What is swing trading?

Introduction

Popular in all markets, swing trading is especially well-suited to CFD traders because it relies on quick and flexible position taking in both directions, going short when an upwards movement overextends and long when a downwards price move does.

What is swing trading?

Swing trading is a form of short to medium-term trading, popular with retail traders. Swing traders use technical analysis to identify long or short trading opportunities, producing buy or sell signals that determine when the trader enters and closes positions. Typical holding times can vary from one day to a few weeks.

Swing trading is a popular technical strategy, based on the principles of mean reversion, that is widely used by CFD traders in many markets. Compared to buy and hold position traders, swing traders work on short timescales, entering and exiting positions quickly, but still use longer timeframes than seen in classic day trading strategies like scalping .

The idea behind swing trading is to profit off the return to average after a short-term market movement, trading the fluctuations or ‘noise’ in markets by taking advantage of their tendency to return to the longer-run mean. The most useful technical indicators for swing traders are oscillators such as the stochastic oscillator, the relative strength index, and moving averages including moving average convergence divergence.

How to swing trade

Swing trading is a technical strategy, relying on price charts to produce buy or sell signals in the target market. Successful swing traders closely monitor charts for characteristic patterns, sometimes using candlesticks to identify ideal entry and exit points, and confirming the strength of an existing trend with oscillators. Fundamental analysis plays little or no role in swing trading.

To swing trade, you need to first identify your target market, then choose an appropriate chart timeframe to begin trading, bearing in mind that swing trading positions take place over approximately 6 hours to 2 days. Once you have done this, you need to find a failing trend, and enter a position against it, (hopefully) profiting off the price’s move back to the long-term average. There are any number of technical methods to identify failing trends, with the most popular being moving average lines and the relative strength index.

Moving averages

You are probably familiar with momentum-based strategies using this indicator. The same principles apply to swing trading, but are reversed: when, during a long trend, the short-term moving average dips back below the long term average, a swing trader sees a sign of weakness and will enter a short position. As the long trend corrects the swing trader then collects profit on his open position, closing it again as the market starts to recover. Moving averages are a lagging indicator, and so do not show in advance which trends are likely to reverse, but by using short time periods they can quickly pick up on a failing trend after it happens.

Relative Strength Index (RSI)

The RSI is an indicator that measures the speed and magnitude of recent price changes. An asset trading bullishly will have a higher RSI and one selling off aggressively a lower one, with an RSI below 30 or 20 considered ‘oversold’ and one above 70 or 80 ‘overbought’. This is used by mean reversion traders to estimate when a given trend has gone too far and is about to reverse but should be used with care as sometimes sustained bull runs (or sell-offs) will see overbought or oversold conditions persist. The indicator weight recent price changes, so a slowing trend will see a corresponding fall (or rise) in the score, making this a good indicator for swing traders seeking reversing trends.

Does swing trading work?

The best swing trading strategies have proved profitable for many traders, but it takes time to master any strategy, and no strategy is guaranteed to prove successful. Some analysts believe that momentum or ‘trend following’ strategies outperform mean reversion ones (like swing trading) on average, so the decision to use swing trading should be made with care. The sort of trader who will most benefit from adopting this approach is one who is comfortable with charts, and who looks to deal with larger market movements than faster traders, allowing positions to run further before taking profit. This changes the risk / reward profile of swing trading, which relies on fewer trades with higher profits and normally a higher win rate than scalping.

Swing trading in different asset classes

Swing trading principles can be applied to any market, and the best swing trading strategies work equally well in any asset class. That said, equity CFD traders are among the most likely to use swing trading due to the specific characteristics of that market. Some brief differences between each asset class are outlined below.

Equities

Swing trading with stocks is by some distance the most popular market for this type of strategy. The reasons for this are several: stocks trade on exchanges, which matters to equity CFD traders because the markets close regularly, preventing price action from taking place when you are not paying attention. Because successful swing trading requires holding a position from around one session to two or three sessions, it is not ideal if the asset continues trading when you are asleep. Equity markets neatly avoid this problem by fixing trading to certain set hours, though traders need to pay attention to their time zone: the NYSE, for example, opens at 17:30 UAE time and doesn’t close until midnight.

Forex

Forex CFDs can be traded at any time of day, with markets running five days a week on a 24 hour basis. That means swing traders will be letting positions run unmonitored for some of the time, which some day traders may not be comfortable with. Fortunately, when compared to stock markets FX tends to see less volatility, so simply avoiding major market announcements should be enough to protect your positions. In terms of price action, the same swing trading principles can be applied to the forex market as for stocks, making this another popular choice for traders.

Crypto

Crypto CFD traders show a heavy bias towards momentum or trend following strategies, and with good reason: once trends get underway in these highly volatile markets they tend to continue, and traders trying to stand in their way can suffer huge losses. Because of the massive volatility seen in crypto markets, both long and short CFD positions can result in enormous losses, making swing trading a risky proposition here. Momentum strategies are normally the way to go with crypto, and leaving positions unmonitored overnight is frankly unwise.

Conclusion

Swing trading is a strategy popular with intermediate to advanced traders, and used across CFD markets including forex, indices, and stocks. Most popular with equity traders, the technical principles behind swing trading are simple and based on mean reversion. What is unique about these strategies is the hold time, which is intermediate between buy and hold (or ‘position trading’) and the fast intraday positions of scalping. Swing trading is an interesting opportunity for traders looking to follow price moves further than short term momentum strategies, and who don’t mind holding open positions overnight, depending on the market.

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