A beginner’s guide to swing trading

Swing trading is a short-term trading method that aims to take profit from trending rises or falls in asset prices. Read on to find out how swing trading works, and how to start building your swing trading strategy.

Market data
Source: Bloomberg

What is swing trading?

Swing trading is a trading style that focuses on trying to capture a portion of a larger move. It is based on the assumption that asset prices rarely move in a straight line, and that the minor oscillations in the price movements of markets can provide an opportunity for profit. Swing traders focus on the points where a market changes direction, entering and exiting their trades at these ‘swings’. 

Swing trading sits between day trading and trend trading. While trend traders will look to take advantage of a long-term trend, ignoring the oscillations that take place within that trend, a swing trader is focused on those oscillations.

A number of definitions for swing trading will suggest that a swing trade is held overnight, or for a couple of days to a couple of weeks. However, the trade duration is relative to the timeframe of the trend, which could be as short as 30 minutes, or even less. Swing trading is about trading short-term legs of longer-term trends.

How swing trading works

Swing trading works by identifying profitable times to enter a trade based on two different types of swings: a ‘swing low’ or a ‘swing high’.

A swing low is a term used to refer to a major price low, while a swing high is a term used to highlight a major price high. A swing trader is concerned with trying to capture the price movements between these major lows and highs

The chart below shows a price chart in an uptrend, with the swing highs and swing lows highlighted.

The chart below shows a price chart in a downtrend, with the swing highs and swing lows highlighted.

In an uptrend, a trader would be looking to buy, or 'go long', from these lows to the highs.

In a downtrend, traders would be looking to sell, or 'go short', from the highs to the lows.

It is impossible to consistently pinpoint the exact high and low of every swing move, but the idea is to capture as much of the price movement as possible. In fact, it’s common to miss the exact highs and lows, as it can take time to confirm that a new swing is underway.

Let’s look at a swing trading example in an uptrend and a swing trading example in a downtrend. 

In essence, this type of trading involves identifying short-term trends. If the trend is up, you 'buy the dips' and if the trend is down you consider 'selling the rallies'.

Building a swing trading strategy 

Before you open your first position, it’s important to build a swing trading strategy that you have confidence in. As swing trading is based on identifying points where the market is changing direction, you will need to establish a methodology for entering and exiting trades, as well as a risk management strategy to minimise losses if the market moves against your prediction. 

Using technical indicators for swing trading

Many traders will use charts and technical indicators to try and identify swings in markets, and profitable entry points. 

One of the most popular indicators to use is the moving average. In principle, when the price is trading firmly above the moving average the trend is considered to be up and when the price is trading below the moving average the trend is considered to be down.

Once a trend is identified, a trader could consider using a momentum indicator in an attempt to try to capture swings in the overall trend. 

Popular momentum-type indicators are often referred to as oscillators, and two of the most popular are the stochastic and the Relative Strength Index (RSI).

In an uptrend, a move out of oversold territory as indicated by the RSI (highlighted on the chart below) might be a signal to buy a trade (take a long position). An overbought signal may be a signal to exit the trade.

In a downtrend, a move out of overbought territory (highlighted on the chart below) might be a signal to enter a short trade (sell), while an oversold signal may be a signal to exit the short trade and not trade against the trend.

Managing your swing trading risk 

As swing trading is based on a market changing direction, it is important to have measures in place to prevent unnecessary losses and manage your risk.  

Traders taking long positions might consider placing a stop loss, an order to sell at a specific price to limit potential losses, at the point where they think the short-term swing trend has started, for instance, the swing low. If the swing low were to be broken and a new low formed, that’s a logical place to admit the failure of the uptrend assumption and trade.

Traders taking short positions might consider placing a stop loss around the level of the swing high. Again, if the price moves back above the swing high, going on to form a new high, then it’s logical to admit the failure of the downtrend assumption and trade.

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IG Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.

Find articles by writer