What is swing trading and how to apply it to your trading strategy?

How to Get Started with Swing Trading?

Swing trading can be started initially by gaining a strong foundation using the following steps:

Education: Pepperstone has a vast range of online materials to help traders enhance their knowledge of swing trading basics, this includes technical analysis, chart patterns and market indicators.
Develop a Trading Plan: Prepare a detailed plan that clarifies entry and exit criteria, rules for money management and profit targets. Also determine how much capital will be put at risk and the maximum risk per trade.

Technical Analysis: Technical tools such as Moving Averages, RSI and MACD can be used to identify potential trades. Review charts for trends and formations that may offer entry or exit signals.

Start with a Demo Account: To become consistent with executing several pre-planned strategies consider using a demo account. Pepperstone’s Trading Simulator is a useful tool to consider for practicing the different strategies of swing trading.

Risk Management: Set stop-loss orders to limit losses and ensure trades are within risk tolerance level.

Monitor and Modify: Keep track of executed trades, evaluate performance then change techniques based on market shifts as well as outcomes obtained from trading activities.

Is swing trading suitable for beginners?

Swing trading can be suitable for beginners since it combines multiple trading opportunities within manageable time periods. There are several reasons why swing trading may be an appropriate approach to begin with:

• Time Commitment: Swing traders usually keep positions open from several days to weeks, unlike day trading which requires the constant monitoring of charts daily. This allows beginners to balance trading with other commitments. The longer time frame for the decision-making process also reduces the need for instant decision making that can require minutes or even seconds in day trading.

• Learning Opportunities: Swing trading helps in learning both technical analysis (indicators, chart patterns) as well as fundamental analysis (company earnings, economic indicators). A comprehensive approach helps develop a strong foundation of knowledge regarding trading and markets. By engaging in shorter-term trading versus long-term investing, beginners may get a better experience and learn from market movements more quickly.

• Risk Management: Stop-loss orders can be used as risk management tools which new traders can employ in order to protect capital. Beginners can trade smaller lot sizes in order to minimise potential loss while they are testing their strategies.

• Emotional Control: Trading plans should be rigid to avoid impulsive decisions based on short-term market fluctuations. Losses should be treated as learning opportunities. A review of trades helps develop an understanding of what went wrong and where to improve.

What is Technical Analysis in Swing Trading?

Technical analysis is a key tool for swing trading to identify potential trading opportunities by analysing price charts and patterns. Here’s a step-by-step guide on how to use technical analysis effectively in swing trading:

Chart Types and Timeframes

Choose the Right Chart: Candlestick charts provide detailed information about price movements.

Select Appropriate Timeframes: For swing trading, daily and weekly charts identify broader trends and 4-hour or hourly charts offer more precise entry and exit points.

Identify Trends

Trend Lines: Trend lines identify the direction of the market in a stock. An upward trend line connects higher lows, while a downward trend line connects lower highs.

Moving Averages: Moving averages (MA) smooth out price data and identify trends. Popular periods for the moving averages are the 50- and 200-day.

Support and Resistance Levels

Support Levels: Price levels where buying interest is strong enough to prevent the price from falling further.

Resistance Levels: Price levels where selling interest is strong enough to prevent the price from rising further.

Identify Key Levels: Mark significant support and resistance levels on a chart to anticipate potential price reversals as per chart below:

Technical Indicators

Relative Strength Index (RSI): Measures the speed and change of price movements. An RSI above 70 indicates overbought conditions, while below 30 indicates oversold conditions.

Moving Average Convergence Divergence (MACD): Shows the relationship between two moving averages. A bullish signal occurs when the MACD line crosses above the signal line, and a bearish signal when it crosses below.

Bollinger Bands: A momentum indicator that consists of a middle band (simple moving average) and two outer bands (usually 2 standard deviations). When prices move closer to, or break through the upper band, the market is considered overbought and offers a potential SELL signal; near the lower band, it is oversold offering potential BUY signal.

Chart Patterns

Reversal Patterns: Patterns like head and shoulders (example below), double tops, and double bottoms indicate potential reversals in trend.

Continuation Patterns: Patterns such as flags, pennants, and triangles indicate continuation of current trends after a consolidation period.

Volume Analysis

Confirming Trends: Volume should increase in the direction of the trend. For example, during an uptrend, volume should rise as prices rise.

Spotting Reversals: A significant change in volume can precede a price reversal.

Entry and Exit Strategies

• Entry Points: A combination of trend analysis, support/resistance levels, and indicators to identify optimal entry points. For example, buy near support in an uptrend or on a bullish MACD crossover.

• Exit Points: Target prices set on resistance levels, moving average crossovers, or a specific risk/reward ratio. Stop-loss orders limit potential losses.

What is fundamental analysis in swing trading?

Fundamental analysis in swing trading examines underlying economic, financial and qualitative factors to determine the value of a stock or asset. The combination of the following factors enables swing traders to make informed decisions:

1.Company Performance: Analysis of financial statements such as income, balance sheet and cash flow statements. Revenue growth, profitability, debt levels and investments are all key data to consider. Strong financial health suggests a company can withstand economic downturns and continue to grow.

2. Economic Indicators: Broader economic conditions such as interest rates, inflation and employment are also very important considerations for a swing trader. A healthy economy makes it easier for companies to raise funds which can ultimately affect stock prices positively.

3. Industry Trends: Technological developments, regulatory changes, or even changes in consumer preferences can all affect a company’s performance and sentiment.

4. Qualitative Factors: A company’s management team, competitive advantage, brand value, and market position can all impact stock prices. Strong leadership and a strong work ethic can lead to long-term success and have a positive impact.

What is risk management in swing trading?

One of the most important elements of a swing trading strategy is risk tolerance. More conservative or prudent traders will capture profits after just 3-5% of favourable price movement. Aggressive and speculative traders will let their positions run longer in the hope of capturing more upside. Risk management considerations:

• Stop-Loss Orders: Place stop-loss orders below support levels for long positions or above resistance levels for short positions to protect against significant losses.

• Position Sizing: Determine the size of each trade based on risk tolerance and the distance to stop-loss level.

• Review and Adjust: Regularly monitor trades and adjust strategy based on market conditions and performance.

• Learning from Trades: Keep a trading journal to record trade details and outcomes to learn and refine strategy over time.

See also: Five Rules Around Managing Risk

How To Develop A Swing Trading Strategy

There are no fixed number of strategies in swing trading as the strategy can be highly customisable depending on individual preferences and market conditions but many popular strategies are often used to generate medium-term profits price trends.

An Overview Of The Main Swing Trading Strategies:

Trend Following - Identifies and follows prevailing market trends. Traders look for stocks or assets that are trending up or down and aim to capture gains within the trend.

Chart Tools: Moving Averages, Trendlines

Breakout - Focuses on entering trades when an asset breaks out of a defined support or resistance level. The idea is to capitalise on the momentum following the breakout.

Chart Tools: Support and Resistance Levels, Volume Indicators, Bollinger Bands.

Reversal - Seeks to identify and trade against the prevailing trend, anticipating a reversal. Traders look for signs that a trend is about to change direction.

Chart Tools: RSI (Relative Strength Index), MACD (Moving Average Convergence Divergence), Candlestick Patterns.

Range - Involves trading assets within a defined range of support and resistance levels. Traders buy near support and sell near resistance.

Chart Tools: Support and Resistance Levels, Oscillators (e.g. Stochastic), Bollinger Bands.

Swing Trading with Moving Averages - Uses moving average crossovers to identify entry and exit points. A common approach is to trade when a short-term moving average crosses above or below a long-term moving average.

Chart Tools: Moving Averages (SMA, EMA), Moving Average Crossovers.

Momentum - Focuses on assets that are experiencing strong momentum. Traders buy assets with upward momentum or sell those with downward momentum.

Chart Tools: Momentum Indicators, MACD, RSI.

Gap - Takes advantage of price gaps that occur between the closing price of one day and the opening price of the next. Gaps can signal significant price movement opportunities.

Chart Tools: Gap Analysis, Volume Indicators.

Mean Reversion - Assumes that price will revert to its average or mean after deviating significantly. Traders look for overbought or oversold conditions to enter trades expecting a reversal.

Chart Tools: RSI, Moving Averages, Bollinger Bands.

News-Based - Trades based on news events and market-moving announcements. Traders react to earnings reports, economic data, or other significant news.

Tools: Economic Calendars, News Feeds, Volatility Indicators.

Fibonacci Retracement - Uses Fibonacci retracement levels to identify potential support and resistance levels during price corrections.

Chart Tools: Fibonacci Retracement Levels, Trendlines.

These strategies can be combined or adapted based on individual trading styles and market conditions. Swing traders often use a mix of these approaches and customise them according to preferences, risk tolerance, and the specific asset traded. Regular practice, backtesting, and adjustment of strategies are essential.

Swing trading example

The following strategy example used a combination of moving average crossovers and RSI to identify swing trading opportunities:

Chart Components

Moving Averages:

Short-term Moving Average (SMA): 10-day SMA

Long-term Moving Average (SMA): 50-day SMA

Relative Strength Index (RSI):

RSI Period: 14 days

Overbought Level: 70

Oversold Level: 30

Entry and Exit Rules

**Buy Signal**

- The 10-day SMA crosses above the 50-day SMA

- The RSI is above 30 but below 70, ideally in the 40-60 range

**Sell Signal**

- The 10-day SMA crosses below the 50-day SMA

- The RSI is above 70 or starts declining from above 70

Example using Apple Inc. (AAPL)

Observed Date Range: January 1, 2023 - June 30, 2023

Buy Signal

Date: March 8, 2023

Moving Averages: The 10-day SMA crossed above the 50-day SMA, indicating a potential uptrend.

RSI: RSI at 50, suggesting the stock was neither overbought or oversold.

BUY position entered at $150 per share.

Holding the Position - Monitoring the stock ensuring the 10-day SMA remained above the 50-day SMA, and RSI below 70.

Sell Signal

Date: August 4, 2023

Moving Averages: The 10-day SMA crosses below the 50-day SMA, signalling a potential downtrend.

RSI: RSI rose above 70 and then started to decline, indicating overbought conditions.

SELL order entered at $190 per share.

Trade Summary

Buy: March 8, 2023, at $150 per share

Sell: August 4, 2023, at $190 per share

Profit: $40 per share

Risk Management Considerations

Stop-Loss: Set a stop-loss order 5% below the entry price to limit potential losses. For the buy at $145, set a stop-loss at $142.50.

Position Sizing: Risk no more than 2% of total trading capital on a single trade. If trading capital is $10,000, risk $200 per trade.

What tools can I use in swing trading?

Swing traders should consider using a combination of tools for effective trading decisions. Charting software, technical indicators, economic calendars, stock screeners, and risk management tools are essential for identifying trade opportunities, managing positions, and helping to adapt to market conditions. By integrating these tools into a swing trading strategy, more informed decisions can be made and probability of success improved.

Charting Software

TradingView offers advanced charting features, customisable indicators, and a large community of traders for sharing ideas and strategies. MetaTrader 4/5 (MT4/MT5) is popular for forex and stock trading, offering advanced charting capabilities and automated trading features. Pepperstone also offers Autochartist which is sophisticated software that utilises advanced algorithms to scan financial markets and provide real-time trading opportunities based on statistically significant market movements.

Economic Calendars

Websites like Pepperstone provide free comprehensive calendars with user-friendly charts to help analyse trends.

Stock Screeners

Stock screening tools like Finviz filter stocks based on technical and fundamental criteria such as price patterns, volume, and financial metrics.

News and Research Services

Greater understanding of what makes asset prices fluctuate, the greater the chances of identifying trading opportunities. To get access to news feeds with timely data releases. Free aggregation platforms like PiQ offer over 100 sources of information from the likes of Reuters and Bloomberg.

What are the best platforms to trade on for swing trading?

Tutorials on how to use different order types on platforms such as MetaTrader4/5 are available on Pepperstone’s YouTube channel

What are common mistakes to avoid in swing trading?

Avoiding common mistakes can help improve chances of success and minimise losses. Here is a checklist of the key pitfalls to watch out for:

Swing trading mistakes to avoid

Lack of a Trading Plan

• Mistake: Trading without a clear plan leads to inconsistency and impulsive decision making.

• Avoidance: Develop a detailed trading plan outlining entry and exit criteria, risk management rules, and overall strategy. Stick to plans rigorously.

Ignoring Risk Management

• Mistake: Failing to use stop-loss orders or proper position sizing can result in significant losses.

• Avoidance: Set stop-loss orders to limit potential losses and use proper position sizing to ensure no single trade jeopardises your entire capital.

Overtrading

• Mistake: Making too many trades, often driven by emotional responses or the desire to take advantage of every opportunity.

• ️Avoidance: Focus on high-quality setups based on predetermined strategies. Avoid trading out of boredom.

Neglecting Technical Analysis

• Mistake: Relying solely on newsflow without using technical analysis can lead to poor trade entry decisions.

• Avoidance: Technical analysis tools like moving averages, RSI, and chart patterns can help make informed trading decisions. Ensure trades align with technical signals.

Ignoring Market Conditions

• Mistake: Trading without considering overall market conditions can result in losses during volatile periods.

• Avoidance: Stay informed about broader market trends and economic environment. Adjust the trading strategy according to current market trends.

Over-Reliance on Indicators

• Mistake: Relying too heavily on a single technical indicator without considering other factors can be misleading.

• Avoidance: A combination of indicators and analysis methods can confirm trade signals. Avoid overcomplication with too many indicators.

Emotional Trading

• Mistake: Allowing emotions like fear and greed to drive trading decisions can lead to irrational behaviour.

• Avoidance: Stick to trading plans and rules. Avoid making impulsive decisions based on short-term market movements.

Failing to Adapt

• Mistake: Using a rigid strategy without adapting to changing market conditions or learning from past trades.

• Avoidance: Regularly review and adjust strategy based on performance and market changes. Continuously educate and adapt to new information.

Neglecting Fundamental Analysis

• Mistake: Ignoring fundamental factors that could affect the asset’s price can lead to incomplete analysis.

• Avoidance: Incorporate fundamental analysis, such as earnings reports or economic indicators, to complement technical analysis.

Lack of Patience

• Mistake: Expecting immediate results and not allowing trades to develop fully.

• Avoidance: Allow trades to play out according to the trading strategy.

Swing Trading FAQs

How much capital do I need to start swing trading?

Starting with capital of $2,000-5,000 is usually sufficient for most beginners to start swing trading effectively. As experience and confidence is attained, capital can be gradually increased. Risk management should ALWAYS be prioritised and ensure capital allocation aligns with predetermined trading goals and risk tolerance.

What are the best markets for swing trading?

The best markets for swing trading vary based on individual preferences and expertise. Stocks, ETFs, forex, commodities, cryptocurrencies, and bonds all offer unique opportunities for swing traders. By focusing on markets with high liquidity and volatility, traders can find ample opportunities to capitalise on price swings.

How do I choose the right stocks for swing trading?

Consider choosing from a group of well known large-cap stocks like the FAANG stocks (Facebook, Amazon, Apple, Netflix and Alphabet - the G refers to Alphabet’s core company Google). These stocks have high liquidity, meaning there are plenty of buy and sell orders available over very short timeframes, and makes it more cost effective to buy and sell quickly.

Can swing trading be done part-time?

Swing trading is well-suited for part-time traders because it requires less frequent monitoring compared to day trading. By using automated tools, having a solid trading plan and efficient time management, swing trading can be undertaken while balancing other responsibilities.