Last Updated on 11 September, 2023 by Samuelsson
Swing trading has become very popular with the advent of online retail brokerage services. You may have been hearing of it or have read about it severally on different financial trading blogs, with different analysts and authors saying different things. But what is actually considered a swing trade?
A swing trade is any trade that tries to capture one price swing on the daily timeframe. It is a medium-term trade that can last from a few days to several weeks, depending on how long the particular swing on the daily timeframe lasts.
Certainly, you will like to know more about a swing trade. Read on to find out the following:
- What a swing trade means
- How it works
- Assets you can swing trade
- Strategies you can use to find a good swing trade
- How much you need to start
What a swing trade means
By definition, a swing trade is a trade that tries to capture a medium-term price move. It aims to benefit from a single price swing rather than ride the trend with its multiple up and down swings. So, it is important to know when a new price swing is beginning and when it about to end.
The trade is often done on a daily timeframe; hence, the interest is on the price swings on the daily timeframe. Usually, those swings last from a few days to a few weeks, and the best way to trade them is to enter at the beginning of the swing and get out before it ends.
The price can be in an uptrend, downtrend, or move sideways, so in a trending market, it is best to trade the swings in the direction of the trend and avoid pullbacks. For a sideways market, you can trade in both directions if you are trading forex, but in the stock market, it’s wise to only look for buying opportunities since stock prices have limited downward potential but unlimited upward potential.
How a swing trade works
Swing traders mostly make use of technical analysis methods in finding a potential swing trade, but sometimes, also use the fundamentals. Technical analysis is done on the daily timeframe, but on seeing a potential setup, a swing trader can step down to the 4-hourly timeframe to pick a better entry.
The essence of the analysis is to know when a new price swing is emerging on the daily timeframe so that the trader can take a position in the direction of the emerging swing. After a position is entered, the trader watches as the swing develops and moves as expected over the coming days. The trader would already have a level where he expects the new swing to potentially end and plans to take profit before that level or he may be watching out for some signs of a potential reversal to get out of the trade.
In the event that the emerging swing does not develop as expected but instead falters and turns back before making any reasonable profit, the swing trader would have a level where he gets out of the trade with a small loss.
Assets you can swing trade
You can swing-trade any market once you study the market well to know how it works. Swing trading works for forex, futures, stocks, ETFs, indices, and CFDs, but here, we will focus on stocks and ETFs. As with price movements in most financial markets, the stock prices move in waves, with up and down swings that can be traded.
When you want to swing trade stocks, you are better off looking for buying opportunities as stock prices can only decline to zero but can rise to infinity.
Finding Good Stocks to Swing Trade
To become a profitable swing trader, you need to know which stocks hold the highest profit potential for swing trading, with easy entry and exit. There are many ways to find a stock to swing trade, but it all comes to your trading strategies and methods. Some trading platforms, such as TradingView, has stock filtering functions that you can use to select stocks based on your preferred criteria.
Some of the general criteria include the trading volume, which shows how liquid a stock is, and the price range, which helps you to select stocks that your trading capital can comfortably trade. For example, you can select stocks that have been trading over 5 million shares per day in the last 10 days and set the price range to $20-100. The technical analysis criteria you choose would depend on your trading strategies.
Strategies for initiating and managing a swing trade
There are many strategies for making a swing trade, such as mean reversion, trend following, and breakouts.
This method is one of the most common strategies used in swing trading. It is based on the fact that the stock price tends to make over-exaggerated moves to either side of its mean and then tries to revert to the mean, but in the process, overshoots again on the opposite side and tries to revert to the mean again.
The up and down swinging generates tradable opportunities that traders can benefit from if they have a way of identifying when the price is about to revert to the mean. While it is possible to trade the reversion from both extremities, for stocks, it’s better to look for buy setups when the price is oversold. Some of the indicators that can be used to identify an oversold market include moving averages, Bollinger Bands, and RSI.
A breakout strategy checks when the price rises above a specified price level that is acting as a resistance level — a level where the price had reversed in the past. When the price breaks above a specific high level, it shows that it may have enough bullish potential to keep moving higher, so a breakout creates a viable buying opportunity.
One good example of a breakout strategy is the Turtle Method, which is a price channel breakout used by the famous Turtle traders. The strategy makes use of the 20-day price high and low. A long trade is entered when the price breaks above the 20-day high, and it is closed when the price breaks below the 20-day low. Often, swing traders use a 20-day Donchian Channel for this.
Trend-following strategy, also known as the momentum strategy (although momentum is a broad name for both breakout and trend-following strategies) is based on the fact that when there is a trend, the price is more likely to continue in the trend direction — a trend remains valid until it’s proven to have reversed.
With this strategy, a trader tries to capture the big impulse swings in the direction of the trend. The strategy tends to give good profits when gotten right, but it has a poor winning rate. Nevertheless, the huge profits will often offset the many losses.
An example of a trend-following strategy in play is going long after a pullback has reversed in a strong uptrend. Here, you try to find out when a price pullback has ended so that you go long with the emerging upswing.
At the basic level, the strategy consists of the following:
- A rising medium-term moving average
- A 10-day ADX showing a reading of more than 20
- The 2-day RSI indicator is less than 10
Managing a swing trade
A very important aspect of any trading method is managing an open position. So, how long do you hold a swing trade, and how do you set a stop loss order or take profit?
How to take profit in a swing trade
There are different ways to take profit from a swing trade. The most common method is to set a profit target at a level where the price is likely to reverse. For a buy trade, which is what we are focused on, the profit target should be before a resistance level.
Another way to take profit is to look for signs of the emergence of an opposite swing. Most often, it would be your trading signal occurring in the opposite direction. For example, if you buy because the RSI is in the oversold level, you can take profit when the RSI is in the overbought region.
How to set stop loss in a swing trade
For the stop loss order, you can set it just below the nearest support level. Alternatively, you can use a time-based method, whereby you set the exact time to exit the trade no matter where the price at that time.
How much you need to swing trade
Unlike day trading, there is no restriction on how much you need to start swing trading. How much you need to open a swing trade varies with a lot of factors, such as the price of the stock you intend to trade, the percentage of your trading capital you are willing to risk, your optimal stop loss level, and other trading costs. With a $1,000 initial capital, you can comfortably trade stocks that are priced around $20-90.
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A swing trade is a medium-term trade that tries to capture one price swing on the daily timeframe. It normally lasts from a few days to a few weeks. There are several strategies for spotting a good swing trade, including mean reversion, breakouts, and trend following strategies.
Here you can find our archive with all our swing trading articles.