Swing trading strategies attempt to capitalize on price fluctuation over the short term—a period of days or weeks—but not intraday movement. Learn how swing trading is used by traders and decide whether it may be right for you.
Markets rise and fall. Sometimes prices move a lot in a
short period; sometimes they stay within a tight range over a long time. But
markets are always fluctuating to some degree.
If you’re a long-term investor, your focus may be the bigger
picture—the larger market trends and cycles—bull and bear markets. But within
the larger currents exist a multitude of minor price fluctuations: “swings” in
the form of smaller rallies and declines. Simply put, several trends may exist within
a general trend.
Some traders attempt to capture returns on these short-term
price swings. The term “swing trading” denotes this particular style of market
speculation. Perhaps you’ve been tempted to venture into this style yourself. If
you’re not familiar with it, read on for a brief intro.
As a form of market speculation, swing trading strategies
involve opportunity, but also risks.
According to Ben Watson, education coach at TD Ameritrade, swing
trading seeks to capture short-term gains over a period of days or weeks. Swing
traders may go long or short the market to capture price swings toward either the
upside or downside, or between technical levels of support and resistance.
Watson said although swing traders may use fundamental
analysis to provide strategic perspective for a given trade opportunity, most
will use technical analysis tactically. He pointed to four critical components
of a trade setup.
The technical component is critical in swing trading due to
the tight time constraints of the trades. Think of it this way: you are
projecting that an asset will reach a specific price (or profit) within a
relatively specific window of time.
So, when entering a swing trade, you often have to determine
why you are 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.
“Fundamental analysis, with its focus on economic cycles,
company and sector earnings, and other longer-term trends, isn’t typically
suited for specific entry and exit points,” said Watson. “However, it may
inform the decision to trade a particular asset.”
He pointed to technical analysis and chart patterns, which
can focus on narrower time and price context, to help traders visually identify
specific entry points, exit points, profit targets, and stop order target levels.
The answers to both questions are yes and no. Swing trading
sits somewhere between the two. Let’s explore the differences.
Explore our expanded education library.
Although both swing trading and day trading aim to achieve short-term profits, they can differ significantly when it comes to trading duration, trading frequency, size of returns per profit target, and even the style of market analysis.
Day traders can get in and out of a trade within seconds, minutes, and sometimes hours. This means they can place multiple trades within a single day. Because of the ultra-narrow time frame, day traders often aim to capture smaller gains more frequently—unless they’re trading a major news event or economic release, which can cause an asset to skyrocket or nosedive.
The effects of market fundamentals can be slow to emerge. Fundamentals tend not to shift within a single day. Much of the seemingly “random walk” of prices from minute to minute throughout the day may appear as noise. Yet, some day traders might consider these smaller fluctuations to be “tradable.” And as fundamentals may not necessarily influence every single change in price, day traders often rely on technical analysis to gauge these micro-movements of supply and demand.
In contrast, swing traders attempt to trade larger market swings within a more extended time frame and price range. Larger price action within a span of days or weeks can often be sensitive to investor response toward fundamental developments. Hence, swing traders can rely on technical setups to execute a more fundamental-driven outlook. If you’re new to technical analysis, you might want to review the basics. A few of the common patterns can be found in figure 1.
Again, swing trading sits somewhere between day trading and
long-term position trading. Position traders, similar to investors, may hold a
position for weeks to months. But this may also change the nature of how market
analysis is conducted.
Since position traders look at the long-term trajectory of
the market, they may base their trading decisions on a more expansive view of
the fundamental environment, aiming to see the big picture and seeking to
capture the returns that may result from correctly forecasting the large scale
The longer the time horizon, the more prices swing within the
trajectory. A position trader might hold through many smaller swings. A swing trader
would likely trade them.
Swing trading can be a means to supplement or enhance a
longer-term investment strategy. Swing trading is one of the few ways to
capture frequent short-term price movements in a market landscape that tends to
evolve at a much slower pace.
With that said, if you decide to implement a swing trading
approach, you might want to consider being conservative with the capital you
allocate to this trading style, for it has specific risks.
Trading frequency and
risk: Short-term trading opportunities can sometimes occur more frequently
than their longer-term counterpart. Bear in mind that the more frequent trading
brings more frequent risk exposure. Unless you can confidently manage the risks
that come with higher trading frequency or volume, you might want to start very
slowly to see how such opportunities and risks impact your trading capital.
And remember, the shorter your time horizon and the more
trades you make, the more you’ll rack up in transaction costs. This can water
down your overall return, even if your swing trading strategy is otherwise profitable.
and risk: Since every trading opportunity can present a unique market
scenario, your approach can vary considerably, which introduces complexity. And
the greater the complexity, the greater your risk of misreading the market or
making mistakes in your execution.
Swing trading is a specialized skill. It isn’t for every
investor, and not every investor can succeed at it. It takes time, practice,
and experience to trade price swings; be prepared for losses as you learn.
Or as Watson put it, “It’s one thing to know what a chart
is. It’s another to actually know how to read a chart.”
If you have a low risk tolerance, or if you don’t have sufficient
risk capital, then you might want to avoid it altogether. But if you have the
tolerance, risk capital, and willingness to learn to swing trade, you might
find it a valuable skill and supplement to your longer-term investments.
As Watson and his education coach colleagues like to say, “Keep
things simple. The right combination is different for every trader, so it’s
important to start with the basics and work your way into using the indicators
and patterns that make the most sense to you.”
Karl Montevirgen is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
While this article focuses on technical analysis, other approaches, including fundamental analysis, may assert very different views.
A trailing stop or stop loss order will not guarantee an execution at or near the activation price. Once activated, they compete with other incoming market orders.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2021 Charles Schwab & Co. Inc. All rights reserved.