Swing trading is a strategy that bridges the gap between day trading and long-term trading and investing. Traders using this method typically rely on technical analysis to place trades, keep them open for a few days or weeks, and then hope to cash out at a profit. That last part isn’t guaranteed, of course. In fact, swing trading also comes with its own set of risks, which we’ll go into below. 

So, if you’re curious and want to learn more about swing trading, read on! This guide will cover the basics of swing trading, including what it is, how it differs from day trading, several possible approaches, and some pros and cons.  

What is swing trading?  

The term “swing trading” refers to capturing large potential market trends/swings, either upswings or downswings, rather than day traders’ daily fluctuations or investors’ multi-year home runs. That can happen over the course of a few days to a few weeks. So, you can consider swing traders more active than investors and more passive than day traders. They trade market fluctuations, but at a moderate level. As the name implies, they trade market swings!  

As we mentioned, the objective is to monitor the fluctuation of the value of different assets, then buy at a price that is suitable for you and sell at a profit a short time later. In the case of selling, the opposite is true. Because swing traders frequently buy and sell, compared to buy-only traders. But it’s easier said than done. Also, some traders may opt to hold their position open for several weeks—it depends on the market volatility, target and stop-loss.

Pros and cons of swing trading  

The upside  

Traders who have limited spare time could find this method to be a good fit. That’s because swing traders typically use hours charts, which means they only need a few minutes each day to monitor and analyze the markets. As a result, most swing traders are day traders who don’t have time to trade the minute charts and spend more time and effort trading. 

Swing traders also trade less than day traders because they trade larger charts and seek higher returns. Typically, they trade one or two times per week, depending on the markets in which they trade. This is useful for swing traders because trading costs (spreads and commissions) do not typically affect them. The swing trader, on the other hand, should consider the swaps on their trades because it will count depending on the trade duration.

The downside  

Technical analysis skills are pretty essential for traders to pinpoint optimal entry and exit locations. Those who want to start swing trading may need to set aside more time to practice analyzing price charts.  

Swing traders risk gapping when a position is held overnight (or over many nights, based on how long their position stays open). That’s because various economic variables might alter an asset’s price overnight. The risk is even higher when you hold your trading over the market weekends (Saturday and Sunday). If anything happens politically or economically relevant, you have nothing to do until the market is open, usually with an unfavorable gap! And stop-loss won’t limit your loss if the price gapped over it. 

Swing traders use leverage, which might increase the potential gains from a position, but it also increases the potential losses. That can be both tempting and risky if you’re not managing your risk properly.  

Swing traders are exposed to risk more often due to longer trade duration. If a trade starts moving in an unfavorable direction, swing trading may become a high-stress situation and require a lot of patience. You also need discipline and patience when a trade starts to move to avoid closing the trade too early and wasting good opportunities.

Day trading vs. swing trading 

Although positions in swing trading may be held for several days or weeks, this kind of trading is more appropriately classified as short-term. That’s why people frequently draw parallels between this and day trading and other forms of trading with a similarly short time horizon.  

By definition, day traders close their positions on the same day. The duration of such trades might not exceed a few minutes; it differs and depends on a trader’s strategy and market conditions. Daily traders generally analyze the market’s short-term fluctuations and execute several trades within that time frame. To fulfill their daily profit objective—which is not as high as that of swing traders—they focus on making a large number of little trades. What’s more, day traders are often professionals who devote their whole working day to trading and market research.  

Swing trading works differently. Swing traders also dive deep into market research, but their focus is on capitalizing on market shifts. When trading, they primarily use technical analysis to find investments with the highest potential returns in the shortest feasible time frame—which might be longer than a day. Technical analysis may also add some short-term fundamental analysis like high-impact news or central banks meetings. Although the risks that swing traders take could be bigger than those that day traders face, the rewards they can potentially reap if things go their way can also be much greater! 

Swing trading tips  

Think about leverage, but consider your circumstances  

Using proper leverage could expand your trading opportunities beyond the limits of your initial capital. However, that comes with a higher degree of risk, so do your homework and decide whether that’s a good decision for you and your risk management.

Stay in the know  

You can better anticipate price movements and plan your next move if you’ve added some fundamental analysis to your tools, particularly the short-term high-impact ones. The political climate, the state of the economy, scheduled economic indicators and central bank meetings all have a significant impact on the value of a stock or currency—so keep up with a variety of news.  

Keep an eye out for extra costs  

There’s a swap, or interest, charged for holding a position overnight. To avoid being blindsided by the added costs associated with swing trading, it’s crucial to factor swaps into your budget from the get-go.  

Don’t put all your eggs in one basket  

Putting all of your eggs in one basket might backfire if you engage in swing trading, which can potentially be riskier than other forms of short-term trading. To lessen the impact of any one asset’s fall, it can be helpful to consider diversifying your investments.  

Last thoughts  

If you’re a fan of trading for the short term but don’t have hours to devote to it each day, swing trading may be a good option. It demands a deep grasp of technical analysis, but it can potentially yield good—you have to know your stuff, though. And don’t forget, you run the risk of losing money whenever you invest or trade, so you’ll want to tread cautiously.  

Swing traders, especially newbies, need to ensure they have a firm grasp on the technical indicators and market fundamentals that guide their trading decisions. Finally, all swing traders hoping that a specific market direction should seriously consider robust risk management—you never know when unexpected news could change that direction.