Buying and selling of stocks that show an upward or downward trend in the future
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What is Swing Trading?
Swing trading is a trading technique that traders use to buy and sell stocks when indicators point to an upward (positive) or downward (negative) trend in the future, which can range from overnight to a few weeks. Swing trades aim to capitalize on buying and selling the interim lows and highs within a larger overall trend.
Traders use technical indicators to determine if specific stocks possess momentum and the best time to buy or sell. To exploit the opportunities, the traders must act quickly to increase their chances of making a profit in the short-term.
How Swing Trades Works
Swing trading seeks to capitalize on the upward and downward “swings” in the price of a security. Traders hope to capture small moves within a larger overall trend. Swing traders aim to make a lot of small wins that add up to significant returns. For example, other traders may wait five months to earn a 25% profit, while swing traders may earn 5% gains weekly and exceed the other trader’s gains in the long run.
Most swing traders use daily charts (like 60 minutes, 24 hours, 48 hours, etc.) to choose the best entry or exit point. However, some may use shorter time frame charts, such as 4-hour or hourly charts.
Swing Trades vs. Day Trading
Swing trading and day trading appear similar in some respects. The main factor differentiating the two techniques is the holding position time. While swing traders may hold stocks overnight to several weeks, day trades close within minutes or before the close of the market.
Day traders do not hold their positions overnight. It often means they avoid subjecting their positions to risks resulting from news announcements. Their more frequent trading results in higher transaction costs, which can substantially decrease their profits. They often trade with leverage in order to maximize profits from small price changes.
Swing traders are subjected to the unpredictability of overnight risks that may result in significant price movements. Swing traders can check their positions periodically and take action when critical points are reached. Unlike day trading, swing trading does not require constant monitoring since the trades last for several days or weeks.
Trading Strategies
Swing traders can use the following strategies to look for actionable trading opportunities:
1. Fibonacci retracement
Traders can use a Fibonacci retracement indicator to identify support and resistance levels. Based on this indicator, they can find market reversal opportunities. The Fibonacci retracement levels of 61.8%, 38.2%, and 23.6% are believed to reveal possible reversal levels. A trader might enter a buy trade when the price is in a downward trend and seems to find support at the 61.8% retracement level from its previous high.
2. T-line trading
Traders use the T-line on a chart to make a decision on the best time to enter or exit a trade. When a security closes above the T-line, it is an indication that the price will continue to rise. When the security closes below the T-line, it is an indication that the price will continue to fall.
3. Japanese candlesticks
Most traders prefer using the Japanese candlestick charts since they are easier to understand and interpret. Traders use specific candlestick patterns to identify trading opportunities.
Additional Resources
Thank you for reading CFI’s explanation of swing trading. CFI offers the Capital Markets & Securities Analyst (CMSA)®certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:
FAQs
Additionally, there are golden rules in the swing trading game. There is a 2% rule that says one should never put more than 2% of account equity at risk. On the other hand, there is a 1% rule that says the loss on a single trade should not exceed more than 1% of your total capital.
What is the 1% rule in swing trading? ›
The 1% rule is a key risk management strategy for swing traders, where a trader aims to limit each loss to 1% of their portfolio's value. traders have enough capital to keep trading and avoid significant losses that could wipe out their account.
How much can you realistically make swing trading? ›
Aiming for a 5-10% monthly return is a common and a realistic swing trading return. To translate this into a living wage, you'd need to define what “making a living” means for you. For instance, if your monthly expenses are $3,000, a capital of $30,000 with a 10% return would suffice.
Can I make a living off swing trading? ›
One of the main benefits of swing trading is that while it doesn't take much time, you can earn large profits for the time invested. This trading style can be anything you want it to be. If you are willing to dedicate yourself entirely to it, you can easily earn a living through swing trading alone.
What is the 5-3-1 rule in trading? ›
The numbers five, three, and one stand for: Five currency pairs to learn and trade. Three strategies to become an expert on and use with your trades. One time to trade, the same time every day.
What is the success rate of swing trading? ›
However, it's important to note that an estimated 90% of swing traders do not make money. This suggests that the average success rate of swing traders who do earn a profit annually is about 10%. As such, swing trading isn't a get-rich-quick scheme, but a strategic approach that requires skill, patience, and discipline.
Can you swing trade with $1000 dollars? ›
That's why it's tough to put a dollar amount on what is considered a “small account”. However, we see many new traders start small with just $1,000 in their accounts. This is a pretty good starting place for new traders because your risk is pretty limited.
What is the golden rule of swing trading? ›
Finally, I want to leave you with what I believe are two Golden Rules, applicable to all traders but, of essential importance to short-term swing traders: NEVER, ever, average a loss! Sell out if you think you are wrong. Buy back when you believe you are right.
What is the best timeframe for swing trading? ›
The best time frame for swing trading if you have just started investing is between 6 months to 1 year. Technical analysis is the tool that is often used to select a stock and perform trades. The analysis of stocks gives you an insight into when to buy the stock and when to go short on the stock.
What is the average income of a swing trader? ›
The average salary for a Swing trader is ₹1,00,000 in New Delhi, India.
Let's start with the basics of a swing trading strategy. Rather than targeting 20% to 25% profits for most of your stocks, the profit goal is a more modest 10%, or even just 5% in tougher markets.
Can I swing trade with $50? ›
$50 is theoretically the least amount of capital you should start day trading with. But, there are some problems with this. If you have a few losing trades, you now have less than $50, yet you still have to risk about $0.50 on a trade. This means you're now risking more than 1% of your account.
What is the downside of swing trading? ›
While swing trading offers opportunities for quick gains, it comes with drawbacks such as overnight risks and the potential to miss out on long term investment opportunities. Despite its challenges, swing trading remains popular, especially with the convenience of online trading platforms like Share India.
What is the daily routine of a swing trader? ›
Swing trading combines fundamental and technical analysis in order to catch momentous price movements while avoiding idle times. Retail swing traders often begin their day at 6:00 a.m. EST to do pre-market research, then work up potential trades after absorbing the day's financial news and information.
What is a good moving average for a swing trader? ›
20 / 21 period: The 21 moving average is my preferred choice when it comes to short-term swing trading. During trends, price respects it so well and it also signals trend shifts. 50 period: The 50 moving average is the standard swing-trading moving average and is very popular.
What is the 2% trading strategy? ›
The 2% rule is a risk management principle that advises investors to limit the amount of capital they risk on any single trade or investment to no more than 2% of their total trading capital. This means that if a trade goes against them, the maximum loss incurred would be 2% of their total trading capital.
What is the 2% rule for stop loss? ›
The 2% Rule. Not allowing a position to lose more than 2% of the overall portfolio. This can be prevented by proper position size and not engaging in any bad behavior as mentioned above. Use no more than a 20% stop loss on each position.
What is the rule of 2 in trading? ›
What Is The 2% Rule? Simply put, make sure the loss on any one trade is less than 2% of your total equity. In the classic book "Market Wizards," one of the famous traders interviews recommends that traders risk no more than 2% of their capital on any one trade.
