Swing Trading

Swing trading is a style of short- to medium-term trading in which a trader holds a position for a few days to a few weeks, trying to capture one "swing", a single upward or downward move, in an asset's price. Swing traders buy when they expect a rise and sell or go short when they expect a fall, then exit once the move appears to have run its course. The approach is used with shares, currencies, commodities, indices and cryptocurrencies.

Swing trading sits between day trading, in which all positions are closed before the end of each session, and position trading or long-term investing, in which assets may be held for months or years. It relies mainly on technical analysis, although many swing traders also watch news, earnings dates and broader market conditions. It is popular with part-time traders because it does not require watching screens all day.

Prices rarely move in a straight line. Even in a long climb, they rise for a while, dip back, then rise again, like waves coming up a beach. A long-term investor cares about where the tide ends up. A day trader tries to ride the tiny ripples within each hour. A swing trader tries to catch a single wave: jump on as it starts to build and jump off before it breaks.

To do that, swing traders study charts for clues that a wave is starting or ending, such as the price bouncing off a level where it has bounced before. They decide in advance where they will get out if they are wrong and where they will take their profit if they are right. Then they let the trade play out over several days, checking in rather than watching every tick.

A typical swing trade follows a plan made before the order is placed:

1. Finding a setup. The trader scans charts, often daily or four-hour charts, for a pattern that has historically preceded a move, such as a pullback within an uptrend or a break above a range.
2. Choosing an entry. The trader picks a price or condition for entering, for example a bounce from a support level.
3. Setting the exit for a loss. A stop-loss order is placed where the idea would be proved wrong, such as just below that support.
4. Setting the target. A take-profit order or price target is set, often near a resistance level.
5. Sizing the position. The trader chooses a position size so that a loss at the stop would cost only a small share of the account, often one or two per cent.

Many swing traders look for trades where the potential gain is at least twice the potential loss, so they can be profitable even if fewer than half their trades succeed.

• Trend pullbacks. Buying temporary dips within an established uptrend, or selling rallies within a downtrend, often using a moving average as a guide.
• Breakouts. Entering when the price moves decisively out of a range, ideally on rising trading volume.
• Reversals. Trading turns at overbought or oversold extremes, measured with momentum tools such as the relative strength index or the stochastic oscillator.
• Chart patterns. Using shapes such as flags, triangles and double bottoms on candlestick charts.

Traders usually test their rules through backtesting or paper trading before risking money.

Swing trading needs less screen time than day trading, involves fewer trades and so lower fees, and can capture larger moves than intraday trading. It also allows traders to combine chart signals with a view on the news, such as a company's coming results.

Its main risk comes from holding positions overnight and over weekends. Prices can jump, or gap, on news while the market is closed, skipping past stop-loss orders and causing larger losses than planned. In crypto, markets trade around the clock, so there are no closing gaps, but sharp moves can happen at any hour. Swing traders who use leverage magnify both gains and losses and may face margin calls or liquidation, and those who go short need to understand long and short positions and borrowing costs. Holding positions for several days also means paying overnight financing on leveraged products. Like all active trading, swing trading carries a high risk of loss, and studies of retail trading accounts have found that most active traders underperform simple buy-and-hold strategies after costs. Gains are usually taxed as short-term income or gains, depending on the country.