Swing trading is a strategy that offers potential profits from smaller price moves, making it popular among traders.
Read on to find out more about how this strategy works, as well as some of the indicators that you could use to guide future swing trade positions that you take.
Swing trading is a strategy that aims to capture short- to medium-term gains in a financial instrument. This involves holding a currency pair or stock for a few days or several weeks until they are sold when the price swings. 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 where the market is bearish, reaching a low before bouncing, opening up the chance for a long trade.
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.
Traders who are looking to make a swing trade look out for these fluctuations from bull to bear as this is where they can spot opportunities to make gains. Those who are experienced in swing trading will know to predict price movements, and they'll follow patterns in order to work out if prices should move up or down.
In terms of trading strategies, swing trading sits between day trading and position trading. 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. However, like day trading, swing traders stand to take a profit from both positive and negative movements.
While beginners may want to try making a swing trade early in their trading career, it should be noted that it is an advanced trading strategy. This is because, in order to make a successful swing trade, traders must interpret research, charts and technical indicators before any trades can be placed. This research stage is designed to give traders the insights needed to know the optimal moment to take a position.
Through derivative products such as CFDs, swing traders take a position on a market. These derivative products mean that 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.
Find out more about CFDs in our in-depth guide.
You can use a swing trade strategy on any of the underlying assets that can be traded with Tradu.
Swing traders typically use both technical and fundamental analysis to build strategies and tap into suitable entry and exit points. 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 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:
Looking at moving averages can be useful for traders looking for pattens in price movements. It can also help to spot where prices are likely to swing.
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.
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 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.
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.
Day trading involves opening and closing positions in a single trading session (one day). Traders tend to focus on a specific time of the day or a set session where they will open two or three positions and move quickly, making it a short-term strategy.
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.
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.
It's easy to put your swing trading skills to the test with Tradu.
With Tradu you can trade crypto via CFDs.