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What is swing trading?

By Douglas Thane

Swing trading allows you to compound many small gains into a large cumulative return but it comes with certain risks.

Swing trading is an intermediate length trading strategy. Unlike day trading strategy, swing trading usually means keeping your position for a few days up to several weeks and months but there is no definitive time frame for exiting an investment.

While a day trader will exit their position at or before the end of each trading day, and a position trader will ignore small fluctuations in the market to capture long term trends, swing traders will take the middle road. They seek to capitalise on interim swings in the market with wider boundaries than a day trader.

How does swing trading work?

A swing trader is seeking to capture profit on small upward and downward swings in the price of an investment instrument. This trading style works best in stagnant markets because markets that are experiencing extreme bullish or bearish swings tend to take a much straighter trajectory up or down than during relatively stable times.

Swing trading offers the opportunity to compound many small gains into a large cumulative return. Traders mostly rely on technical analysis, looking for multi-day chart patterns. Some of the common patterns and trading tactics include:

Fibonacci retracement

Using Fibonacci Retracement (FR) investors look to identify market reversal opportunities. The retracement levels are based on the underlying values of 23.6 per cent, 38.2 per cent, 61.8 per cent and 78.6 per cent, which represent the standard “corrections” a stock price will undergo while on an upward or downward trend. These represent the small “steps” commonly seen on a longer-term stock price chart.

Trigger line

They are used to estimate if a stock will continue to rise or fall based on a mathematical representation of momentum. It is essentially a moving average and is utilised to gain a better understanding of the micro corrections a stock will make during its overall direction.

Candlesticks

Candlesticks aim to graphically show the high, low, open, and closing prices of a stock. They are looking to account mathematically for the investors’ sentiment that impacts a stock price movement.

All of the key strategies for swing trading are based on capitalising on the small incremental movements that are typical of the stock market and are not necessarily tied to the overall performance of a stock.

Swing trading pros

A lot of the positive and negative aspects of swing trading are subjective and depend on if you are comparing to day trading or a long-term strategy. Some of the benefits of swing trading are:

  • It is based mostly on technical analysis, simplifying the research process.
  • Swing traders can focus on short-term trends, they do not need to consider every single option.
  • Risk control. Stop-loss points are typically lower than long-term investment strategies.
  • Time commitment. This is a matter of opinion as swing trading takes a considerably larger time commitment than a long-term strategy but much less than day trading.

Swing trading cons

Swing trading strategies are not for everyone and there are some negative aspects to consider. Every trade you place whether it is a buy or sell comes with a risk attached. Some of the cons to swing trading are:

  • Requires extra work of learning technical analysis
  • Transaction costs.Every transaction has a cost and thus fees will be higher than a strategy that requires fewer trades. Similarly to day trading, investors should seek a platform with the lowest per transaction costs.
  • Overnight risk. Unlike day trading, swing traders will typically leave their money in the market overnight. This brings the risk of price fluctuation while you sleep.

As with all trading strategies swing traders are not completely bound to tight restrictions. If there is information that was not known previously that indicates that a stock will continue to rise, think a new oil discovery or merger announcement, the investor can choose to increase the upper boundary to capitalise on increased gains. Similarly, if there is unexpected negative news the investor does not need to wait for the lower boundary to be reached if they anticipate the investment’s inevitable downturn. Swing trading tips, like all investment strategies, are to never lock yourself into a specific set of rules but rather guidelines. If something is evident do not force yourself to ride it out just because the strategy dictates. Swing trading is a middle of the road investment strategy and should be considered when developing your individual approach.

FURTHER READING: How to read trading charts

FURTHER READING: What is intraday trading?

FURTHER READING: What is scalping and how do you do it?

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