What is swing trading? How to swing trade

In this article, we'll do a deep dive on swing trading? We'll cover the tools and methods of the strategy and the pros and cons so you can make a more informed decision before deciding if you want to become a swing trader. Whether you're a newbie or a seasoned veteran, we'll give you some objective and useful insights to help you improve your game or get off on the right foot.

What is swing trading?

Swing trading is a strategy that tries to profit from holding short-term to medium-term positions for a few days to several weeks. It's not for long-term investing. For example, buying XYZ stock at $24 on Tuesday and selling it for $27 the following Friday would be considered a swing trade and a nice $3 profit per share. 

Swing trading looks simple enough, but looks are deceiving. The outcome could have played out much differently by buying at $24 on Tuesday and stopping out at $21 on Friday, for a $3 per share loss. The trick lies in which methods you used to derive the $24 entry price and the sale at the $27 exit price. Any way you slice it, swing trading is not without risks. 

The swing trading definition uses elements of day trading and investing and applies them to maximize gains and minimize losses. A key difference in swing trading vs day trading is the timeframe. If you find that day trading is too hectic and stressful, but long-term investing is too slow and boring, then swing trading falls right in the middle. 

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Swing trading is more active than investing but less active than day trading. The most notable factor with swing trading is the holding period for positions. Unlike day trading, swing trading involves taking positions overnight from days to weeks. It entails overnight and over-the-weekend event risks being exposed to a position while markets are closed and absorbing a price gap from an event.

It's also worth noting that swing trading should be premeditated with a game plan prepared before the trade. Too often, traders find themselves "stuck" in a position and label it swing trading. A swing trade should start and end as a swing trade. Sometimes, a day trade may turn into a swing trade due to new compelling reasons like a wider time frame chart pattern or a strong trend in your favor to maximize gains. You should make a swing trade because you don't want to sell a day trade position for a loss. 

Swing trading methods

Swing trading utilizes many different methods that day traders commonly use. Mechanically, it's like day trading but with wider time frames and price ranges. Here are some swing trading methods to consider applying to your trades. The time frame charts commonly used for swing trades range from 60 minutes daily, weekly and monthly. Many traders use a combination of the following methods as part of a trading methodology or system using the best indicators for swing trading. 

Bullish or bearish crossover points

Crossover signals can be used with different chart indicators. The most common is the moving average (MA) crossovers that indicate a reversal breakout or breakdown. Utilizing the 50-period and 200-period moving averages enables you to trade golden cross breakouts and death cross breakdowns.

The daily chart for the e-commerce platform Shopify Inc. NASDAQ: SHOP illustrates the alternating nature of crossover point trigger patterns. The bearish death cross breakdown occurs on January 25, 2022, on the daily 50-period MA crossover down through the 200-period MA, triggering at $93.90 as it sinks to a low of $23.60 by October 13, 2022. The bullish golden cross pattern forms on January 20, 2023, on the 50-period MA crossover up through the 200-period MA, triggering at $40.48 as it climbs to a high of $70.50 on July 15, 2023.

Support and resistance triggers

By analyzing longer periods on a candlestick chart, you can identify and use horizontal trend lines to mark significant resistance top and support bottom levels. A resistance top forms when the stock price peaks at a price level and falls back down. When a new high forms, a new top should be drawn; it should also be drawn on lower tops. The same applies to support bottoms.

These support and resistance triggers can be played as stop-loss, break, or target price levels depending on your trade. For example, if you buy XYZ stock long at $27 and the resistance top at $30, you can use that as a profit price target. If you short sell XYZ at $29, you might use the $30 level as a stop-loss trigger. If XYZ breaks out through the $30 resistance, it can transform into a new support level at $30. 

On the weekly Amazon.com Inc. NASDAQ: AMZN chart, very distinct tops are marked by red horizontal resistance trend lines. There are horizontal support lines in the market with horizontal support trendlines. The $188.11 is a resistance double top. If it retests this level, this can be a signal to short sell AMZN. If the stock breaks higher, it can be a signal to go long. The same applies to the $147.08 resistance. The $65.35 is a support level bottom to consider taking long for a bounce or a short on a breakdown lower. The $81.30 is a double bottom support level for longs or a short on breakdowns.

Moving average convergence/divergence (MACD) crossovers 

Using a momentum indicator helps to time your entries and exits. The MACD comprises two exponential moving averages (EMAs), a lead MACD line with a 9 EMA, and the laggard signal line smooths with a 26 EMA. When the lead MA crosses up through the laggard, it is often considered a buy signal. When the lead MA crossover falls through the laggard, it is often used as a short-sell signal. The histogram illustrates the distance between the MACD and signal line and can help confirm the crossover when the histogram goes from green to red and red to green.

The weekly Starbucks Co. NASDAQ: SBUX candlestick chart illustrates the MACD crossovers for long and short entries. The MACD crossover up triggers along at $66.18 on May 4, 2022. The MACD crossover down triggered a short sell at $109.06 on August 12, 2021. The MACD crossover triggers a long $70.13 on June 21, 2022. 

Fibonacci retracement pattern 

This pattern uses a price indicator called the Fibonacci levels (fibs). Fib levels are created by plotting a starting and ending point consisting of a swing low to a swing high and back down from the swing high to the swing low. Fib ratios are applied to the distance popularly using 0.25 or 25%, 0.32 or 32%, 0.50 or 50%, 0.618 or 61.8%, 0.78 or 78% and 0.886. The 0.618 fib or its inverse, which is 0.382, tends to be levels of most interest. Each of the fib levels are treated as potential support and resistance levels. These static price levels change when the fibs are replotted with new swing lows or swing highs. A fib level can be played long if it holds support and bounces or short if it acts as a resistance.

The daily candlestick chart of Darden Restaurants Inc. (NYSE: DRI) fib lines were plotted using a swing low of $116.26 and a swing high of $173.06. Some fib levels act as key price inflection points that can trigger a swing trade depending on how the price reacts. The 0.50 fib level at $144.66 has proven to be a support level on its last two pullbacks, which sets it up for a possible buy zone if it retests again. A stop-loss would be underneath if it forms a breakdown, turning it into a resistance level.

Day trading vs swing trading

Swing trading is similar to day trading with longer holding periods and wider price ranges. Swing trading takes more patience than day trading. It also requires proper allocation of shares, meaning fewer shares versus day trading, which uses leverage with large positions for small increment gains held for the shortest amount of time. Swing trading requires patience, while day trading requires diligence to react quickly to take stop losses and incremental profits. 

Most importantly, day trading requires you to close out your positions by the end of the day. Swing trading allows you to hold positions from days to weeks until price targets are hit, or crossovers trigger. Transitioning from day trading to swing trading should be gradual. One of the largest pitfalls is that if adjustments to share allocation are not made, much larger losses can form. A different mentality is required when you are looking to swing stocks. Small quick losses are to be avoided since you’re letting time smooth out the noise and focusing on the larger trend. Swing stock trading requires more patience and a higher tolerance for larger price swing ranges.

Example of swing trading

Let's look at how we can utilize some of the methods for a stock swing trade. Using the daily candlestick chart on DRI, we can apply the MACD crossover trigger and fibs to find trade entry points.

The daily candlestick chart shows a MACD crossover on May 17, 2023, triggering the long position at $151.99. The MACD continued to rise as the histogram remained green until just over a month later. On June 21, 2023, the MACD had a crossover down as the histogram turned red, triggering an exit to sell the position at $165.60, resulting in a profit of $13.61 or 9% in a swing trade held for just over a month. 

Pros and cons of swing trading 

Here are the pros and cons of swing trading. 

Pros

Here are the benefits of swing trading:

• High profit potential. The flexibility to hold a position without a time limit enables you to maximize your profit potential. In best-case circumstances, you may score high since you might let your profits run for days to weeks. 
• Less constraints than day trading. Aside from the margin aspect being less than the day trading margin, swing trading overall has fewer constraints regarding positions. You can hold a position for as long as it takes to complete a pattern or trigger a trail stop. This could take days to weeks. You won't be constrained by any requirements to close your position during market hours.
• Less screen time is required. Swing trading holds positions for longer intervals, which require less time sitting and staring at the screen. This is different from day trading, which requires you to make split-second reactions to capture an incremental profit. You can place limit orders to sell a position for a profit or loss on most brokerage platforms, enabling you to spend time doing things like a full-time job or operating a business.

Cons 

Here are some of the pitfalls of swing trading:

• Exposure to overnight event risk. The biggest risk with swing trading and holding overnight is the inability to react in the event of an overnight risk. The U.S. equity markets are closed from 8:00 p.m. EST to 8:00 a.m. EST. Some brokerages may enable trading as early as 4:00 a.m. EST, but liquidity is likely thin as most market participants are not engaged until later. Event risk can come from geopolitical tensions and events, earnings warnings, economic reports and unexpected disasters and catastrophes. 
• Swing trading is still speculative and risky. Swing trading is still speculative since the position can also turn against you. It requires discipline to throw in the towel and stop losses when they trigger. However, failing to take stop losses can result in potentially blowing out your account. Position sizing is a significant risk element that you can and should control.  
• Larger stop losses. Swing trading requires larger stop losses since a wider price range accompanies a longer holding time. While day trading emphasizes keeping stops small, swing trading gives a trader more rope to let the pattern play out. As a way for you to mitigate this risk, you should take smaller share size positions. This strategy allows you to accommodate the larger stop losses. For example, a 25-cent stop on a 1,000-share day trade position equals a $2.50 stop on a 100-share swing trade.

Don't be a bag holder or accidental swing trader

Swing trading should be methodical and pre-planned. Too often, a day trade may go red, and the trader decides to hold it overnight and swing trade it until it bounces back to green. Too often, the result is a deeper shade of red as the stock continues to plummet lower until the pain is too much, and a stop loss is executed. Or the trader may still be holding the trade as a bag holder convinced not to sell the stock for a loss. The bottom line is to honor your stop losses if they trigger and reassess when you're back in a cash position.