Buying and selling of stocks that show an upward or downward trend in the future
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What is Swing Trading?
Swing trading is a trading technique that traders use to buy and sell stocks when indicators point to an upward (positive) or downward (negative) trend in the future, which can range from overnight to a few weeks. Swing trades aim to capitalize on buying and selling the interim lows and highs within a larger overall trend.
Traders use technical indicators to determine if specific stocks possess momentum and the best time to buy or sell. To exploit the opportunities, the traders must act quickly to increase their chances of making a profit in the short-term.
How Swing Trades Works
Swing trading seeks to capitalize on the upward and downward “swings” in the price of a security. Traders hope to capture small moves within a larger overall trend. Swing traders aim to make a lot of small wins that add up to significant returns. For example, other traders may wait five months to earn a 25% profit, while swing traders may earn 5% gains weekly and exceed the other trader’s gains in the long run.
Most swing traders use daily charts (like 60 minutes, 24 hours, 48 hours, etc.) to choose the best entry or exit point. However, some may use shorter time frame charts, such as 4-hour or hourly charts.
Swing Trades vs. Day Trading
Swing trading and day trading appear similar in some respects. The main factor differentiating the two techniques is the holding position time. While swing traders may hold stocks overnight to several weeks, day trades close within minutes or before the close of the market.
Day traders do not hold their positions overnight. It often means they avoid subjecting their positions to risks resulting from news announcements. Their more frequent trading results in higher transaction costs, which can substantially decrease their profits. They often trade with leverage in order to maximize profits from small price changes.
Swing traders are subjected to the unpredictability of overnight risks that may result in significant price movements. Swing traders can check their positions periodically and take action when critical points are reached. Unlike day trading, swing trading does not require constant monitoring since the trades last for several days or weeks.
Trading Strategies
Swing traders can use the following strategies to look for actionable trading opportunities:
1. Fibonacci retracement
Traders can use a Fibonacci retracement indicator to identify support and resistance levels. Based on this indicator, they can find market reversal opportunities. The Fibonacci retracement levels of 61.8%, 38.2%, and 23.6% are believed to reveal possible reversal levels. A trader might enter a buy trade when the price is in a downward trend and seems to find support at the 61.8% retracement level from its previous high.
2. T-line trading
Traders use the T-line on a chart to make a decision on the best time to enter or exit a trade. When a security closes above the T-line, it is an indication that the price will continue to rise. When the security closes below the T-line, it is an indication that the price will continue to fall.
3. Japanese candlesticks
Most traders prefer using the Japanese candlestick charts since they are easier to understand and interpret. Traders use specific candlestick patterns to identify trading opportunities.
Additional Resources
Thank you for reading CFI’s explanation of swing trading. CFI offers the Capital Markets & Securities Analyst (CMSA)®certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:
FAQs
The 2% rule is an investing strategy where an investor risks no more than 2% of their available capital on any single trade. To apply the 2% rule, an investor must first determine their available capital, taking into account any future fees or commissions that may arise from trading.
What is the 1% rule in swing trading? ›
The 1% risk rule means not risking more than 1% of account capital on a single trade. It doesn't mean only putting 1% of your capital into a trade. Put as much capital as you wish, but if the trade is losing more than 1% of your total capital, close the position.
What percent of swing traders are successful? ›
However, it's important to note that an estimated 90% of swing traders do not make money. This suggests that the average success rate of swing traders who do earn a profit annually is about 10%. As such, swing trading isn't a get-rich-quick scheme, but a strategic approach that requires skill, patience, and discipline.
How much profit is enough in swing trading? ›
The Swing Trading strategy can lead to profits in the short term, usually in the range of 10% to 30%. However, as most things investing usually are, it is a risky bet. About 90% of traders report losses during trading.
What is the 5-3-1 rule in trading? ›
The 5-3-1 rule in Forex is a trading strategy based on three key principles: choosing five currency pairs to trade, developing three trading strategies, and choosing one time of day to trade.
Who is the most successful swing trader? ›
Paul Tudor Jones - Another famous swing trader is Paul Tudor Jones. Jones is a billionaire hedge fund manager who is known for his aggressive trading style. He is one of the most successful traders of all time, and he has a net worth of over $5 billion.
Can you swing trade with $1000 dollars? ›
That's why it's tough to put a dollar amount on what is considered a “small account”. However, we see many new traders start small with just $1,000 in their accounts. This is a pretty good starting place for new traders because your risk is pretty limited.
What is the golden rule of swing trading? ›
Finally, I want to leave you with what I believe are two Golden Rules, applicable to all traders but, of essential importance to short-term swing traders: NEVER, ever, average a loss! Sell out if you think you are wrong. Buy back when you believe you are right.
What are the common swing trading mistakes? ›
One of the most common mistakes that swing traders make is not having a well-defined trading plan. A good trading plan should include your entry, risk management and target booking. Without a clear plan, it can be easy to make impulsive decisions or to deviate from your strategy.
Why is swing trading so hard? ›
So, when entering a swing trade, you often must determine why you're buying or selling at a specific price, why a certain level of loss might signal an invalid trade, why price might reach a specific target, and why you think price might reach your target within a specific period of time.
The average salary for a Swing trader is ₹1,00,000 in New Delhi, India.
What is the best timeframe for swing trading? ›
Generally, a swing trader holds the stock between a few days to a few weeks. The best time frame for swing trading if you have just started investing is between 6 months to 1 year. Technical analysis is the tool that is often used to select a stock and perform trades.
What is a realistic monthly return for swing trading? ›
Aiming for a 5-10% monthly return is a common and a realistic swing trading return. To translate this into a living wage, you'd need to define what “making a living” means for you. For instance, if your monthly expenses are $3,000, a capital of $30,000 with a 10% return would suffice.
What is the failure rate of swing traders? ›
We've seen estimations that as many as 90% of swing traders fail to make money in the stock market – meaning they either break even or lose money. That suggests that the average swing trading success rate is somewhere around 10% – meaning 10% of swing traders actually bring in profit over the course of a year.
Which strategy is best for swing trading? ›
Five strategies for swing trading stocks
- Fibonacci retracements. The Fibonacci retracement pattern can be used to help traders identify support and resistance levels, and therefore possible reversal levels on stock charts. ...
- Support and resistance triggers. ...
- Channel trading. ...
- 10- and 20-day SMA. ...
- MACD crossover.
This has since been adapted by short-term equity traders as the 2 Percent Rule: NEVER RISK MORE THAN 2 PERCENT OF YOUR CAPITAL ON ANY ONE STOCK. This means that a run of 10 consecutive losses would only consume 20% of your capital. It does not mean that you need to trade 50 different stocks!
What is the 2% stop loss rule? ›
The 2% Loss-Limit Rule
Abiding by the 2% rule, the maximum amount that can be lost on any single trade is $200 ($10,000 x 2%). If a trade turns unfavorable, the trader has the means to cut the loss and keep the bulk of the capital available for future trades.
How do you calculate the 2% rule? ›
To calculate the 2% rule for a rental property you just need to know the property's price. You could then take that number and multiply it by 0.02. For example, say your budget for purchasing an investment property is $175,000. If you multiply $175,000 by 0.02, you'd get $3,500.
