Swing trading is a short-term trading strategy designed to make a profit out of changes in price.
Typically, a position, often in a stock, is only held for a number of days before it's sold. It's the ‘swing’ in the stock’s price, from one value to another, that gives the trading method its name.
The key is to keep a close eye on the movement in value of various kinds of stocks, so that you can get in at a level that's appropriate for you, and get out a short time later – one to four days is common – with a profit. However, some traders may choose to keep their position open for weeks, depending on their strategy. Choosing to keep the position open will mean traders may have to pay a holding cost, either positive or negative, depending on the direction of their trade and the applicable holding rate.
In this way it differs vastly from strategies, like position trading, often employed by institutional investors, among others, who hold their assets for many years. Generally, these investors will look to ride the asset’s price ups and downs, only cashing out when the asset’s value has reached an advanced or mature stage, having risen significantly.
Swing trading explained
Swing traders must carefully analyse price charts and other data in order to identify movements in an asset’s value. Thus, traders will be aiming to determine when a price is likely to move next, before entering the position, in order to capture any potential profit from the respective move.
This means swing traders must familiarise themselves with technical analysis, using these techniques as a set of guiding principles for their decisions. They should also have an understanding of fundamental analysis, examining the asset’s fundamentals to support their technical evaluation.
A swing trade is a method by which a trader can look to capture efficient, shorter-term profits, given the typically narrow timeframes these trades are open, and the relative ease with which they can be set up and managed.
Swing trading forex
Due to inherent fluctuations in many of the world's currencies, some traders develop forex swing trading strategies to benefit from crashes. These can be the result of economic or political instability in one or several countries. For instance, traders can buy low and then sell when the value of currencies rise as they recover, perhaps supported by national central banks or international lenders.
Swing trading vs day trading
A properly executed swing trading strategy can enable traders to get the most out of a short period of time. Unlike day traders and scalpers, it’s less crucial to stay glued to screens as you don’t need to constantly watch the price movements. Swing traders need to be aware of changing trends over a few days or weeks, as opposed to the small price movements over minutes or seconds.
This does mean staying up to date with market sentiment and economic news to have an idea of what direction the market might be heading. Having this understanding, and an understanding of technical indicators on price charts, is what informs a trader when to enter and exit a position.
The freedom of swing trading is why it’s one of the most popular strategies in use, but that's not to say it's for everyone: there is an art to it. Swing traders need to have the ability to quickly scrutinise charts and data, and use historical information to know exactly when to buy or sell. Less experienced traders might find it hard to master this skill, while the more seasoned, or professional traders, may have the expertise to profit from it. It's not always possible though to get in and out of large volumes of assets quickly.
Being properly prepared before the markets open and maintaining a strict watch on the assets you're interested in or hold – as well as keeping an eye on the financial media – should give you a feel for how markets are performing on any given day, to help you to make the most out of swing trading.
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Benefits of swing trading
- This style of trading is compatible with those who have full-time jobs and can’t dedicate hours each day to trading.
- As swing traders often have a day job, it means they have another form of income should they make a loss, something which a lot of day traders don’t have.
- You can set wider stop losses, so this should help reduce the number of positions closing prematurely.
- Day traders often need to be able to remain calm and stay focused on their screens for hours each day; this is less important for swing trading which happens at a slower pace.
- It can be a more efficient use of capital by holding positions for higher returns, rather than opening new positions each day. However, choosing to do so will mean traders must take holding costs into account.
Drawbacks of swing trading
- You need to feel confident with technical analysis in order to identify the entry and exit points. While this may come naturally for professional traders, those who are looking to start swing trading may need more practice analysing price charts.
- Due to the position being held overnight, or over several nights depending on the trader’s time horizon, you run the risk of gapping. Certain economic news over the weekend could result in a vastly different price when the market reopens.
- Holding the position for a longer period of time may result in larger profits, but it can also result in larger losses.
- Swing trading requires patience and could still be a high-stress environment if a trade begins to move unfavourably.
- For day traders, it’s often their full-time job, so they can focus solely on their trades and dedicate more time to improving their strategy, whereas swing traders still need to balance trading with their day job.
Forex swing strategies
Due to inherent fluctuations in many of the world's currencies, some traders develop forex swing trading strategies to benefit from crashes. This can be down to economic or political instability in one or several countries, for instance, giving traders an opportunity to buy low and then sell when rises in the value of currencies occur as they recover, perhaps supported by national central banks or international lenders.
People engaged in swing trading carefully analyse price charts and other data so they can see movements in the value of the assets they're considering taking a position in, and determine between the highs and lows when to act. This is all part of their trading strategy, and a swing trade can potentially be an efficient way to make a profit from the markets, as it requires less time and effort than other styles of trading.
Maximise short trading times
A properly executed swing trading strategy can enable traders to get the most out of a short period of time. Unlike day traders and others, it's less important to stay glued to screens and charts as you watch the data constantly change.
That's why swing trading is one of the most popular forms in use, but that's not to say it's for everyone: there is an art to it, and swing traders need to have the ability to quickly scrutinise charts and data and use historical information to know exactly when to buy or sell. Less experienced traders might find it hard to master this skill, while the more seasoned, or professional traders, may have the expertise to profit from it. It's not always possible though to get in and out of large volumes of assets quickly.
Being properly prepared before the markets open and maintaining a strict watch on the assets you're interested in or hold – as well as keeping an eye on the financial media – should give you a feel for how markets are performing on any given day and help you to make the most out of swing trading.
Summary
Swing trading is an alternative strategy for those who favour short-term trading, but can’t dedicate hours to trading every day. While it requires a comprehensive understanding of technical analysis, it can result in more efficient returns, relative to day trading.
As with any form of trading, there will be risks involved. Swing traders, particularly those just starting out, should ensure they have a solid understanding of the technical indicators, as well as the market fundamentals, that are informing their trade decisions. A swing trader should also strongly consider having a stop-loss in place, should there be breaking news that affects the market direction they’re favouring.
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Disclaimer
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
