Swing trading has been gaining popularity as people look for ways to bring in extra income while working their full time job. And with the arrival of sophisticated apps, trading while on the go has never been easier.

What is Swing Trading?

Swing trading is a trading style that involves holding on to a position for a period of time ranging from a couple days to a couple weeks.

It’s an active trading strategy that captures the swings in market sentiment and allows you to enter and exit at key levels. Swing trading differs from day trading in that you are likely to hold your positions overnight. Your trades might last several days or even weeks.

Swing trading strategies are generally driven by technical analysis. You can employ your strategy in trending markets as well as in choppy market conditions.

Your focus should be a short time horizon when you determine your swing trading risk and reward. Before you determine if swing trading is right for you, consider the several pros and cons of swing trading relative to day trading.

Pros

• You need to devote less time to swing trading.
• It captures most of the upward and downward swings in price action.
• You can focus on technical analysis.

Cons

• You increase your risk by holding positions for longer periods.
• You could face sharp market reversals that generate losses.
• You can not take advantage of day trading leverage.

Now that you understand some of the basics of swing trading, let’s talk about some of the concepts you will want to focus on in order to hone your skills as a swing trader.

This includes building a watchlist, performing technical analysis, and trade execution.

Each piece of the puzzle is important in helping you achieve success in the markets, and we’ll discuss these in greater detail so you can be on your way to becoming a swing trader.

Swing Trading vs. Day Trading

The strategies that you can use for swing trading and day trading may be similar, but the major differences between the two are time you hold your position.

Day traders are in and out of trades during a trading session. When you swing trade you might hold positions for days or even weeks.

Since day traders don’t generally hold positions overnight, they can avoid market-gaps that are created from news announcements that occur during after hour trading.

As a swing trader, you run the risk that the price of the asset you are trading is significantly different that the closing price the night before.

Day traders might experience amplified liquidity risks. During specific periods the bid-offer spread of an asset could expand. This can eat into your profits. A swing trader has the luxury of holding a position until the bid-offer spread contracts.

Day traders can also benefit from enhanced leverage. Day trading buying power can be more than 4-times the buying power of non-levaraged positions compared to double the leverage for swing traders.

The leverage can enhance a day trader returns. Lastly, day traders need to focus on numerous positions and constantly looking for new potential opportunities throughout the day to replace exited positions. This is generally a full-time job.

Swing Trader Mindset

Swing trading requires time and patience to learn the craft. You need to develop strategies that work for you that employ sound risk management techniques. This might take months or even years.

The more discretion you overlay on your strategy, the more time it will take to perfect your techniques.

You need to be cool and calm under pressure and must avoid being easily swayed by emotion. Swing trading using technical analysis which is based on spotting patterns and acting. You must avoid going with your gut and acting on emotion.

Unfortunately, you will experience losing streaks and need to accept those as part of your trading activities.

You also need to have access to technology and the internet. There are some very good free screeners that will help you make a trading decision. You also need access to real-time price data to make your trading decision.

Types of Swing Charting

A popular way to swing trade is to use swing charts. Swing charting has a relatively simple methodology and provides new information as price action evolves.

New chart target points are generated when the new price swings through the target in the same direction.

What drives the swing price is a filter.

Once the price moves the distance targeted by the filter a new line is created to the previous one.

The bottom line is that a swing chart will show the up and down swing price movement for a minimum size regardless of the time it takes to make the price move.

Trend Following Swing Strategies

There are dozens of swing trading strategies that you can use to generate returns.

Your strategies can be completely systematic, or discretionary. You can categorize them as trend following, momentum, breakout or mean reverting.

The development of a swing trading strategy takes time and effort.

Prior to risking your capital you should paper trade or use a demonstration account. A demo account allows you to trade in real-time using your strategy to see if it works. There will be times when you back-test a strategy works but is unsuccess when tested in real-time.

You also want to become comfortable with the type of risk you will be taking when you start to trade using a swing strategy.

Seeing the Forest Through the Trees

If you are going to swing trade, you want to focus on short-term price movements were you can view both a broad view of prices as well as a narrow view. A filter can be helpful in evaluating the movement of an asset you are interested in trading.

 

A ZigZag feature helps you see the different types of asset movements that are available. It will also help you determine the risk and reward you are looking to employ with your swing strategy.

A ZigZag feature allows you to enter a percent feature and it will show you all the price changes that qualify for your criteria.

So, if you want to filter out most of the small movements you can set a ZigZag feature of 10% and the chart will show you all those changes. The chart of gold shows a ZigZag on hourly data that reflects 2% or great changes in price.

The ZigZag feature is not an indicator. It can help you develop a technical trading strategy that can potentially capture the changes in price. You might be able to use a trend following strategy, or a momentum strategy or even a mean reverting strategy once you evaluate the ZigZag.

You can also use the ZigZag to identify support and resistance levels.

Swing Trading Watchlist

Before you can practice swing trading strategies on the simulator, it’s important for you to develop a comprehensive watchlist that you can search through daily to locate trading opportunities.

While there may be thousands of stocks in the markets, there’s only so many that are actively traded and recognized by millions of traders. Those are the names you want to keep on your watchlist.

Trend Following Strategy

To capture the movements of the gold Zigzag chart you might consider a short-term moving average crossover strategy. You can see that when the 5-hour moving average crosses above or below the 20-hour moving average, it signifies that a short-term trend is in place.

This strategy is great when gold is trending but creates many difficult signals when gold prices are moving sideways. There are several ways that you can trade this type of swing trading strategy.

You can enter on a trading signal and exit and reverse on the reverse signal.

For example, you buy when the 5-hour moving average crosses above the 20-hour moving average. You sell and go short when the 5-hour moving average crosses below the 20-hour moving average.

You also might consider having a specific profit and loss level employed when you trade this strategy.

Risk Management

For any swing strategy to be successful, you need a risk management plan that cuts your losses and lets your profits run. Trend following strategies can lose more times that you win, so you need to have a risk management plan that will win a lot on winning trades and loses a little on unsuccessful trades.

Nearly all strategies should attempt to make at least the same on winning trades as you lose up on unsuccessful trades.

Trade Management

Because successful swing trades can continue to move in your favor for days and potentially even weeks, it’s very important for you to learn how to properly and effectively scale out of your position.

Scaling out is the art of selling your position in multiple orders, which generally helps to get a better average exit for the trade. Swing trades can last for days and weeks, so it’s very unlikely you will get the best exit price on a single order.

Scaling out can help you to achieve a better average exit price for your swing trades over the long run. Traders generally scale out in 3-4 orders, but you are welcome to use more scale out orders if you find it to be helpful.

Swing trading requires you to combine your skills in tracking a watchlist, performing technical analysis, executing your trade, and much more. As with other types of trading, emotional management is critical to your success as a trader.

Emotion tends to be the number one reason traders fail at trade execution. It holds traders back from exiting their trades at the necessary moments, but developing a proper strategy and following rules are a great way to eliminate the emotion of trading.

The more systematic you can become, the more consistent your results will become! From its surface, swing trading can seem challenging and risky, but let us help you discover that this is not the case!

Swing trading can be incredibly lucrative and fun when executed with a proper strategy and ruleset. 

Rule of Thumb

We prefer not to trade against an existing trend, which is considered reversal trading. The general rule of thumb is to go long only if the price is up trending, and to go short only if the price is down trending.

By following the existing trend in place, you will substantially improve your odds of success as a trader. The trend is your friend!

For example, a stock may move up 10% in a day and then proceed to consolidate sideways over the next few days.

We would look for a proper consolidation pattern, such as a bull flag and bear flag, or trigger point that we believe can spark a breakout or breakdown in the stock and fuel further continuation in the existing trend of the stock.

The trigger point can be in the form of a support, resistance, or a trendline level and should be used as your entry for the trade. When traders 

Technical analysis is the key ingredient in helping us to locate proper swing trading opportunities, and it is very important for you to develop your skills in technical analysis to succeed in the markets.

It is important to note that technical analysis is an art, not a science. It is critical to incorporate strict risk management rules in order to succeed in technical analysis trading.

Bottom Line

A swing trading strategy is a short-term trading strategy that takes advantage of the ebbs and flows of an asset. By using a filter like the ZigZag, you can see if an asset potential profits can capture a 2%,3%,5% or 10% moves.

There are several different trading strategies that work well with swing trading. This can include:

• Trend Following
• Momentum
• Mean reversion
• Breakout

You should consider testing your swing trading strategy using a paper trading or demonstration account method. Once you determine that your strategy will work in real-time, you can then consider trading the strategy using real capital.

A paper trading account and a demo account will also help you determine if the bid-offer spread or market liquidity will allow you to execute your strategy successfully.

Most swing trading strategies use technical analysis. This is the study past price action. You also might consider using a discretionary overlay.

Swing trading strategies are like day trading. The difference is that you will generally hold your position between a day and a few weeks. There are several pros and cons to using a swing strategy as opposed to day trading.

The largest benefit is that you don’t have to watch the markets non-stop for every hour of the trading day when using a swing strategy as your time horizon might not be the end of that trading day.

The largest drawback is that you will face additional risks which include market gaps or reverses overnight that could lead to signicant losses.

Additionally, the leverage that you can use when swing trading is less than the day trading buying power you can use when day trading.