or 20-day exponential moving averages (EMAs).
When a short-term moving average crosses over a longer one, it can be a sign of a bullish trend to come. In contrast, a drop below the longer moving average could indicate a pullback.
Relative Strength Index (RSI)
RSI is an indicator for measuring whether a stock is overbought or oversold. It works as an oscillator of sorts. An RSI reading over 70 may point to a stock that’s being overbought. Levels below 30 might suggest the opposite — the stock is oversold. Swing traders use RSI along with other indicators for market timing.
Moving Average Convergence Divergence (MACD)
MACD uses two moving averages to find signs of momentum. When a MACD line crosses over its signal line, it can indicate bullish momentum. Crossing below can be a bearish sign. It’s a helpful resource for confirming the direction of a trend, whether it’s an advancement or a reversal.
Trading Volume Analysis
A breakout stock with low trading volume might not have as much potential as first thought. High trading volume tends to indicate strong interest in a commodity. Tools like volume indicators or On-Balance Volume (PBV) help swing traders back up their decisions.
Support and Resistance
The most widely used cheat codes for swing trading are support and resistance levels. A support level is the price point where buying pressure slows down. A resistance level is where the pressure to sell halts upward movement. Swing traders use support and resistance levels to chart market timing.
For example, entering a position near a support level sets up a more attractive risk-return balance than a randomly timed entry. Swing traders also set profit targets close to resistance levels to preserve their gains.
Indicators like support and resistance levels aren’t foolproof. But in general, they offer enough confirmation to stem the chances of deceptive breakouts or premature reversals.
Risk Management
Monitoring risk levels is crucial to swing traders. All traders experience losses at some point. That’s why they use tools to optimize profit potential.
Swing traders often expose only 1% to 2% of their total capital to a single trade. This allows for mistakes without risking the whole account balance. They also use stop-loss orders to exit trades to halt a slide, like exiting a stock they bought at $30 when the price descends to $28.
Skilled swing traders evaluate the risk-reward ratio to find if the potential for gains on a stock exceeds the risk. A ratio of 2:1 indicates the expected profit is double the potential loss. This helps traders maintain profits over the long term, even if they only have an above-average win rate.
Tips for Beginning Swing Traders
Entering the swing trading business is a big jump, especially for investors going in for the first time. Here are some best practices to consider:
- Experiment with a demo or paper account to practice trading without real money
- Start with a small number of trades and focus on improving execution
- Keep a regular trading journal to chart your journey
- Steer clear of low-trading stocks — they’re more susceptible to sudden moves
- Avoid emotional or greed-driven decisions and stick to your original plan
Successful swing trading takes considerable discipline and time commitment. As you grow more experienced, it can become more intuitive.
Swing for the Fences
What is swing trading? A strategic, flexible approach for capitalizing on short-term price changes. It’s slightly more forgiving than day trading — there’s a little more room for error without jeopardizing your entire livelihood. The key is consistency. With dedicated planning and practice, you can wield swing trading as a tool for success.
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