Basics and Rules of Swing Trading

As a trader, it’s natural to want to find effective strategies that can generate additional income. However, not all strategies are suitable for novice traders. In this article, we’ll provide an overview of swing trading and explain why it’s worth considering as an ambitious trader in the stock market.

What is Swing Trading?

Swing trading is a speculative strategy where investors buy and hold assets for a few days or weeks in order to profit from short- to medium-term price movements. This approach allows traders to gain insights into how the market moves, which is why swing traders primarily rely on technical analysis to identify trading opportunities. They may also incorporate fundamental analysis to make informed trading decisions based on price trends and patterns.

Understanding Swing Trading

When entering the stock market, investors often have different goals. Some aim to achieve short-term gains, while others focus on long-term profits. Swing trading is a common strategy, especially among new and novice traders.

Typically, swing trading involves maintaining a long or short position for more than one trading session but usually not longer than a few weeks or months (although this time frame can vary). Even if some trades last for several months or more, traders still classify them as swing trades. While swing trades can occur within a single trading session, this is rare and usually a result of highly volatile circumstances.

The objective of a swing trader is to capture a portion of a potential price movement, or “swing,” in the market. As swing traders prioritize short-term trends and aim to limit losses, individual gains may be smaller. However, consistently achieving modest gains over time can result in an attractive annual return.

Pros and Cons of Swing Trading

Swing trading has its advantages and disadvantages. Let’s explore some of them below.

Benefits

1. Requires less time

Compared to day trading, swing trading demands less time. It typically involves conducting technical analysis on the daily timeframe, along with the occasional analysis of the 4-hour timeframe to identify suitable entry points as trading setups form. Intraday trading strategies may require more time spent analyzing 15 or 30-minute charts based on the chosen timeframe.

2. Lower pressure

Swing trading allows traders to spend less time in front of their computers or mobile trading apps, freeing them to focus on other daytime activities. This alleviates the psychological pressure of relying solely on trading income.

3. Potential for good returns

Successful swing trading relies on effective strategies and strong risk management skills. By combining these factors, traders can potentially achieve annual gains ranging from 10% to 50%. This is often higher than the broader market’s annual returns. Consistency and mental resilience are crucial for achieving these results.

4. Flexible fund management

Unlike long-term investing, swing trading provides the flexibility to quickly reallocate capital from poorly performing stocks to those with favorable trade setups. If a trade doesn’t work out, traders can exit with a small loss and allocate the funds to another stock.

Drawbacks

1. Time-consuming learning process

Although swing trading is beginner-friendly, traders still need to invest time in learning technical analysis concepts. This involves reading technical charts and understanding indicators. Without a solid grasp of these concepts and their correct implementation, it can be challenging to profit from swing trading.

2. Increasing trading costs

While swing trading is less expensive than day trading, it can still accumulate costs, especially when compared to long-term investing. Long-term trades can last for months, whereas swing trades are more frequent.

3. Difficult market timing

Timing the stock market is a complex task, even for experienced traders. New traders must understand this before investing funds and commit to daily learning to navigate the market effectively.

4. Exposure to price gaps

Swing trading involves leaving trades open overnight or over the weekend, making them susceptible to price gaps. These gaps can occur during after-hours trading or over the weekend due to earnings reports or other market news. Price gaps can invalidate a trader’s stop loss. To mitigate risks associated with price gaps, traders can opt for smaller trade sizes without leverage.

Day Trading vs. Swing Trading

The table below summarizes the key differences between day trading and swing trading:

Day trading	Swing trading
Trading positions are only open for a few hours of the day or before the closure of the Stocks market.	Most of the time it involves holding a trade for several days to weeks.
No great risk of unpredictability because trades close in a single day.	There is unpredictability due to the gaps up, or gaps down that might happen overnight against the trading position.
Day traders have the advantage of utilising larger trading positions of even up to 25%-day trading margin.	Swing traders may be forced to trade in small positions due to the overnight risk.
Requires more time	Lesser time to trade

Swing Trading Tactics

When it comes to swing trading, there are several tactics that traders should consider in order to be successful. These tactics involve analyzing multi-day chart patterns. Some of the most commonly used patterns include:

1. Moving average crossovers
2. Head and shoulders patterns
3. Cup and handle patterns
4. Triangles and flags

Every swing trader develops their own strategy and plan that gives them an edge in their trades. The goal is to find trade setups that often lead to predictable changes in the price of an asset. However, it’s important to note that swing trading is not easy and there is no guaranteed setup or strategy for success.

It’s not necessary to win every trade, especially if the risk/reward ratio is favorable. Even with fewer wins, a trading strategy can still generate an overall profit over a large number of trades if the risk/reward ratio is in your favor.

Real-World Example of Swing Trade in Apple

Let’s take a look at a real-world example of a successful swing trade that occurred with Apple Inc. (NASDAQ: AAPL) in October 2019. The trade began with a breakout and ended with the price reaching a new record high above $232.

Over the course of three months, the price of Apple stock sharply increased to over $320 in January 2020. This was a significant change of almost $100 per share. Moves like this are not common for large-cap stocks and can be difficult to predict.

Understanding the “Swings” in Swing Trading

Swing trading is a type of trading that is based on the idea that market prices rarely move in a straight line. Instead, traders aim to profit from small oscillations in the market. Swing traders pay special attention to moments when the market shifts direction, entering and exiting trades at these “swings. The goal is to trade the shorter trends within the overall market.

Difference Between Swing Trading and Day Trading

The key difference between swing trading and day trading is the duration of the positions. Day traders close their positions before the end of each trading day, taking advantage of small market movements throughout the day.

Swing traders, on the other hand, are not bound by this time constraint. The duration of a swing trade is determined by the timeframe of the trend, which can vary widely. Therefore, a swing trade can last anywhere from less than 30 minutes to more than a day.

Indicators and Tools Used by Swing Traders

Swing traders rely on various indicators and tools to make informed trading decisions. Some commonly used indicators include:

• Momentum indicators;
• Moving averages in conjunction with candlestick patterns;
• Price range tools.

Technical patterns include:

• Head-and-shoulders;
• Cup-and-handle.

Securities Suited for Swing Trading

When selecting securities for swing trading, it’s beneficial to find stocks that exhibit relatively calm price movements and low volatility. Ideally, these stocks should have a slight upward or downward trend with steady price action. Large-cap stocks often fit this criteria and are frequently traded on major stock exchanges.

General

In conclusion, swing trading involves identifying major price lows (swing lows) and major price highs (swing highs). The key is to determine the optimal time to enter a trade. While swing trading can be a good strategy for novice traders or those new in the market, it’s important to learn the basics and understand the risks before diving in to avoid potential losses.