What is swing trading?

Typically, a stock’s position is only held for a number of days before it's sold. It's the ‘swing’ in price, from one value to another, that gives the swing 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 enter at a level that's appropriate for you, and exit a short time later - typically 1-4 days - with a profit.

However, some traders choose to keep their position open for weeks. As a result, they may need to pay a holding cost, either positive or negative, depending on the direction of their trade and the applicable holding rate.

In this way, swing trading differs vastly from strategies like position trading, which are often employed by institutional investors who hold their assets for many years and ride the price ups and downs, only cashing out when the value has risen to an advanced or mature stage.

But for now, let’s focus on what swing trading is.

Swing trading explained

Swing trading involves short to medium-term price movements, which traders can identify by carefully analyzing price charts and other data.

The goal is to predict when a price is likely to move next, before entering the position, and then capture efficient, shorter-term profits.

This means swing traders need to be familiar with:

• Technical analysis, a way of identifying patterns in financial markets and potential future price trajectories.

• Fundamental analysis, a method of determining an asset’s intrinsic or ‘real’ value.

Using these two methods, traders might have a clearer view of where prices may move and plan their trades accordingly.

Swing trading forex

Many currencies fluctuate frequently, so some traders develop forex swing trading strategies to potentially benefit from crashes, whether from economic or political instability in one or several countries.

For example, traders can buy low and then sell when the value of a currency rises as it recovers, perhaps supported by national central banks or international lenders.

The difference between swing trading vs day trading

Unlike day traders and scalpers, swing traders might not need to constantly watch the market to identify even the smallest price movements.

Instead, it’s about recognizing changing trends over a few days or weeks and knowing when to enter and exit a position. This requires:

• Staying up to date with market sentiment and economic news to have an idea of where the market might be heading.

• Having an understanding of technical indicators on price charts (which can be a hard skill to master for less experienced traders).

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Benefits of swing trading

Swing trading comes with several potential advantages that appeal to both new and experienced traders:

• Less continuous screen time. Because positions are held over several days, traders may not need to monitor markets constantly throughout the trading session.

• Not reliant on continuous trading activity. Because positions are held over several days, some traders choose to participate alongside other professional commitments.

• Wider stop losses. Swing trading allows for broader stop-loss placements, which helps reduce the number of positions closing prematurely.
  

  Stop losses are automatic orders to sell an asset at a specific price to protect capital and limit potential losses.

• Less emotional pressure. Day traders often need to remain calm and focused on their screens for hours a day. This is less important for swing trading, which moves at a slower pace.

• Multi-day market exposure. Holding positions over several days can increase exposure to broader price movements. Traders should also consider overnight financing charges and market volatility.

Drawbacks of swing trading

Like any other strategy, it also carries risks and challenges that traders should understand:

• Strong technical analysis skills needed. Identifying the entry and exit points requires confidence with chart patterns and indicators, which beginners may need time and practice to develop.

• Overnight and weekend risk. Positions are held overnight, or even over several nights, so there’s the risk of price gapping, especially after major economic events.
  

  Price gapping is when an asset’s price increases or drops significantly with no trading activity in between, creating a blank space on the price chart.

• Potential for larger losses. Holding the position for longer may amplify profits, but it could also lead to larger losses if the trade turns against you.

• Requires patience under pressure. Even though it’s slower-paced, swing trading could still be a high-stress environment if a trade starts moving unfavourably.

• Time management considerations. While swing trading does not involve constant intraday activity, traders still need to dedicate time to market analysis and risk management.

Summary

Swing trading is a short- to medium-term strategy that typically involves holding positions beyond a single trading session. While it may be less time-intensive than intraday trading, it still requires market knowledge, active monitoring, and careful risk management.

As with any form of trading, there are risks involved. Swing traders, particularly beginners, should make sure they understand technical indicators and market fundamentals that inform 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.

Learn more about forex trading