Swing Trading

A type of trading that tries to gain profits in the short and medium term.

Author: Edwin Saile
Edwin Saile
Edwin Saile
Banking | asset management

Edwin Saile, a dedicated professional with a Bachelor of Commerce in Banking and Finance from the University of Malawi, possesses over 4 years of expertise in trading financial instruments, specializing in gold, stock indices, and foreign exchange.

His seasoned background includes roles at NICO Asset Managers Limited and presently at the National Bank of Malawi, showcasing a wealth of experience in asset management and investment. He excels in technical and fundamental analysis reflecting a deep understanding of financial markets and adeptness in analytical strategies.

Reviewed By: Osman Ahmed
Osman Ahmed
Osman Ahmed
Investment Banking | Private Equity

Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology. He's currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.

Osman holds a Bachelor of Science in Computer Science from the University of Southern California and a Master of Business Administration with concentrations in Finance, Entrepreneurship, and Economics from the University of Chicago Booth School of Business.

Last Updated:October 14, 2023

What Is Swing Trading?

Swing trading is a type of trading that tries to gain profits in the short and medium term. Traders place trades based on short to medium-term fundamental and technical biases ranging from days to weeks.

Swing traders are generally exposed to risks resulting from living a trade overnight or over the weekend. Typically, trades that stay overnight are prone to have gaps, and other charges like swap fees may apply.  

The goal for these types of traders is to maximize their profits by capturing medium-term price movements while at the same time minimizing the time they have to spend on the charts analyzing the market, and searching for trade entry opportunities.

It is a crucial distinction in contrast to those that hold on to positions during the day and close by the end of the day, commonly known as day traders and scalpers. 

Swing traders will purchase securities, hold them for days or weeks, and then sell them at a remarkably higher price. Their higher profits result from capturing more pips, unlike day traders, who profit more by higher leveraging.

Besides maximizing worth and minimizing time spent on charts, swing traders aim to reduce the stress associated with market spikes, FOMO, and the urge for precision entries. As a result, swing traders execute their trades with calm and confidence.

Some commonly traded instruments by swingers include commodities, stocks, stock indices, forex, and cryptocurrency. These instruments fall within the types whose general fundamental outlook can be easily predicted.

It involves using tools like candlesticks charts, moving averages, price range indicators, and momentum indicators. Some commonly searched patterns include head and shoulders.

Examples of these types of traders include but are not limited to hedge funds, medium-sized insurance companies, people less skilled at trading (copy traders), small-medium-sized institutions, and sometimes large institutions, among others.

Understanding Swing Trading

Swing trades are made in short to medium-term time frames, using market momentum and medium-term fundamental data as a basis for the transactions. It involves holding trades for days and weeks.

This trading strategy hinges on capturing tops and bottoms in the shorter and medium term. It is achieved mainly by technically drawing critical levels on the charts and aiming for prices to hit those levels. 

This trading strategy can be very lucrative as it offers high price movements given the period of holding the asset, particularly in a range-bound market. This strategy is also good as it covers transactional costs due to heavy positions placed in the market.

Swing trading typically involves identifying ranging markets, drawing out the key levels in the ranging markets, and then placing trades with the direction of the range. They usually sell at resistance levels and buy at support levels.

A trader might also use this strategy to hedge against risk over the short-medium term. For example, it can be done by position traders who believe the price may pull back for a while before continuing.

Swing Trading Requirements

To best suit swing trading, it is imperative to have advanced charting tools, indicators, and quality research capabilities about the underlying assets. In addition, trades must understand the drivers of securities over the short and medium term.

Predicting a medium-term market trend is not as easy in the financial markets. Therefore, an in-depth analysis must be conducted to identify areas to place trades.

Knowing when a movement is losing momentum and when a reversal might likely occur is also imperative. It helps to avoid missing optimum exit points and reduces the amount that could have been made after waiting a long time. 

Market analysis for swing traders must encompass all the factors in the economic environment, including the likelihood of some critical events that might affect the prices of the underlying assets. Knowing the dates of critical economic changes might help in predicting movements.

Some of the things to take into consideration include (these have the capabilities of leading to short-term price rallies); 

  • Inventories, e.g., crude oil inventories
  • Earnings reports
  • Auctions
  • And significant economic variables e.g, Interests rates, CPIs, and sales reports

Advantages of Swing Trading

It generally offers the advantage of not having to stay glued to the charts, as do day traders. Because the trade goals are short to medium-term, these traders place their trades and then wait for days and weeks even before they have to look at the charts.

It gives the privilege of catching all profits within a range instead of entering and closing trades intraday because positions long standing in the market will accumulate all the pips along the way until its optimum end.

It also gives people with more other things to do the chance to participate in the financial markets. Instead of scalping, traders must actively look at the charts for opportunities.

Professionals like doctors whose time is limited to be glued to the chart have the advantage of placing their positions and closing at a relatively later point while dedicating their time to other things.

This strategy also favors corporations with enough trading funds to build longer-term portfolios, thereby reducing trading risk by opening several short-term positions intraday. In addition, the massive chunk of funds helps the corporations accumulate heavy profits by the end of the range.

It enjoys economies of scale as the costs associated with trading are distributed across large profits from medium-term positions. Costs associated with trading include brokerage fees, spreads, and other operating expenses like internet and trading equipment.

Disadvantages of swing trading

The risks of swing trading are not the same for all individuals. Some swing traders with a good strategy can build enough capital to be set for life. However, some traders will run into trouble if they're not careful.

For example, if you swing trade without a proper technical and fundamental backdrop, you might take on more risk than you are comfortable with. As a result, it could lead to over-leveraging, resulting in more considerable losses in the future.

You should always ensure that your trades are calculated based on factors you can predict to ensure success. For example, a swing trader has to be right about the medium-term market direction otherwise might lose a considerable chunk of funds.

Swing traders should be aware that the following risks are eminent:

  • Range breaks: A range can suddenly break. It could be due to a sudden event in the market that affects the underlying asset's price, e.g., a Natural disaster or war. 
  • Gaps: leaving trades overnight is prone to experiencing wide gaps in the market. Usually, the price does not precisely open at a price closed the previous day or week.
  • Overnight charges: Most brokers charge overnight swap fees. Although these fees may be minimum, they reduce the profits the traders could have gotten if they had not left their trades to stay overnight.
  • Missing Earning reports. These releases bring volatilities into the markets in short to medium term.
  • Changes in interest rates. Central banks may change interest rates in response to economic conditions, e.g., falling or rising demand. These changes trigger massive volatilities and short-term trends in the market.

Should you start swing trading? 

This type of trading can be quite challenging to anyone new to the trading world. It is a matter of preference for every individual. Some prefer to speculate in stocks, while others look to safer places like mutual funds.

Capital is a crucial constraint for anyone looking to start their career as a swing trader because it does tie up a significant amount of capital for the medium term. Therefore, we have listed some pointers to guide you in becoming a swing trader.

  • Firstly, you need to know about trading and market prediction in the financial markets and have a good idea about risk management, brokerage & taxes, capital, etc.
  • Spend a lot of time studying charts, understanding market technical and fundamental drivers, and perfecting your strategies. Make dummy paper trades to track the success ratio of your trading strategies.
  • Control your emotions when you are on the losing side. Know that the market is supreme and accept ‘small’ losses. Revenge trading emanates from emotional trading and will wipe out your entire capital.

Swing trading markets

Swing traders usually prefer range-bound markets, i.e., oscillating between a few defined price points, because range-bound markets & assets are easier to predict. The traders can sometimes pick out the top & the bottom of the range correctly. 

These traders prefer stocks because the fundamental data underlying share prices give more insight into the overall mid-term direction of the stock in question. In addition, company earnings, as well as management itself, can guide investors in the direction of the market.

Each time a corporation has a major revolutionary event, the stock prices react over the short to medium term. Take the example of Apple discovering a new technology to incorporate into their devices; this will lead to the stock going up for at least a considerable amount of time.

Another market well suited for swing traders is the commodities market. Commodities are primarily seasonal and respond to short-term shortages and supplies. Traders take advantage of the commodity seasons to place trades.

A good example is a natural gas and oil. For certainty, the war in Ukraine is affecting their prices. In addition, issues of sanctions will lead to their prices responding accordingly over the medium term. 

Other examples of commodities following medium periods of the trend include precious metals like gold (a haven), silver, and copper. Other items include wheat, coffee, cocoa, and crude oil. 

The strategies for analyzing all these lie in the asset's underlying technical and fundamental aspects. Traders must be well versed with technical setups and basic drivers of the commodities market. 

Lastly, indices are one of the most preferred types of instruments for trading by these types of traders. These may be stock indices, currency indices, and commodity indices. These indices are a weighted average of prices of several assets in a class of instruments.

A good example includes stock indices like the S&P 500, which represents the weighted average price of Fortune 500 companies on the New York stock exchange. Likewise, the Nasdaq represents the group of tech companies in the United States of America.

The reason why indices also follow medium-term price movements is that they reflect the overall state of the economy of the underlying country. If a sector is good, most of the stocks in that sector are prone to experience booms so do the indices over a medium period.

For this reason, indices are regarded as indicators of the economy's state over time. The same applies to the dollar index, a weighted average of the major trading currencies with the dollar, such as the Euro, Pound, Yen, Swiss franc, etc.

Swing Trading Tactics

Although swing traders use fundamental data to analyze the market, they mostly use technical indicators, especially range-bound indicators, to gauge the points where the price is like to get to and bounce from over the medium term. One of the most used indicators is the Bollinger bands.

Other traders also use moving averages for swing trading. These are dynamic support and resistance lines formed by the underlying assets' previous prices. 

These averages can be plotted on different time frames depending on the scope of coverage preferred by the trader.

Generally, when the price is in an up trend, the investors tend to buy the market when the price touches the moving average from the downside, acting as resistance.

Traders may also use several moving averages on a chart to determine when a direction is about to change. Ideally, when a short period and long period moving averages are plotted together, the crossing of the two tells a story about an eminent changing direction.

When a short period moving average crosses a long period moving average, investors interpret that a directional change is about to occur, and they tend to close their sale positions, if any, and open new positions.

Researched and authored by Edwin Saile

Reviewed and Edited by Aditya Salunke I LinkedIn

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