Swing trading

Swing trading is a short-term trading strategy designed to make a profit out of changes in price. Typically, a position in a stock or another financial asset is only held for a number of days before it's sold. It's the ‘swing’ in the stock’s price, from one value to another, that gives the trading method its name.

The key is to keep a close eye on the movement in value of various kinds of securities, so that you can get in at a level that's appropriate for you, and get out a short time later – one to four days is common – with a profit. However, some traders may choose to keep their position open for weeks, depending on their strategy. Choosing to keep the position open will mean traders may have to pay a holding cost, depending on the direction of their trade and the applicable holding rate.

In this way, swing trading differs vastly from long-term trading strategies, such as position trading. It is often employed by institutional investors, who tend to hold their assets for many years. These investors look to ride the asset price's ups and downs, only cashing out when the asset’s value has reached an advanced or mature stage, having risen significantly.

What is swing trading?

A swing trade is a method by which a trader can look to capture efficient, shorter-term profits, given the typically narrow timeframes these trades are open, and the relative ease with which they can be set up and managed. Swing traders must carefully analyse price charts and other data in order to identify movements in an asset’s value. Thus, traders will be aiming to determine when a price is likely to move next before entering the position, in order to capture any potential profit from the respective move.

This means swing traders must familiarise themselves with technical analysis, using these techniques as a set of guiding principles for their decisions. They should also have an understanding of fundamental analysis, examining the asset’s fundamentals to support their technical evaluation.

hourglass represents the limited amount of time in swing trading

Swing trading strategies

Swing trading forex

Due to inherent fluctuations in many of the world's currencies, some traders develop forex swing trading strategies to benefit from crashes. These can be the result of economic or political instability in one or several countries. For instance, traders can buy low and then sell when the value of currencies rise as they recover, perhaps supported by national central banks or international lenders. Learn more about how to trade on forex news.

How to swing trade stocks

Swing traders will try to capture upswings and downswings in the stock market when there is differing price action. Swing trading is particularly effective in the share market due to its volatility and the way it is affected by many economic indicators and news announcements. Read our guide to five effective strategies for swing trading stocks to gain further insight.

Price action strategy for swing trading

Price action is a strategy that involves monitoring price charts and historical data without the use of technical indicators. As swing trading is a short-term strategy, it is essential that traders are experienced in the analysis of price charts and trending waves in order to determine appropriate entry and exit points. By monitoring swing highs and swing lows on candlestick charts, price action traders can spot patterns, including trends and reversals, which gives them more knowledge of the markets and whether there may be a potential reversal in trend.

Best indicators for swing trading

  • Relative strength index (RSI) is a popular momentum oscillator that is used to determine the future direction of a market, and to see whether an asset is overbought or oversold. The default period for this indicator is 14 days but can be shortened according to each trading strategy, in particular for swing trading.
  • Simple moving average (SMA) is perhaps the most popular technical indicator for identifying trends. It is customisable over different time horizons, therefore it can be used for both short and long-term trading strategies.
  • Moving average convergence divergence (MACD) is used to identify new trends on price charts and decipher whether they are more bullish or bearish. It is a momentum indicator that calculates the strength and momentum of a trend within a financial market.
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Swing trading vs day trading

A properly executed swing trading strategy can enable traders to get the most out of a short period of time. Unlike day traders and forex scalpers, it’s less crucial to stay glued to screens as you don’t need to constantly watch the price movements. Swing traders need to be aware of changing trends over a few days or weeks, as opposed to the small price movements over minutes or seconds. This does mean staying up to date with market sentiment and economic news to have an idea of what direction the market might be heading. Having this understanding, and an understanding of technical indicators on price charts, is what informs a trader when to enter and exit a position.

The freedom of swing trading is why it’s one of the most popular strategies in use, but that's not to say it's for everyone: there is an art to it. Swing traders need to have the ability to quickly scrutinise charts and data, and use historical information to know exactly when to buy or sell. Less experienced traders might find it hard to master this skill, while the more seasoned, or professional traders, may have the expertise to profit from it. It's not always possible though to get in and out of large volumes of assets quickly.

Being properly prepared before the markets open and maintaining a strict watch on the assets you're interested in or hold – as well as keeping an eye on the financial media – should give you a feel for how markets are performing on any given day, to help you to make the most out of swing trading.

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Benefits of swing trading

  • This style of trading is compatible with those who have full-time jobs and can’t dedicate hours each day to trading.
  • As swing traders often have a day job, it means they have another form of income should they make a loss, something which a lot of day traders don’t have.
  • You can set wider stop-losses, so this should help reduce the number of positions closing prematurely.
  • Day traders often need to be able to remain calm and stay focused on their screens for hours each day; this is less important for swing trading which happens at a slower pace.
  • It can be a more efficient use of capital by holding positions for higher returns, rather than opening new positions each day. However, choosing to do so will mean traders must take holding costs into account.

Drawbacks of swing trading

  • You need to feel confident with technical analysis in order to identify the entry and exit points. While this may come naturally for professional traders, those who are looking to start swing trading may need more practice analysing price charts.
  • Due to the position being held overnight, or over several nights depending on the trader’s time horizon, you run the risk of gapping. Certain economic news over the weekend could result in a vastly different price when the market reopens.
  • Holding the position for a longer period of time may result in larger profits, but it can also result in larger losses.
  • Swing trading requires patience and could still be a high-stress environment if a trade begins to move unfavourably.

How to start swing trading

Traders can open a live account to get started trading right away. Alternatively, you can open a demo account to practise your swing trading strategy first with £10,000 of virtual funds. With a live account, you will have access to our spread betting chart forum, where traders of all experience levels can share information about the financial markets, including tips and strategies for swing trading. Read about spread betting vs CFDs to see which product is best for you.

Swing trading as a part-time job

For day traders, it’s often their full-time job, so they can focus solely on their trades and dedicate more time to improving their strategy, whereas swing traders still need to balance trading with their day job. This is because swing traders do not need to monitor price charts all day for tiny price movements, therefore there is more room to trade at home or on-the-go, as a hobby.

Swing trading platform

Our award-winning swing trading platform, Next Generation, comes complete with tips and updates for the financial markets. In particular, swing traders can make the most of our price projection tools, technical indicators and drawing tools in order to display your data as clearly as possible. Price action strategies in swing trading are particularly simple to monitor with our customisable chart types. Familiarise yourself with our online swing trading system by registering for an account below.

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Summary: is swing trading worth it?

Swing trading is an alternative strategy for those who favour short-term trading, but can’t dedicate hours to trading every day. While it requires a comprehensive understanding of technical analysis, it can result in more efficient returns, relative to day trading. As with any form of trading, there will be risks involved. Swing traders, particularly those just starting out, should ensure they have a solid understanding of the technical indicators, as well as the market fundamentals, that are informing 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.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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