Swing trading is a trading strategy designed for those who wish to capture price fluctuations (‘swings’) in the live markets. This speculative trading style aims to benefit from medium-term price movements over a period of days or weeks, where traders seek to close their position for a profit before the asset makes its next significant price movement.
Ideally suited to those who do not have the time or inclination to monitor the markets all day, swing trading offers a balanced trading pace with the potential for steady, consistent returns.
Our informative guide has been compiled by ActivTrades experts and covers all the most essential components of swing trading to help even the most novice trader benefit from this approach. Our guide will cover:
- Swing trading meaning
- Key strategies and indicators
- Best assets to swing trade
- How swing trading compares to scalping and day trading
What is Swing Trading? Meaning and How it Works
Swing trading strategy is designed to capitalise on short-to-medium term market price fluctuations in the financial markets. Traders hold their position for several days to several weeks with their entry and exit (ideally) timed to capitalise on price “swings” in the value of the asset.
Traders traditionally employ both technical and fundamental techniques to analyse the market. Technical analysis examines (historical) price patterns, niche and wider market trends, cycles, and sentiments. This information helps traders estimate future price movements and conduct in-depth data analysis using indicators such as moving averages and Bollinger Bands to build a strong trading strategy.
Building successful swing trading strategies also involves a degree of fundamental analysis, examining underlying economic and financial factors that could influence the value of instruments. This may cover economic and market developments as well as the financial performance of companies related to specific trades.
Traders also need to identify the most appropriate types of trade. Swing trading is best suited for certain markets, specifically, stocks, indices and forex. This is because there is plentiful opportunity to capitalise on price swings due to the high volatility, high liquidity and clear trends typical of these markets.
Swing Trading Strategies Explained
Below we have outlined some of the most popular swing trading strategies, offering a clear picture of the different approaches that beginner traders can use.
Trend-following Strategies
This systematic, trends-informed approach identifies both the direction and strength of market movements. The cornerstone of this strategy involves buying pullbacks in uptrends (e.g. at the start of a 7-day moving average) and holding a longer position while the asset increases in value. Traders may also use trend data to sell in anticipation of a downward trend.
By using in-depth data informed by technical indicators, momentum indicators and chart patterns, as well as employing strict rules such as stop-loss, traders can make informed decisions and operate effective trade management techniques.
Breakout Strategies
The breakout strategy focuses on potential profits associated with capitalising on breakouts, i.e. taking up a position at the start of a trend and when the price of an asset breaks out above a key support or below a key resistance level with increased volume. After such activity takes place, we can reasonably expect increased volatility and strong price swings. Traders can utilise a range of indicators to potentially identify the most effective breakout opportunities.
Reversal Strategies
With the reversal strategy, swing traders use technical analysis to identify assets that are changing direction from a recent high or low trend, often due to overbought/oversold conditions. It works similarly to the breakout strategy as traders take advantage of a trend in its early stages to make a profit.
Traders buy when indicators suggest a reversal is starting and sell when the stock shows signs of reversing again. Various technical indicators may be used to identify potential reversals, with the Relative Strength Index (RSI) and MACD (Moving Average Convergence Divergence) some of the most effective.
Support and Resistance Trading
This swing trading strategy uses technical indicators such as moving averages to identify common price points where stock prices start to increase (support level) and start to drop (resistance level).
By ascertaining the strongest levels, traders can use this as a signal to buy and sell just before a price swing. Support and resistance can be used as a standalone strategy or as a component of an alternative approach.
How to Find the Best Swing Trading Stocks and Assets
When choosing the best stocks for swing trading, “large-cap stocks” are typically the best candidates because they are actively traded in high volume, indicating a high level of interest in the stock.
Swing trading is also suited to actively traded commodities and the Forex market thanks to a high level of liquidity and activity creating major opportunities for traders. Volatility is another essential feature because there needs to be a high enough frequency of price swings to make the trade worthwhile. The higher the volatility, the larger the potential profit opportunities.
Your chosen swing trading candidates should also offer a clear price structure with plentiful data available on supply/demand dynamics, market trends and chart patterns in order to support informed trading decisions.
Finding the best swing trading candidates is unique to the individual trader. We recommend leveraging trading brokerages such as ActivTrades to gain access to the most competitive trades on the global markets.
We would generally recommend avoiding trading if you don't have effective risk management built into your strategy, such as stop-loss orders, and/or if you're at risk of not having enough capital to sustain potential losses. It's also best not to trade when the trade in question has a poor risk-reward ratio.
Best Indicators for Swing Trading
Swing trading indicators play a key role in any trading strategy, helping traders to identify effective setups and manage trades. These are some of the best indicators available:
Moving Averages (for trends)
A technical analysis indicator that levels out price fluctuations to calculate the moving average (MA) of an asset’s price over a specific timeframe and identify key trends. The Simple Moving Average (SMA) looks at average price over a specified time period while the Exponential Moving Average (EMA) focuses on more recent data to give insights into current market conditions.
RSI and MACD (for momentum and reversals)
Both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) analyse momentum in the financial markets to generate buy/sell signals. The MACD measures the relationship between two moving averages, while the RSI looks at both the speed and strength of recent price changes to identify potential trend reversals.
Bollinger Bands (for volatility)
Bollinger Bands compare the SMA of a specified stock/asset with any significant deviations away from the norm to offer informed insights into market volatility and its potential consequences on market movement. This may mean identifying potential overbought/oversold conditions or anticipating trend reversals and breakouts.
Swing Trading vs Day Trading vs Scalping – Key Differences
There are some key differences when it comes to scalping and day trading vs swing trading. Both types of trading are focused on short-term gains but with a very different trading style and environment.
Swing traders typically hold positions for several days to several weeks, while day traders enter and exit multiple trades within a single day. Scalping trading is an even shorter-term trading style, where positions are held for minutes or even seconds.
The time commitment also differs significantly– day trading is intense and requires constant attention. Swing traders requires less time consistently monitoring the markets, stop-losses can be set and some trades may even be automated.
Day trading has a clear risk/reward profile – the potential for multiple, short-term quick gains (or losses). Swing trading is less time-consuming with the potential for larger price movements and large returns, although this also presents the risk of larger losses.
Choosing the right style of trading should be based on individual goals and schedule. Day traders need to be able to invest significant time into consistently monitoring their trades – it’s a full-time job and therefore only suited to those who are truly passionate about trading and willing/able to cope with the high-intensity trading environment.
Swing trading is best suited to those with less time or motivation to invest in trading full-time but willing/able to accommodate more significant profits (or losses).
This style of trading is associated with a relatively high level of risk and if you are not able to invest the time appropriately, you can increase this risk. For example, the use of leverage comes with an element of risk regardless but holding positions for too long can lead to larger losses. Swing trading positions by definition are also more at risk of overnight and weekend losses.
Swing Trading Strategy FAQs
What is swing trading?
As a flexible alternative to fast-paced trading strategies, swing trading sees positions held for a few days up to a few weeks and designed to capitalise on price swings as part of overall market trends.
What is the best swing trading strategy?
Some of the most popular strategies include counter-trend (reversal) trading, breakout trading and trend-based strategies.
Is swing trading suitable for beginners?
Absolutely! As a highly accessible form of trading, swing trading requires less expertise than other types of trading such as scalping. It’s a balanced, medium-paced way to become familiar with the markets and learn how to profit without undue pressure.
The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.
All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.