Swing Trading Definition and Tactics

Swing traders aim to capitalize on market movements (swings) over an intermediate time frame of days or weeks. They are most often thought of as trading stocks and using technical analysis. Nevertheless, swing trading can be applied to other markets, for example, forex, commodities, or cryptocurrencies.

By definition swing traders hold positions for days and weeks while day traders close their trades before the end of the day. Here are some of the important differences between the two styles of trading:

• Swing traders have the opportunity to capture larger moves in the market.
• Swing trading comes with greater risk due to holding trades overnight and over the weekend. There is the danger that prices may gap up or down substantially in an adverse direction based on news that came out while the market was closed.
• Day traders are likely to rack up substantial costs in commissions due to placing many trades each day.
• Swing traders who use margin must pay margin interest on their leveraged positions that are held overnight.
• Day traders are subject to different margin requirements. Pattern day traders are required to maintain a minimum of $25,000 in their accounts at all times. Traders using margin who execute 4 or more day trades in a 5-business-day period are designated as pattern day traders.
• Swing trading has the advantage of requiring less time than day trading. Swing traders can hold down regular jobs, while day traders are unlikely to be able to do so. Day traders are typically in front of the screen for many hours each day.
• Day trading is arguably more challenging psychologically and more stressful than swing trading. This is because day traders are constantly processing a great deal of rapidly changing information, and important decisions must be made very fast.

See also: What is Day Trading? The Basics & How to Get Started

Trend lines, moving averages, oscillators, Fibonacci retracement levels, and volume are among the most valuable indicators for swing trading. 

Trend lines. A trend line is a straight line drawn from a series of highs or lows in price. Trend lines show the direction of the price trend and identify support and resistance levels. Common chart patterns such as trend channels, wedges, and triangles are made up of two trend lines.

Moving Averages. Moving averages smooth out price movement over a period of time and indicate trend direction. They provide support and resistance levels and can also generate signals. For example, when two moving averages cross, this can suggest a potential change in trend is imminent. For swing traders, the 20-period, 50-period, and 200-period moving averages are especially important to watch.

Oscillators. Oscillators measure momentum, which is the percentage change in price over a given period. They are commonly used as indicators of when an instrument has become overbought or oversold. Falling momentum suggests that a trend change may be imminent. Popular oscillators include stochastics, the relative strength index (RSI), and moving average convergence divergence (MACD). The stochastic indicator moves on a scale between 0 and 100. When the stochastic lines move above the 80 level, it indicates that the market may be overbought. Conversely, when the stochastic lines cross below the 20 level, it suggests that the market may be oversold.

Fibonacci. Fibonacci retracement levels are derived from a number sequence discovered by a thirteenth-century Italian mathematician Leonardo Pisano, nicknamed Fibonacci. Fibonacci retracement levels are often key support and resistance areas. The most important levels to watch are 38.2% and 61.8%. Although it is not based on a Fibonacci ratio, the 50% retracement is also a significant level to watch. Fibonacci extension levels can serve as potential support and resistance areas and as profit targets.

Volume. Volume is a powerful and often overlooked indicator that helps determine the strength and validity of price movements. For example, if you are watching a major support level and the price breaks through that level with substantial volume, it is more likely that the trend will continue in the same direction. Conversely, if the price breaks through the level on weak volume, it is a less significant move, and it is less likely that the price will follow through in the same direction. The same concept applies to all chart patterns. Strong volume serves as a form of confirmation of the validity of the price move.

Swing traders often use classic chart patterns to form the basis of their strategy. Some patterns, known as reversal patterns, suggest that the price trend will change course. The Head and Shoulders and Double Top are examples of reversal patterns and indicate that the prevailing upward trend in price may reverse. Continuation patterns, for example, a Bullish Pennant, suggest that the prevailing trend will keep going, and traders will be looking for a potential breakout to the upside of the formation.

Japanese candlestick chart patterns are also widely used by swing traders. Traders can look for candlestick patterns such as the Shooting Star, which is a bearish reversal pattern, or the Marubozu, a trend continuation pattern. (See also: Candlestick Patterns Explained). 

Chart patterns give traders a clue, but they get a stronger signal if there is confluence across different indicators. In other words, when multiple patterns or indicators suggest the same bullish or bearish outlook. For example, there is confluence if a Head and Shoulders pattern forms, and at the same time, there is a bearish signal coming from a momentum oscillator, such as stochastics or RSI.

Traders can also simply identify major support and resistance levels and look for potential reversals off those levels or breakouts through them. With support and resistance levels, there is an expectation that the price may bounce off them, but also if the price manages to break through, that it will continue to follow through in that direction. Support and resistance levels can be identified in many ways. Trendlines, moving averages and Fibonacci levels are among the most popular ways of finding these levels.

Whether you are using chart patterns or simple support and resistance levels, it is important to be conscious of the trend across multiple time frames. For example, if you are working with a chart on the daily time frame and the trend is bullish on the 4-hour, daily, and weekly charts, the bullish signals that you identify will be more significant. Ideas that you derive from a chart that are aligned with the broader trend across different time frames are more likely to lead to profitable trades.

Charting software typically offers a range of time frames from one minute to one month. The daily or 4-hour time frames are ideal for finding swing trading setups. Patterns on the 1-hour chart are also relevant to swing traders as they often play out for longer than one day. Japanese Candlestick charts can provide trading ideas on their own and are easy to read at a glance, making them an ideal chart type for both day trading and swing trading.  

In this example, there is a well-defined descending channel on the Microsoft (MSFT) daily chart. On April 4th, 2022, the price reached the resistance level of the upper trendline. In addition, stochastics gave a bearish signal by crossing from above to below the overbought level of 80. These bearish conditions presented a possible opportunity for selling Microsoft short. The price of Microsoft then trended lower and fell to the lower trendline of the channel on May 12th, where it bounced. There was also bullish confluence from stochastics at this level, as it moved from below the oversold level of 20 to above it. This would have been an ideal place to cover the short position and to possibly open a long position for a swing trade.

The best stocks for swing trading are typically highly liquid large-cap stocks. Traders can use stock screeners to filter out stocks with volume, price, and market cap above a set level. Screeners can also help identify stocks in an uptrend using moving averages. For example, a screener could be used to show stocks that are trading above both the 20-period and the 50-period simple moving averages. Price being above one or more moving averages is generally an indication that the trend is upward. When selecting stocks for swing trading, traders may also look for stocks that are outperforming others in their sector.

The Master Swing Trader by Alan Farley, Swing Trading for Dummies by Omar Bassal, CFA, and How To Swing Trade by Brian Pezim are some of the best books on swing trading.

Swing trading crypto is absolutely viable. The same principles apply to swing trading cryptocurrencies as to other markets.

With a good strategy and proper risk management, swing trading can be profitable.