Swing trading entails profiting from the purchase and sale of assets due to swings or short-to-medium-term movements in price within the market. In swing trading, the emphasis is on swings rather than on every single price move.
Swing trading involves profiting from the trends that occur on shorter or intermediate timeframes. The aim of a swing trader is to recognize support and resistance areas so that he can enter the trade once the trend reverses. For those asking what is swing trading, it is a style focused on capturing short- to medium-term moves in the market.
While the day trader does many trades in a day and closes them all before the end of the market day, the swing trader is interested in identifying stronger trends that will last for longer periods. This explains why swing trading is attractive to new traders more than any other style of trading.
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Swing trading is based on the concept that markets rarely go straight up or down. Instead, they swing back and forth as they get to where they’re going. At the same time, they set up high highs and high lows when there is an uptrend, and low highs and low lows when there is a downtrend. This happens because of the existence of market psychology, which generates natural fluctuations caused by constant action and reaction from the part of traders and investors.
In order to make successful swing trading trades, one of the most important aspects that should be considered is the application of technical analysis to determine turning points within these counter-trend actions. Technical indicators that are commonly applied include moving averages, momentum oscillators like the Relative Strength Index, MACD, and support and resistance levels derived from price action. Many traders consider these among the best indicators for swing trading.
The S&P 500 offers swing traders multiple entries at the 20-day moving average during this rally.
Swing traders try to enter positions at key support and resistance levels, with many waiting until the reversal is underway before entering a trade. They also have well-defined targets for the trade, often seeking to exit just before or just as the move ends. While many swing traders target volatile stocks with wide price fluctuations, others choose stocks with more stable trends.
Because swing traders want to enter at reversal points and usually have well-defined profit targets, assessing each trade’s risk/reward ratio is essential. While a trend trader might enter a rising market and hold on for as long as the market’s going up, swing trading strategies must determine beforehand exactly where they’ll enter and exit, placing a tight stop-loss order to minimize any losses.
For instance, depending on a particular method’s win-loss ratio, many swing traders wouldn’t risk $1 per share on a trade without a reasonable expectation of earning $3 from the win. On the other hand, risking $1 only to potentially make $0.75 is unwise unless your win-loss ratio is extremely high.
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Swing trading occupies a middle ground between day trading and position trading, which is driven more by fundamentals and involves holding on to positions for weeks or months at a time. This is why many compare intraday trading vs swing trading when choosing a style.
The trend is your friend, as the saying goes. This is why entering a short-term pullback from a strong trend, just as it reverses and the dominant trend resumes, is one of the most successful swing trading strategies. Early in a trend, swing traders may look to enter on a touch of the 8-day moving average, while others might wait for a bounce off the 20-day.
Trading with support and resistance is one method that is based on the fact that certain levels of the price were resistance or support for the asset. Therefore, traders expect that the price will be rejected at these levels and enter the trade within the zone of support or resistance.
In this type of trading, traders are interested in assets where prices consolidate and form a tight range and where, after reaching this level of resistance or support, they enter a trade when the price breaks through these levels. These setups are core forex swing trading strategies as well.
After a strong price movement, traders may expect some retracement before continuing their movements in the same direction. The Fibonacci retracement relies on specific “golden” numbers, which include 23.6%, 38.2%, 61.8%, and 161.8%.
An experienced swing trader spots specific chart patterns, which indicate reversals or continuation of trends and provide a pre-identified entry point that reduces risks by showing how to cut losses in case of failure. These patterns include head-and-shoulders, double tops and bottoms, and flags and pennants.
While not based on Fibonacci numbers, 50% and 100% are equally important levels.
Now, let us walk through an example of a swing trading strategy for Apple (AAPL), using the following chart:
An experienced swing trader is watching the price action of Apple stocks. The stock has been trading sideways, roughly between $185 and $195, while forming a classic bullish cup-and-handle pattern in June and July. The pattern suggests an upside breakout, and the trader is looking for an opportunity to go long on a move over the short-term peak formed in late July.
In mid-July, the trader notices that there is a breakout in the stock as Apple breaks above $195 on an increase in volume. Given that this is consistent with what the trader observed, he buys the stock at $196 with a stop-loss of about $185 (below the bottom of the handle formation).
As expected, the stock continues to trend upwards through the summer period, breaching the initial price target and touching levels around $230. Rather than closing the trade at the initial price target, they decide to move their stop loss higher and keep on with the position by using the 20-day moving average as the stop loss level. Many traders using the best indicators for swing trading rely on this approach.
By mid-September, Apple starts to decline and pull back from the highs. It is the first time that the stock has fallen after the breakout, but it finds support at around $216. With Apple rallying again toward $230 in early October, there are some things that concern the trader:
It cannot make a higher peak compared to the previous one made in September.
There is negative divergence developing between the stock price and some technical forex indicators, such as RSI.
There is less volume accompanying the rally compared to the original run.
Upon Apple’s decline below the support level of $216 in mid-October, the trade was closed out at the price of $215, resulting in a profit of $19 per share or 9.7%.
Swing traders often use multiple indicators for confirmation of their forex trading strategies. A trader might decide to go long when a stock reaches oversold levels on the RSI, demonstrates positive divergence with the MACD, and also approaches a significant support level. These are common in forex swing trading strategies and stock setups alike.
When comparing intraday trading vs swing trading, the major difference is holding time. Intraday traders liquidate their positions on the same day, whereas swing traders keep their positions open for days or even weeks. In contrast, learning about swing trading for beginners may prove less daunting for most individuals.
Swing trading leverages technical analysis and a market’s natural ebb and flow to capture profit. The swing trader stays in his or her position for days or even weeks, by finding out areas of support and resistance within the development of the trend or consolidation.
Whereas the investor can live through long-term loss-making periods and the day trader can take advantage of volatility to the minute, intraday trading vs swing trading remains a common debate. However, swing trading requires skills because it calls for adopting a particular strategy as opposed to emotion-driven actions such as hopes, fears, and greed.
For anyone researching what is swing trading, studying proven swing trading strategies, learning the best indicators for swing trading, and starting with swing trading for beginners, resources can provide a strong foundation. Even swing trading for dummies guides often emphasize disciplined execution and risk management.
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