What is swing trading?

What is swing trading?

Swing trading (or swing trading) is a trading approach that focuses on short-term fluctuations in asset price movements. These can be stock indices, commodities, currencies (forex), or other financial instruments. The aim of swing trading is to take advantage of these short-term fluctuations and make a profit by entering long (speculating on a rise in price) or short (speculating on a fall in price) trades.

It is therefore typical of swing trading strategies that traders look for significant price movements (larger than the daily average) and tend to keep their positions open for up to several days and weeks. In contrast, intraday traders open and close positions within one trading day and never leave them open overnight. Swing trading strategies thus try to make the most of trends and fluctuations in the market.

If you are a swing trader and you manage to execute a swing trading strategy correctly, you can ride the market on the correctly expected price movement from its beginning to its end. This is often a cause for celebration.
 

"In general, the frequency of trades is higher for swing trading than for positional trading but lower than for intraday trading."

The popularity of swing trading

Among traders, swing trading is one of the most popular forms/styles of active trading. This is due to several factors. One of them is the fact that both fundamental and technical analysis can be incorporated into swing trading. While fundamental analysis can identify longer-term trends (but sometimes also short-term ones) by tracking various macroeconomic reports and overall world events, technical analysis helps them identify ideal places to enter or exit the market.

For example, learning how to correctly mark supports and resistances on a chart, or understanding price action, is the basis of technical analysis. Fundamental analysis, on the other hand, requires traders to actively monitor market conditions, economic news, as well as geopolitics, and general world events.

The influence of fundamentals is illustrated on the example with oil

_{WTI crude oil on the H4 timeframe}

When OPEC+ announced cuts in oil production in early April, it began to rise sharply. But then investors reassessed the situation, and concerns about persistent inflation, declining US economic growth, combined problems in the US banking sector, along with the risk of a US debt default, dampened investor confidence in oil, which then began to weaken to strong support at point A.

Advantages and disadvantages of swing trading

Benefits

1. Time-saving

   Swing trading is an active form of trading that requires less time than intraday trading. While an intraday trader follows minute charts and has to watch the screen during the trade to react quickly to market changes, a swing trader works with a higher time frame, which allows him/her to manage time more freely. Swing trading strategies are therefore suitable for people who want to trade while working/studying, for example.

2. The "wait and see" aspect

   Within swing trading strategies, traders have the option to wait for an opportunity that offers them a long move. This is not possible in intraday trading because the trader is limited by the average daily range, which is determined by the price movements of the previous days. Within this daily range, the day trader must then act. Thus, the intraday trader must work with what the day has to offer, the swing trader can wait.

3. Possibility to open multiple trades at the same time

   In swing trading, it is possible to have multiple positions open from different markets at the same time. In intraday and especially scalping trading, this is usually not possible because the trader has to react quickly.

4. Lower psychological demand

   Because swing trading is a calmer form of active trading, there is less risk of emotional trance, which cannot be said about day trading. Emotional trance is a dangerous phenomenon in trading, which causes the trader to be unable to follow the psychological and risk management rules which fairly often leads to account deletion.

5. Profit optimization

   Swing trading maximizes short-term profit potential by capturing most of the market fluctuations. In addition, by holding trades for longer periods of time and achieving longer movements, swing trading strategies have the ability to achieve a higher ratio of average potential profit to average loss. In this case, it is then possible to achieve profits even with less than a 40% probability of profitable trades.

6. Compatibility with technical analysis

   Although some traders also use fundamental analysis for swing trading, it can also be done exclusively with technical analysis. After all, when backtesting, traders also usually only test the chart and do not look for fundamental relationships that were in play, for example, six months ago.

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Disadvantages

1. Night and weekend risk

   Swing trading positions are subject to night and weekend market risk. By holding a position overnight, a swing trader bears the unpredictability of overnight risk, such as gaps against the position after the markets open or overnight spread widening at times when liquidity is low in the market. This then necessitates the need for a wider stop loss, which is larger than the stop loss for intraday trading.

2. Smaller volume of positions

   By requiring a wider stop loss, swing trades are usually executed with smaller position volumes compared to day trading while maintaining the same amount at risk per trade.

3. Disruption of the sleep cycle

   Sudden reversals in the market can lead to the loss of a position that has been in profit for several days. This tends to be a frustrating moment that forces some traders to keep checking the screen even when they should be sleeping. But sleeplessness then leads to exhaustion and weakens discipline. Because of this, some traders prefer day trading to swing trading.

4. High demands on patience

   Swing trading is all about patience. You have to be able to wait for the best opportunities. But this can be a problem for some traders. They then succumb to the urge to enter the trade prematurely due to the fear of missing the opportunity.

5. Overlooking long-term trends

   Swing traders often overlook longer-term trends in favor of short-term market movements. The result is a short trade within an uptrend or a long trade within a downtrend, which are less likely to be profitable in swing trading.

Which markets are suitable for intraday trading?

In swing trading, to maximize the potential of a given price movement, it is important that the market in question has sufficient volatility and produces clearly visible waves, i.e. swings, which traders try to trade within swing trading strategies.

With swing trading, it is possible to trade:

• A rising trend, where the trader will prefer to trade in the long direction after its current corrective decline when the price has returned to some support level.

• A downtrend with speculation short after the current corrective rise when the price has returned to a specific resistance level.

• A sideways trend, where the trader will enter trades at significant horizontal support and resistance levels.

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What time frames are used for swing trading?

Swing traders often identify the main trend on a daily chart or a 4-hour chart. They then use the hourly chart to identify the entry. Based on this, they determine the level to set stop loss and take profit.

An example of time frames using swing trading is shown in the following chart.
 

_{DAX index on the daily time frame}

Here we have a daily chart on the DAX index where we establish the overall context and trend. At point A, the support level was broken, which became the new resistance, as the break was followed by a sharp move down. This indicated a downward trend. In swing trading, it is then necessary to wait for the price to return to the resistance level in the case of a downtrend (in the case of an uptrend, it is then necessary to wait for a return to the support level) and then fine-tune the entry here on the hourly chart.

_{Debugging short entry on DAX index on H1 chart}

At point B, there was a return to the established resistance. The price tested it and broke slightly upwards. This indicates that liquidity has been taken out above this level, which was confirmed by the price going back below this resistance. At this point, the trader would have more confidence that the price could continue to fall and could have entered the trade short, i.e. speculating on the decline.

With a stop loss above the nearest high and a take profit to the nearest support (which occurred at point 1), the trade would generate a profit of 2R (where R is the unit of risk taken). If R were 1% of the account balance, then the profit would be 2% of the account deposit. This trade would last for 6 business days.

Conclusion

Swing trading refers to a trading style that attempts to take advantage of short to medium-term price movements in a traded instrument using favorable risk/reward indicators. Swing traders rely primarily on technical analysis to determine appropriate entry and exit points, but may also use fundamental analysis as an additional filter. In particular, the combination of a lower trading tempo with a smaller volume of trading positions makes swing trading a suitable style for beginner traders.

The main disadvantages then include exposure to night and weekend market risk, sudden price reversals, and the need to wait patiently for the ideal entry.

 

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