Swing Trading: Definition, Examples & Must-Have Indicators

June 9, 2021
by Leon Marshall,

Article Recap

Swing trading is a style of trading that attempts to capture short- to medium-term gains in an asset.

When first entering the trading scene, you may notice that there are multiple approaches that you can take. One of these is swing trading. It relies on investment in short to mid-term trades of 1 day to several weeks, with some exceptions reaching months.

As a result, swing traders may be able to achieve returns similar to those of day traders, without spending as much time on it each day. Trades that require several days or weeks to unfold mean that there is no need to consistently be on the lookout for changes in the market. So swing traders are more likely to look for swings upwards and downwards when picking their open and close positions. Additionally, there are fewer commissions and fees to pay than when day trading, which then have a smaller impact because of the potentially larger profits per trade.

Swing Trading: The Basics

That said, it is good to note that like all trading, risk is still apparent in swing trading. For example, while trading amid the coronavirus pandemic, the overnight risk of market changes is greater for swing traders than for day traders, as there is no way to mitigate the effects even on individual stocks. Trend days are usually once-in-a-month days with trades being high-conviction throughout the whole day. Benefitting from them may lead to reasonable gains for swing traders. But to day traders there are many more opportunities when they can take advantageous positions. Additionally, swing traders are charged with a swap rate for their open positions overnight.

While this comparison between pros and cons can turn some people off, it is the reality of swing trading. To tackle it in the most effective way, an appropriate trading strategy is needed. In order to see results, consistency is necessary, and the strategies that can prove to be the most successful require time and deliberate effort to develop.

A swing trader’s goal is to capture the movement in a market in a multi-day or multi-week time frame. Even a simple trading strategy should involve taking several steps to build a strong foundation. A set of rules to better classify price movements can help you do that by splitting them into trending or range-bound.

Trends, Ranges & Indicators

Charts and patterns overlaying the map of the World with tall buildings in the background.

Markets that are trending are represented by chart movement from bottom left to upper right. Of course, this may vary, but what defines this as a trend is the pattern; overall it follows this same trajectory. Conversely, range-bound markets are those where no trends can be observed. This means that the chart moves up and down without it becoming clear if buyers or sellers are in control.

At this stage comes the element of consistency. Once a market environment is identified, it usually persists in that state, be it a trending or range-bound market. However, identifying this is but the first step in the process of building a swing trading strategy. Next, you will need to set rules that will be the guidelines to capturing the movements in a risk-adjusted way.

That can be done by utilising technical indicators, or pattern-based signals determined by the volume, price, or open interest of a contract or security. There are many such indicators that can be used for swing trading. For example, a stochastic oscillator, on-balance volume, moving averages, price rate of change indicator, commodity channel index, and more.

An Example

We will take the most common one as an example, which is the moving averages (MA). The lines that fluctuate above and below the flatline of zero show trends and momentum. Observing, as mentioned, is the first step to determining how much strength a trend has. Looking for the distance of the price and trend are what helps swing traders look for potential reversals and hence, entry or exit points. To keep it simple, when the MA lines are above zero for a steady period of time, this is considered an upward trend and a signal to buy. Downward trends are the exact opposite, when the MA line goes below zero, it may be time to consider selling.

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It is important to mention that, as with all trading approaches, swing trading does not guarantee profit or success for everyone. A common saying has formed around this idea. It states that 90% of active traders lose money and only 10% break even or make profits.

All things considered, a question some people may have on their mind can be “Is swing trading legal”. Swing trading in itself is not illegal. There are no restrictions on the starting amount, but it is necessary to consider the risk and align that with your finances.

All times are AEDT.