What Is Swing Trading & How Does It Work?
Swing trading is a strategy that offers potential profits from smaller price moves, making it a popular trading style among active market participants.
Read on to find out more about how this strategy works, as well as some of the indicators swing traders use to identify trading opportunities and guide future positions.
What is swing trading?
Swing trading is a strategy that aims to capture short- to medium-term gains in any financial market. This typically involves holding positions in assets like stocks, currency pairs, or other securities for several days to a few weeks, aiming to sell when favorable price swings occur. Ultimately, the goal is to make a profit on these smaller price swings that happen within a broader trend.
These small moves between bullish markets, where prices rise, and bear markets, where they fall, are the primary focus. Swing highs are where the market is bullish and reaches its peak, making it possible to make a short trade. Swing lows are local price troughs during downward movements, providing entry points for long positions expecting a rebound.
To make a profit from a swing trade, traders must take a short position at a high and close it when it's low. Similarly, a long trade opened at a low should be closed when it's high.
Swing traders monitor these fluctuations to spot entry and exit points for profitable trades. Experienced swing traders analyze historical patterns and indicators to forecast potential upward or downward price movements.
It serves as a balanced approach for many traders, avoiding the intense daily monitoring required in day trading. In terms of trading strategies, swing trading sits between day trading and position trading. Understanding the difference between swing trading and day trading helps you choose the right trading style for your schedule and risk tolerance. It can be a midway point that works for traders because the time pressure that comes with day trading isn't there. Additionally, the longer stretches of time that come with position trading don't apply here. Like day traders, swing traders can profit from both rising (long positions) and falling (short positions) price movements. A day trader closes all positions before the market shuts each day, while swing traders may hold positions for several days or weeks to capture larger price swings.
While beginners can start with swing trading after some education, it's often considered an intermediate strategy requiring solid foundational knowledge. This is because successful swing trades require interpreting charts, technical indicators, and possibly fundamental research before entering positions. This research stage is designed to give traders the insights needed to know the optimal moment to take a position.
Swing traders can use various instruments, including derivative products like CFDs, to take positions across financial markets such as stocks, forex, and commodities. Before starting, it's essential to understand your chosen instruments—such as CFDs—and whether they align with your trading style and risk tolerance. These derivative products mean you don't own the underlying asset; however, you can take a long ('buy') position if you expect an asset's price to rise. Should you believe that a market is due to fall in price, you can opt for a short ('sell') position.
Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. A significant percentage of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Find out more about CFDs in our in-depth guide.
What markets can I swing trade on?
You can use a swing trade strategy on any of the underlying assets that can be traded with Tradu.
- Shares: Have you predicted when share prices could change? If you predict a swing, you could potentially profit from the shift in value.
- Forex: If you follow current affairs, political events and other developments, you may be able to spot how these could impact on currencies.
- Indices: It's possible to make short-term trades in indices. Swing traders look out for external factors that could impact big, blue-chip businesses that are listed on an index and go from there.
- Commodities: Commodity markets are also volatile, but traders can go with the trends to make a swing trade here.
Swing trading indicators
Swing traders use technical analysis alongside fundamental analysis to build strategies and identify suitable entry and exit points. These technical indicators help recognise support and resistance zones where trading opportunities often emerge. Indicators used in swing trading form the fundamental analysis that help to recognise trends – or long-term moves with short-term fluctuations in the market – and breakouts, which are the starting points of new trends.
Some of the most common indicators used in swing trading include:
Moving averages
Moving averages are used to confirm a trend rather than forecast one that's coming up. They establish the mean average of price movements across a set time period. As these reflect on past changes, they're known as lagging indicators. This lag grows in line with the length of the time period that's covered by the moving average.
There are two types of moving average:
- Simple moving averages (SMAs) – these average out the closing prices that fall within the time period
- Exponential moving averages (EMAs) – these focus on the price fluctuations that fall closer to the current date
Looking at moving averages can be useful for traders looking for patterns in price movements. Combined with support and resistance levels, this helps swing traders identify where prices are likely to swing and find optimal entry points.
Volume
Volume is most commonly used by those working on breakout strategies. Here, the focus is on the strength of a new trend, with a high-volume trend stronger than a low-volume one.
Volume works well at the start of a new trend – or breakout – as this initial phase tends to follow low volume before it increases as the breakout gathers momentum.
Stochastic oscillator
This is a type of momentum indicator that compares the market's range in price over a time period with the price when the market closes. A chart between zero and 100 is used to map out the price movements, with anything over 80 labelled as overbought, which can be a sign to open a short position. Anything under 20 is oversold, indicating that it could be worth going long.
Overbought or oversold movements noted on a stochastic oscillator don't always mean that there will be a swing in prices. Instead, traders look for when the two lines mapping out the closing figures and the price movements overlap, as this is where there could be a reversal for which to look out.
Relative strength index
Relative strength index is another momentum indicator. This one highlights oscillations across a trend and, like the stochastic oscillator, shows whether a market is overbought or oversold. This indicates whether a swing is coming.
Here, anything on the chart that falls over 70 is deemed to be overbought. When the RSI drops beneath 30, it's oversold. This overshooting on both sides could be a sign that the market is about to change direction.
Advantages of swing trading
- Swing trading strategies give the trader the chance to stay in the market – regardless of any intraday volatility.
- As swing trading doesn't require the trader to dip out due to volatility, it removes the issue of exiting too soon that can come with day trading and can deliver a higher success rate than some short-term tactics.
- Profits from swing trades can be substantial. Traders are more likely to get in on a trend by being active in the live market.
Disadvantages of swing trading
- Implementing swing trades is expensive because stop losses are much greater in comparison to intraday strategies.
- Holding open positions in the live market for longer periods than other types of trading can expose the trader to a higher degree of risk.
- There may be costs that come from a rollover – for instance, a forex rollover. In this case, the currency pair and position size must be taken into account.
- Though profits maybe substantial in swing trade, there are also risks involved which could lead to substantial losses especially if the market moves against your position.
What other trading disciplines can I use?
If you're new to these markets, it's recommended that you use one style of trading at first. Other trading options are available to you and it's worth exploring these once you've mastered one of them. This will help you to find the right fit.
Swing trading vs day trading
Day trading involves opening and closing positions in a single trading session (one day). A day trader focuses on specific times when they'll open multiple positions and move quickly, making it an intensive short-term trading style. The key difference between swing trading and day trading is time horizon—swing traders may hold positions through short-term volatility that would force a day trader to exit.
Swing trading vs position trading
Position trading is the opposite of day trading. Instead of the fast-paced movements that happen with day trading, here, traders hold a position over a longer time period. This can be over the course of a few days or weeks. It can even take months.
Swing trading vs trend trading
Like position trading, trend trading is a longer-term option. Where position trading involves keeping the position through adverse market movements in search of higher profits, trend traders will see adverse conditions as a sign to exit a trade.
How to start swing trading with Tradu
It's easy to put your swing trading skills to the test with Tradu.
- Sign up: You can open a trading account with us in minutes.
- Use our resources: It's important to understand the markets before you begin trading. Our market, trading and platform guides offer lots of useful information.
- Choose your market: Pick from a wide range of assets and financial instruments to trade.
- Pick your strategy: Use fundamental and technical analysis, choose your position and plan your trade.
- Carry out your first trade: Our intuitive platform quickly locks in your trade. When it's time to close your position, you can do so easily or take advantage of our automatic orders.
- Diversify your portfolio: With a Tradu account, it's easy to trade listed stocks and CFDs on forex, indices and commodities, so you can build a diverse trading portfolio all in one place.