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.

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 with a profit. However, some traders may choose to keep their position open for weeks, depending on their strategy.

Swing trading differs slightly from long-term trading strategies. 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.

When swing trading on our platform, traders are required to trade using margin​, also referred to as leverage. This means that you only need to deposit a percentage of the full value of the trade to open a position and gain exposure to the financial markets. The margin requirement will vary depending on the asset that you want to trade, but can start from as little as 3.3%. Choosing to keep the position open overnight on margin positions will also mean that traders may have to pay a holding cost​, depending on the direction of their trade and the applicable holding rate.

We offer spread bets and CFDs, which are leveraged products that you can use with a range of short and long-term trading strategies, including swing trading. This is useful for traders who want exposure to a larger position size, but it is important to remember that profits and losses are equally magnified. If the market moves in the opposite direction to your position, this will result in a much larger loss of capital, as it will reflect the full value of the position, rather than just the margin requirement.

Learn more about margin trading​​.

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.

A swing trading strategy involves traders ‘buying’ a security when they suspect that the market will rise, or ‘selling’ an asset when they suspect that the price will fall. Swing traders can take advantage of the market’s fluctuations as the price swings back and forth, from an overbought to oversold state.

Price action​​ is a strategy that involves monitoring price charts and historical data without the use of technical indicators. As swing trading is a form of short-term trading, 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 candlestick patterns​​, including trends and reversals, which may help to give them more knowledge of the markets and whether there may be a potential reversal in trend.

Learn how to short-term trade​​.

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.

There are numerous strategies you can use to swing-trade stocks. In the below example, we've shown a swing trade based on trading signals produced using a Fibonacci retracement​. The three most important points on the chart used in this example include the trade entry point (A), exit level (C) and stop loss (B). Any swing trading system should include these three key elements.

Guide to diagram:

A – Trade entry point

B – Stop-loss

C – Price forecast (exit level)

D – Fibonacci technical analysis

The stop-loss level​ and exit point don't have to remain at a set price level as they will be triggered when a certain technical set-up occurs, and this will depend on the type of swing trading strategy you are using. The estimated timeframe for this stock swing trade is approximately one week. It's important to be aware of the typical timeframe that swing trades unfold over so that you can effectively monitor your trades and maximise the potential for your trades to be profitable.

When swing trading stocks, it is essential to choose the right assets to trade, as bad market selection could be a major weakness in your trading strategy. Make use of these tips to enhance your market selection efforts.

The Fibonacci retracement pattern can be used to help traders identify support and resistance levels​, and therefore possible reversal levels on price charts. For example, stocks often tend to retrace a certain percentage within a trend before reversing again, and plotting horizontal lines at the classic Fibonacci ratios of 23.6%, 38.2% and 61.8% on a stock chart can reveal potential reversal levels. Traders often look at the 50% level as well, even though it does not fit the Fibonacci pattern, because stocks tend to reverse after retracing half of the previous move.

A stock swing trader could enter a short-term sell position if price in a downtrend retraces to and bounces off the 61.8% retracement level (acting as a resistance level), with the aim to exit the sell position for a profit when price drops down to and bounces off the 23.6% Fibonacci line (acting as a support level).

Support and resistance lines represent the cornerstone of technical analysis and you can build a successful swing trading strategy around them.

A support level indicates a price level or area on the chart below the current market price where buying is strong enough to overcome selling pressure. As a result, a decline in price is halted and price turns back up again. A swing trader would look to enter a buy trade on the bounce off the support line, placing a stop-loss below the support line.

Resistance is the opposite of support. It represents a price level or area above the current market price where selling pressure may overcome buying pressure, causing the price to turn back down against an uptrend. In this case, a swing trader could enter a sell position on the bounce off the resistance level, placing a stop-loss above the resistance line. A key thing to remember when it comes to incorporating support and resistance into your swing trading system is that when price breaches a support or resistance level, they switch roles – what was once a support becomes a resistance, and vice versa.

This swing trading strategy requires that you identify an asset that's displaying a strong trend and is trading within a channel. If you have plotted a channel around a bearish trend on a stock chart, you would consider opening a sell position when the price bounces down off the top line of the channel. When using channels to swing trade, it's important to trade with the trend, so in this example where the price is in a downtrend, you would only look for sell positions – unless price breaks out of the channel, moving higher and indicating a reversal and the beginning of an uptrend.

Learn more about breakout stocks​.

Another of the most popular swing trading strategies involves the use of simple moving averages (SMAs)​. SMAs smooth out price data by calculating a constantly updating average price which can be taken over a range of specific time periods, or lengths. For example, a 10-day SMA adds up the daily closing prices for the last 10 days and divides by 10 to calculate a new average each day. Each average is connected to the next to create a smooth line which helps to cut out the 'noise' on a price chart. The length used (10 in this case) can be applied to any chart interval, from one minute to weekly. SMAs with short lengths react more quickly to price changes than those with longer timeframes.

With the 10- and 20-day SMA swing trading system, you apply two SMAs of these lengths to your stock chart. When the shorter SMA (10) crosses above the longer SMA (20) a buy signal is generated as this indicates that an upswing is in progress. When the shorter SMA crosses below the longer-term SMA, a sell signal is generated as this type of SMA crossover indicates a downwards swing.

The MACD​ crossover swing trading system provides a simple way to identify opportunities to swing trade. It's one of the most popular swing trading indicators used to determine trend direction and reversals. The MACD consists of two moving averages – the MACD line and signal line – and buy and sell signals are generated when these two lines cross.

If the MACD line crosses above the signal line, a bullish trend is indicated and you would consider entering a buy trade. If the MACD line crosses below the signal line, a bearish trend is likely, suggesting a sell trade. A swing trader would then wait for the two lines to cross again, creating a signal for a trade in the opposite direction, before they exit the trade.

The MACD oscillates around a zero line and trade signals are also generated when the MACD crosses above the zero line (buy signal) or below it (sell signal).

Swing trading is seen as more of a medium-term trading strategy, whereas day trading​ applies only to the short-term. Whereas swing traders could hold their positions for days or weeks at a time, day traders only buy and sell assets with the aim of closing their positions before the end of each day. Therefore, unlike day traders and scalpers, it is less crucial for swing traders to stay glued to their screens as you don’t need to constantly monitor quick 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 means staying up to date with market sentiment and economic news to have an idea of what direction the market might be heading. Having 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. 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 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.

The main difference between swing trading and position trading​​ is the time that the financial asset is held for. Whereas swing trading aims to capture the up-swings and down-swings in price for a short period of time, often for a number of days or weeks, position trading involves a longer timeframe. Position traders tend to buy assets and hold them for several months or even years, depending on the trend direction.

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 and range of chart timeframes.

Familiarise yourself with our online swing trading system by watching our platform trading tutorials​.

You can also practise swing trading strategies using our mobile trading application for both iOS and Android devices. Learn more about the Next Generation mobile app​, which comes with customisable trading charts and adaptable layouts. The app can also be used on tablet devices for traders on-the-go.

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. Read more about money management​​.