Swing trading: what you need to know

The temptation with every trade is to squeeze it until the pips squeak. That means getting in at the very bottom and getting out at the very top. However, there is much to recommend leaving a little on the table for the next person: it’s easier, it’s kinder and it may make more money in the long run. This is the premise of swing trading.

Swing trading is different to day trading in that it usually involves holding a position over multiple trading sessions rather than buying and selling within the same day. Positions are generally held for longer than a few days, but not more than a few weeks.

Swing trading aims to identify which way a security is ‘swinging’ – where the price will move next. The trader enters a position and then aims to capture a chunk of the swing before it starts to move back again. The successful trader will bag their profit and move onto the next opportunity, leaving the braver (or more foolhardy) to try to capture the final gains.

Done well, this approach can see traders make, perhaps, a series of 5% gains week by week, rather than waiting several months to earn a 25% profit or aiming to capture very short-term gains. However, it means traders have to be careful about the balance of losses and gains in their portfolios.

If a security has downward momentum, they will go short, or long if prices are trending higher. To take advantage, swing traders will need to be alert to price movements and ready to act quickly. With this in mind, most traders will set a series of alerts that let them know when a particular security has hit their price targets.

Swing traders will usually be adept at technical analysis and use short-term charting tools to judge the best time to enter and exit a trade. However, fundamental analysis can also be useful. If the Dollar is trending higher, for example, it may be useful to know that there is support from monetary policy changes as well as short-term fund flows.

Like day traders, swing traders will usually pick just a few stocks or markets on which to focus. They will need to build a good understanding of how the price moves over time and the factors that influence it. 

The key difference between swing trading and day trading is that day traders don’t hold their positions overnight. Holding securities overnight (or longer) can bring different risks. There may be news announcements, for example, that influence the price. This can make swing trading less predictable.

Swing trading sits between day trading and longer-term investing on transaction costs. Day traders will often incur significant transaction costs because they trade often. Unless managed well, this can exert a drag on their profits. Swing trading can also incur relatively large trading costs, because traders are still relying on a larger number of transactions to generate a profit.

While day trading is often a full-time job, swing trading does not usually require constant monitoring. Trades can last for several days or weeks and it’s usually possible to set up alerts and automatic trades.

Like day trading, successful swing trading relies on small incremental gains. So swing traders also need to ensure that they get the right balance between gains and losses. It’s about getting more right than they get wrong overall. For example, if a trader achieves a 10% gain from a transaction, they can have two losses of 5% elsewhere and still break even. If they only achieve a 5% gain, they can only have one loss of 5% elsewhere. Outsized losses can quickly erase gains elsewhere, so the swing trader’s risk management needs to be robust.

There are a variety of trading approaches that can be used to identify the right times to buy and sell. For example, swing traders employ Fibonacci retracement models to identify support and resistance levels. T-line trading uses the T-line on a chart to help traders make the decision on the best time to buy or sell. Japanese candlesticks are also popular, making it easy to identify trading patterns. 

Swing trading shares many of the characteristics of day trading, but is generally less intense, makes less use of leverage and can be a good way to ease into trading individual markets.

Fineco’s low-cost trading platform provides the tools you need to get started. There are a range of live webinars and videos with experts to help you understand what’s involved in swing trading. If you’re ready to get started Powerdesk offers a reliable platform experience with low pricing.