A Guide to Swing Trading Strategies

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Contributor, Benzinga
October 13, 2023

Are you an adventurous investor with an appetite for frequent trading? If you're an active trader looking for new strategies, swing trading strategies may offer opportunities to profit. This approach takes advantage of short-term market swings to profit from rising and falling prices. Typically you’ll only hold your trades for several days or weeks.

This article will provide a comprehensive guide to swing trading, including the benefits and potential risks.

What Is Swing Trading and How Does It Work?

Swing trading is a short-term technical analysis-based trading strategy used to take advantage of price movements in securities, commodities or other financial instruments. You hold a position in an asset for a few days or several weeks before unwinding the position, hopefully for a profit. This strategy attempts to capture a smaller portion of a trend rather than a longer expected price movement over lengthier periods like months or years. 

Traders typically use technical analysis tools such as charts, trend lines and moving averages to identify entry and exit points for trades. Current events and market news are also important to track. 

Advantages of Swing Trading

Swing trading has a few attractive features:

  • Risk management: Because swing trades are generally held for a shorter time, traders can manage risk by closely monitoring their positions and exiting when necessary. This is in contrast to long-term trading, where traders may experience significant price fluctuations over an extended period.
  • Profit potential: Swing traders try to capture a portion of an expected price movement, which means they can profit even if the overall market is not trending in a particular direction.
  • Technical analysis: Swing traders may rely on technical analysis to find potential trading entry and exit points. Charting tools give you objective trading rules that don’t have to depend on subjective opinions or emotions.

Disadvantages of Swing Trading

Swing trading also comes with risks.

  • Higher potential for loss: Compared to day traders who close out trades on the same day, swing traders hold positions much longer, which exposes them to overnight and weekend market risk — with the risk of the market going south after trading hours.
  • Potential for lower profits: You might see lower performance because positions are held for a shorter time than other longer-term trading strategies. 
  • Requires a high level of technical and fundamental knowledge: Traders need to quickly identify trends and keep tabs on the market to decide when to buy and sell securities. This skill requires a thorough understanding of technical analysis and market fundamentals, which can take time and effort to develop.

4 Types of Swing Trading

There are four main types of swing trading:

1. Breakout Trading

Breakout trading is a type of swing trading that involves identifying a security's price range and then buying or selling it once it breaks out of that range. Once a security breaks out of the expected range, it could continue moving in that direction, potentially providing a profit opportunity for the trader.

Consider the following example:

You see that shares of XYZ Company have been trading between $50 and $55 per share between support and resistance levels. Once the price breaks out of this range, you expect it to continue to rise.

You set a buy order for $56 per share, intending to sell the shares once the price reaches $60. If it does, you realize a $4 profit per share.

2. Breakdown Trading

Breakdown trading is the reverse of breakout swing trading. Here, the trader identifies a security's price range, then sells or short sells the security once it breaks down from that range. 

Suppose you see that shares of ABC Company have been trading in a range of $70 to $75 per share. You enter a sell order at $69 per share to repurchase the shares at a lower price once the price falls to $65. The profit would be $4 per share if the shares trade as you expect.

3. Reversal Trading

Reversal swing trading requires anticipating a change in the recent price trend. Trends often reverse, and traders can profit by trading ahead of the reversal. Changes in momentum indicators, volume and chart patterns like head and shoulders can indicate a reversal.

4. Retracement or Pullback Trading

Also known as a Fibonacci retracement, this swing trading technique is based on the concept that prices will often retrace recent movement before returning to a trend.

For example, a stock on an upward trend might pull back lower before continuing to move upward.  

The retracement is created by dividing the distance between the high to the low of the price move by key Fibonacci ratios of 23.6%, 38.2%, 50% and 61.8%. These horizontal lines are then used to indicate possible support and resistance levels.

Say the price of a stock has been trending upward, but you believe the stock is overbought and is likely to retrace before continuing its upward trend. Once it pulls back down to halfway between the recent high and low, you might consider this an excellent opportunity to buy the stock. If the stock continues to fall below that 50% retracement level, you might consider it a signal to sell, as it could be a sign that the downward trend is continuing.

Swing Trading in Different Market Conditions

Swing trading can be a profitable approach to trading in both bull and bear markets. Take a look:

Bull Market

In a bull market with a general upward march in prices, swing trading usually involves trying to buy low and sell high. You can use technical indicators or fundamental valuation methods to look for profitable prices to enter a trade. 

Swing trading may appear easier because the general trend is upward and you don’t need to take on the risk of shorting stocks, which theoretically has unlimited risk. As a result, it can be tempting to become overconfident and take on too much risk by using excessive leverage or holding on to losing positions for too long.

Bear Market

Swing trading in a bear market can be more challenging than in a bull market, as prices trend downward rather than upward. In a bear market, it can be harder to find trades with attractive risk profiles because you may need to short sell, which is riskier than entering a long position.

One approach to swing trading in a bear market is to shorten the trading period. Reducing the holding period might minimize the impact of market volatility.

Another strategy is to hold more cash as a buffer. With more money on the sidelines, traders can take advantage of opportunities as they arise rather than being forced to close positions in a declining market. Additionally, using options contracts can allow traders to manage downside risk by limiting potential losses.

Swing Trading In-Between Market Conditions

Swing trading in-between market conditions can be a challenging but potentially rewarding endeavor. Generally, the best conditions for swing trading occur when volatility is high and conditions are relatively stable.

When volatility is high, traders have more opportunities to profit from price movements. But high volatility can also increase the risk of loss because prices can move quickly and unexpectedly.

Conditions are optimal when the market is relatively stable and trends are clearly defined. Even in relatively stable market conditions, you still need to manage your downside risks.

Day Trading vs. Swing Trading

Day trading and swing trading are both shorter-term approaches to trading financial markets. Day traders hold positions briefly — sometimes for a few minutes or a few hours — before closing out positions by the end of the day.

Swing trading, on the other hand, involves holding positions for longer, typically a few days to a few weeks. Traders can potentially profit from larger price movements over an extended period, in contrast to a day trade. Both strategies can be profitable but have different timelines and, as a result, risk profiles.  

Swing Trading Risk and Returns

Swing trading involves holding positions for a few days to a few weeks and trying to profit from price swings. Depending on the market conditions, swing trading can carry different risks. As with any trading approach, understanding your risks and return potential can help you trade most efficiently.

Frequently Asked Questions

Q

Is swing trading actually profitable?

A

Yes, swing trading can be profitable if you time your entries and exits accurately. 

Q

How much money do you need to start swing trading?

A

There’s no legal minimum limit to swing trade stocks. However, your brokerage firms might designate you as “Pattern day Trader” if you executes four or more “day trades” within five business days may be considered as “Pattern Day Trader”. Under FINRA rules, “pattern day traders” must have at least $25,000 in their accounts and can only trade in margin accounts. 

Q

Is swing trading good for beginners?

A

Compared to other trading types, swing trading is often considered better for beginners.   However, for traders who do not have a strong understanding of technical analysis and market trends swing trading may be challenging. 

About Anna Yen

Anna Yen, CFA is an investment writer with over two decades of professional finance and writing experience in roles within JPMorgan and UBS derivatives, asset management, crypto, and Family Money Map. She specializes in writing about investment topics ranging from traditional asset classes and derivatives to alternatives like cryptocurrency and real estate. Her work has been published on sites like Quicken and the crypto exchange Bybit.