Swing trading is a style of trading that involves holding a position for a period of time ranging from a few days to a few weeks. It is a more or less active trading approach, in which the trader tries to capture a good part of a market trend that is established.
The swing trader looks for a good entry point, then closes their position at key levels where the market could turn around. Swing means wave. Since a trend is formed by a series of waves, the goal of the swing trader is to make the most of it.
Top 3 Brokers for Forex Swing Trading
Pepperstone, eToro and FXCM are brokers suitable for swing trading.
|Spread + Commission in pips (EUR / USD)||0.8||3||0.8|
|Execution speed||Fast||Slow||Very fast|
The 3 Best Brokers for Swing Trading on Stocks, ETFs and Indices
XTB, Avatrade and Forex.com are good brokers for swing trading in the stock markets.
How to Swing Trade?
Swing traders generally use technical analysis in combination with other fundamentals factors.
Swing traders typically work on four hour (H4) and daily (D1) charts. They can use fundamental analysis and technical analysis to guide their decisions.
The swing trader has a prolonged exposure to the markets since he can maintain his positions over several days. As prices can move strongly against his position he takes a smaller position than the day trader or the scalper, who often uses more leverage.
That being said, swing traders can use low leverage. Margin trading, in swing trading, can be risky. Especially if the volatility increases considerably after you have taken a position.
To analyze the markets, the tools most commonly used by swing traders are chart patterns and technical indicators such as moving averages. Congestion figures such as triangles, rectangle and bevel are the starting point for new trends, which swing traders can exploit. Likewise, the head and shoulders pattern and the double top are turning points that offer interesting trading opportunities.
Stop Loss and Take Profit
Swing trading requires setting a larger stop to avoid being out of a position prematurely. While scalpers have tight stop losses of a few pips, swing traders have stops placed sometimes hundreds of pips from their entry point. This obviously implies reducing the size of the positions. Thus, the swing trader is less affected by market noise.
Take profit can also be placed hundreds of pips from the entry point. Swing trading positions often offer a better return / risk ratio than day trading and scalping.
A Better Return / Risk Ratio?
The swing generally allows you to have a take profit placed at a distance further than the stop loss. This means that we are aiming for much more than what we risk losing. A risk / return ratio greater than 1 is and probabilities of success higher than 50% are often necessary to be profitable as a trader.
Which Instrument Should you use for Swing Trading?
All instruments can be used for swing trading. Each market behaves differently. Indices can be stable over several weeks, currency pairs can set regular waves during a trend. Stocks can fluctuate rapidly over a short period of time.
The best environment is when the financial instrument describes regular bullish and bearish waves and there’s volatility in the market. In this way, swing traders can anticipate reversals, to position themselves to buy or sell.
How to Swing Trade Effectively?
To swing trading, there are two options available to traders.
- Focus on an instrument and exploit different patterns.
- Specialize in a pattern which you are looking for on different instruments.
In the first case, we can for example follow the EUR / USD daily chart, on which we can trade breakouts, pullbacks, but also ranges. We try to take advantage of all the movements of the instrument.
In the second case, one is satisfied with a graphic configuration, for example the breakout or breakout of a triangle pattern. We look for this pattern on a selection of different financial instruments, for example, on the stocks that make up the Nasdaq 100, or on cryptos.
By proceeding this way, we organize our trading better and we avoid taking random configurations.
The Qualities of the Swing Trader – Is Swing Trading Right for You?
There are several resources to learn all about swing trading: podcasts, books, blogs, etc. They will teach you the technical aspect of swing trading. But this is not enough. The psychological aspect is also important and it is essential to swing trading profitably.
Stick to Your Trading Plan
There will be ups and downs, it’s inevitable when trading on the stock exchange. But it is important for a swing trader to stick to his trading plan at all times. There will be times when you don’t have trading signals. At such times, it will be necessary to fight against the temptation to initiate positions of little relevance.
Furthermore, in the H4 and D1 time units, trading signals may take a long time to fully form. The swing trader must be patient enough to wait for the desired pattern to be fully formed and validated.
Taking Volatility Into Account
Risk appetite is different for everyone. You need to find the level of risk that’s right for you. For example, you can start by not risking more than 2% of your account on a single position. There is no common figure for all traders. Some would be perfectly comfortable risking 5% per trade.
When setting your stop loss, however, remember that market volatility can increase at any time after an event that shakes the markets. The 100 stop pips you had envisioned may turn out to be much more when you factor in slippage.
Take a Long Term Approach
Swing trading is different from scalping where you expect to generate small profits all along the trading session. The swing trader must measure his results over the medium and long term, over several months. The trader should not be obsessed with a particular position. In the jargon, we say “do not fall in love with your position or trade”. This means that the trader should remain pragmatic and apply their trading plan objectively.
Pay Attention to Economic News
Swing traders keep their positions longer in the market. This means that they can be impacted by the different economic events, company results, news, etc.. The markets are constantly on the move, in reaction to the news.
Many sources, including brokers, provide analysis and commentary on the markets. Used correctly, the news could help you spot interesting trading opportunities. They can also help you plan your entry and exit, or get out of positions to limit your losses.
Never Stop Learning
There is a wealth of information available to help you develop swing trading strategies. Consult various resources on the internet, as well as books to discover different swing trading strategies.
The idea is to see which approaches or strategies work best for you. You can use a free demo account to test different strategies. For a given approach, it may need to be tested for several months to see if it works or not.
Don’t Swing Trade If You Have These Traits
Although less demanding than scalping or day trading, swing trading requires patience and discipline.
Outside of long-term investing, swing trading is the least active approach to trading. A single trade can last days, or even weeks, before the goal is reached, or the trade is closed.
Swing trading therefore belongs to patient traders who do not feel the need to close their position until their goals are met. If you change or close your positions on impulse or feel the need to take your profits quickly, swing trading is probably not for you.
Eager to Trade Actively
You may find the urge to analyze and intervene in the markets very often. Swing trading does not need to be very active on the stock market. Many swing traders only look for opportunities once a day, when the US markets close. If you want to trade fairly actively it would be better to turn to scalping or day trading.
Things to Consider in Swing Trading
The ability to spot a trend and buy or sell early is essential for swing trading effectively. The trader must also be able to anticipate reversals.
The swing trader often needs a prolonged trend in order to make sufficient profits. To maximize his profits, he must follow the trend. This involves positioning yourself on the right side of the market fluctuation and maintaining your position to take advantage of much of the price extension.
Following the trend has several advantages. You reduce trading costs because your positions last longer. In addition, historically, the biggest gains on the stock market have come about in this way. You cannot expect to make 20% on a position by scalping unless you take insane risks. But this is possible with swing trading, without taking leveraged risk.
Momentum is very much linked to the trend. Momentum trading is a strategy that relies on the strength of price movements. Momentum trading is about buying and selling instruments based on the current strength of the trend. If the trend is bullish, we wait for pullbacks to buy the instrument. If the trend is bearish, we also wait for a retracement to sell towards momentum.
The idea is that the trend will move in the same direction. Momentum traders seek to identify the strength of the trend in a given direction, then open a position to take advantage of some of the underlying trend. Then close their positions when the price starts to pullback. They start the operation again at the end of the pullback.
A reversion to the mean is a concept in which the price of an instrument will always return towards its fluctuating average after being overbought or oversold. It is somewhat the reverse of momentum, which states that the generated trend is likely to continue.
The followers of mean reversion buy a security after an unusually large drop in its price. When it experiences a sharp decline, there is usually a good chance that it will return to a normal level. The same logic applies for a title that is rising sharply.
The latest events linked to Covid-19 are an illustration of this. The markets fell dramatically in March. But from mid-March, prices began to correct the decline to stabilize at a level which is admittedly lower than the pre-crisis prices, but which can be considered as “normal” levels for a period of decrease linked to this epidemic. The excessive decline thus creates an opportunity for investors who hope that prices will recover.
Volatility can affect the swing trader as he often has long exposure to the markets, unlike short-term traders who close their position after a few hours.
On January 15, 2015, the Swiss National Bank (SNB) abolished its floor rate of 1.2 Swiss francs to 1 euro. This unexpected move resulted in a drop of more than 2,000 pips on some CHF currency pairs. Some traders then saw their balance enter the negative zone, because stop losses were not guaranteed.
You must be aware of this kind of phenomenon, although rare, can still shake the markets.
Swing trading does not have the same intensity as scalping or day trading. But it requires discipline. You have to take care to organize yourself to monitor the markets during a period of the day, in the evening for example.
Outside of this period, you should not modify or manage your intraday positions. Otherwise, you will go from swing trading to day trading, which probably would not be in your trading plan.
Choosing the optimal position size, depending on volatility, is important. Some instruments are more volatile than others. They therefore require a stop loss and take profit placement further from the entry point. Likewise, when market volatility increases, you have to reduce the size of your positions and move your stop loss and take profit away.
Manual or Automated Swing Trading?
Very often, swing trading does not require automation of your strategy, because in theory you do not intervene very often in the markets. Swing trading can be done with a basic platform, which allows you to do analyzes and place orders. A screener may be necessary to find the stocks that interest you.
Comparison Between Day Trading and Swing Trading
There is no one style of trading that is better than the others, it all depends on your goals and your psychological abilities.
The time frame over which you trade can impact your profitability. Day traders open and close multiple positions during the same session. In contrast, swing traders take a few positions per month. These two styles of trading can be suitable for a variety of traders depending on the amount of capital, time, and risk aversion.
You cannot say that one style of trading is better than the other. It’s, in fact, about knowing which style suits you best based on your availability and risk aversion. However, one does not exclude the other. A day trader can very well hold swing positions over several days.
|Swing trading||Day trading|
|Prolonged exposure to the markets||Exposure limited to a few minutes or even hours|
|Limited use of leverage||Use of high leverage for small accounts amplifying losses|
|Better risk / return ratio Return / risk||ratio sometimes less than or equal at 1|
|Less exposed to market “noise”market||Very exposed to”noise”|
|Requires little time||May take several hours a day|
Swing Trading Strategies
There are different methods for swing trading. The use of supports and resistances, combined with Japanese candle figures is widespread among traders.
Support and Resistance
Trading of support and resistance levels is very simple and works well for swing trading. On major time units such as the daily or weekly chart, support and resistance are more relevant and are followed by most participants in a market.
The most common use of S / R is the concept of support turning into resistance and vice versa. When a support is crossed on the downside, it tends to become resistance. Likewise, when resistance is crossed on the upside, it tends to become support. These levels thus offer relevant entry points for traders.
This indicator is widely used in technical analysis. It allows you to anticipate the resumption of a trend after a pullback. The most followed retracement levels are: 23.6%, 38.2%, and 61.8%. These are the retracement percentages of an already formed extension.
When a Japanese candlestick reversal pattern forms on these levels, it is a relevant trading signal that can be exploited.
In the chart above, a pattern of hesitation called “tweezers” forms at the 38.2% (0.382) level after a pullback. Which foretells the resumption of the upward trend.
Channels are formed when the trend is very regular, with ascending and descending waves of the same amplitude. In an uptrend, the low points of a channel are entry points that swing traders exploit. Likewise, in a downtrend, channel highs are attractive entry points for selling.
By applying the principle of momentum, the swing trader can take advantage of a channel multiple times, until the price comes out.
The breakout of support and resistance can be very profitable, as it is often accompanied by a rapid rise or fall in prices. The most relevant breaks are those of chart patterns, triangle, rectangle, bevel, etc. These are figures of congestion, the breakout of which by the price is accompanied by rapid fluctuation.
We have on this chart a break of a descending triangle, followed by a sharp drop in price.
Some swing traders specialize in breakouts because they allow you to make relatively quick wins.
The Advantages of Swing Trading?
Saving on trading costs and flexibility are some of the main advantages of swing trading.
1- Swing trading allows you to benefit naturally from stock fluctuations. These never follow one direction, they go up and down. The swing trader is not affected by minor retracements within a trend.
2- Swing trading is more economical than active short-term trading. Over a month, we can only take a few positions. We therefore pay much less costs than a scalper.
3- It’s a flexible trading approach, which you can do without disrupting your usual schedule (work, family, etc.). The same cannot be said for day trading.
4- The swing trader often has a good return / risk ratio for his positions. Its stop loss can be 150 pips from its entry point and its take profit 500 pips.
Disadvantages of Swing Trading
Swing traders are exposed to stock market crashes and other market turmoil.
1- Prolonged exposure to a security can maximize your earnings, but increases the risk of enduring a stock market crash. You increase your risks of encountering an economic or earning event outside trading hours when the markets are closed and you can’t close your position.
2- Swing trading can be boring, with many months without any profits.
Swing trading is recommended for beginners, as it is a trading approach that requires less risk. In addition, you can do it without disrupting your schedule. Of course, at the beginning, it will take the time to learn swing trading and test strategies.
If you have a profitable and sustainable method, you can generate more or less passive income annually, since it is a not very active style of trading. However, you should be aware of the risk of trading in the markets.
There are several methods of swing trading. The important thing is to specialize and to have a plan and a validated strategy.
The Nasdaq 100 and the DAX are dynamic indices that are popular with swing traders.
You can swing trade in any market, as long as it has a minimum of liquidity.