What Is Swing Trading?

Swing trading tries to capture investment gains on short- to medium-term price swings. Swing traders may use technical and fundamental indicators to find and capitalize on potentially profitable positions. However, this strategy requires accepting heavy risks and losing out on long-term profits. 

🤔 Understanding swing trading

Swing trading is an active strategy where a trader buys or shorts stocks, commodities or forex on short- to medium-term timeframes. The goal is to identify where an asset’s price is likely to move and take the appropriate position. Then, when the price swings, the trader sells out to lock in profits. 

Generally, swing traders don’t catch a security’s entire upswing or downswing. Instead, they try to buy in after a security starts to move and exit before the price peaks or bottoms out. Successful traders hope to lock many small gains to beat annual market returns. 

How swing trading works

Traders may use technical indicators, price charts or business fundamentals to determine their next trade. Once they identify a viable security, they establish a buy or short position and sell following future “swings.” 

Some of the strategies and indicators swing traders mix-and-match can include:

• Technical analysis. Swing traders often examine daily, hourly or 15-minute charts to identify price trends and spot entry, stop-loss and profit-taking levels. 

• Support and resistance levels. A security’s support level is its lowest price below which it doesn’t generally fall. By contrast, a resistance level is a security’s upper price point that the market resists pushing past. Swing traders may buy off support levels and sell near resistance levels. 
• Moving averages. Moving averages smooth out market “noise” and volatility to help identify price trends. Traders may use moving averages to identify bullish and bearish trends or support and resistance levels. 

• Fundamental analysis. Swing traders may examine the business underlying a security to determine potential trade points. Earnings announcements, economic data and new policies can all provide profit-taking opportunities. 

Day trading versus swing trading

Day trading and swing trading are both active, short-term strategies, but they do have some differences. 

To start, swing traders hold positions for days to months, while day traders hold securities for minutes to hours. Additionally, day trading requires more time, while swing traders keep a closer watch on macroeconomic news. 

How does swing trading affect you?

As with any form of investing, swing trading risks significant losses. You can mitigate these somewhat with stop-loss orders—but, even then, higher trading costs and tax bills will eat into your profits. 

That’s why Q.ai recommends a long-term, buy-and-hold investing strategy over riskier short-term trades. Taking the long view can increase your potential of garnering greater long-term gains.