What Is Swing Trading Guide
What is swing trading, how is it used in range-bound markets, and how does it apply to buying and selling? This guide walks through swing trading strategies with examples and the type of trader it suits best.
What Is Swing Trading?
Swing trading is a trading strategy that tries to profit from price changes, or swings, in the forex market. A swing trader usually keeps a position open for a period ranging from a single day (a day trader) to a week or two.
That said, there is no fixed rule, and some traders keep a position open for several weeks in an attempt to capture the short-term trend.
Traders do not follow the tiny changes in market prices; they care about the bigger picture. Swing traders, or day traders, usually look at the 4-hour chart, the daily chart, or the weekly chart to identify trading opportunities, using one or a variety of technical indicators and the risk factors of a single trading day.
Swing trading is not only for risk-takers who use technical analysis. Investors who base their decisions on fundamentals such as earnings and price movements in the stock market or forex, profit potential, and economic data can also be swing traders. This is because it can take several days or even weeks for the expected changes in the fundamentals to occur and affect market prices.
Bull Market or Bear Market?
Traders can take advantage of both rising and falling markets, and they usually work in line with the market’s main trend, whether up or down.
So in an uptrend chart the trader usually buys, and in a downtrend market swing traders usually aim to sell. That said, there are also counter-trend trading strategies.
Swing traders are also well suited to trading conditions where the market is range-bound. This happens when the market rises for a few days and then falls for a few days, repeating the pattern; the market can spend several months at roughly the same value.
For a position trader looking for long-term trends and profits, this is a difficult time to trade because of the high risk percentage. However, swing traders will not hold a position long enough for this to matter.
Swing traders actually look for volatility: the more volatile the market, the more opportunities there are for short-term swing trading to profit from overnight positions.
Which Markets Suit Swing Trading Best?
Since the trader is looking for volatility, some markets are more suitable for this style of trading than others. Forex, indices, commodities, and large-cap stocks tend to show the short-term moves best suited to this style of trading, more so than small-cap stocks.
How Swing Trading Works
Swing traders aim to profit from short- to medium-term price movements by using moving-average strategies. This is a trading style rather than a strategy in most swing trading that looks for average profits. Comparing swing trading against day trading, swing trading works with swinging stocks, while day trading uses technical analysis to place many trades.
So the basics of swing trading rest on this: instead of targeting 20% to 25% profit on most of your trades, the profit target is more modest, at 10% or even just 5% in the more difficult and volatile markets.
These kinds of gains may not look like the life-changing profits usually sought in the forex market, but this is where the time factor comes in once you master swing trading.
The swing trader’s focus is not on gains developing over weeks or months, since the average trade length is more like 5 to 10 days. This way you can make a lot of small profits through swing trading, which add up to large total returns over time.
So if you are happy making 20% gains over a month or more, gains of 5% to 10% every week or two can add up to large profits when using swing trading.
You still have to account for losses too, since small gains will only raise your portfolio balance if losses are kept small. Instead of the usual 7% to 8% stop loss, take losses faster, with a maximum of 3% to 4% in swing trading.
This keeps you at a 3-to-1 profit-to-loss ratio, a sound portfolio-management rule for success in swing trading, and a crucial part of the whole system, since a large loss can quickly wipe out a lot of the profit made from smaller gains.
Swing trading can still produce larger gains on individual trades: an asset may show enough initial strength that it can be held for a bigger profit, or partial profits can be taken while giving the remaining position room to run.
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Frequently Asked Questions
What are forex strategies?
A forex trading strategy is a technique a forex trader uses to decide whether to buy or sell a currency pair at any given time.
What is the best strategy on the one-minute time frame?
If an asset is moving in an upward direction, you can open a buy trade and hope the trend continues. Likewise, if a stock is moving in a downward direction, you can sell the asset and benefit from it as the price rises. Following the trend is a fairly simple strategy to use when speculating on a one-minute chart.
What is scalping?
Scalping uses larger position sizes to make smaller price gains in the shortest amount of time. It is done during the day. The main goal is to buy or sell a number of shares at the bid, or ask, price, then quickly sell them a few cents higher or lower to make a profit.
What are the best trading strategies?
Scalping is one of the most popular strategies. It involves selling almost immediately after a trade becomes profitable. The price target is any number that means you will make money from the trade.
Disclaimer: This article is for educational purposes only and is not investment advice. Trading forex and CFDs carries a high level of risk because of leverage and can lead to the loss of your entire capital, so you should not trade with money you cannot afford to lose. The profit targets, stop-loss levels, and ratios described here are illustrative and outcomes vary from trader to trader. This site may earn a commission from affiliate links to brokers at no extra cost to you.
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