Swing trading

Quick definition

Swing trading is a trading strategy that reacts to reversals in price when a stock hits a certain level.

Key details

• Swing trading is about taking advantage of trend reversals
• It usually means finding opportunities where the price looks set to rebound based on established support or resistance levels
• Swing trading is based on a hard set of rules that dictates when to trade reversal areas

What is swing trading?

Swing trading is a strategy deployed by traders looking to take advantage of price reversals. Every prevailing trend sometimes experiences reversals upon hitting critical technical levels. At the end of every trend, there is usually a period of high price volatility in the opposite direction, which swing traders always look to take advantage of.

Swing traders sell or buy securities once a trend reverses, taking advantage of the high price volatility that sets in. The traders also rely on a set of rules to identify potential price reversal areas based on technical analysis.

Unlike scalping, swing traders hold a position either long or short for more than one trading session. However, unlike position traders, they don’t hold trades for longer than a few weeks. The strategy is also ideal for traders who are willing to take a few trades while making sure they only capture good setups. Patience is at the core of this trading strategy, as is the use of large-stop losses.

Examples of some swing trading strategies

Range-bound markets

Swing trading works best with range-bound markets that swing between a high and a low. The support and resistance levels act as price points where traders can successfully open and close positions.

A closer look at the chart above makes it clear that price oscillates between two key points. Occasionally the price tries to break out lower, only to get rejected and bounce back up. A swing trader would, in this case, wait for such failed breakouts and enter a trade in the opposite direction.

For instance, if the price was moving lower only to pause, a swing trader would open a buy order and run the trade until it reaches the upper end of the range. The stop loss, in this case, is placed below the lowest candlestick in the pullback.

Swing trading with pullbacks

This strategy works best with trending markets. Occasionally price will deviate from a prevailing trend and start moving in the opposite direction in what is often referred to as a pullback.

In the case of an uptrend, as shown above, the price started moving lower, resulting in a deeper pullback. The deep pullback essentially means there is more potential on the upside for swing traders to enter long positions in anticipation of the prevailing trend resuming its move upwards.

For traders who use moving averages, you want to see a pullback that moves towards the 50-period moving average to count it as a deep pullback. Once a long position is opened, you will want to place a stop loss below the lowermost candle of the pullback. You would want to place another order to take a profit set before the swing high.

Fade the move strategy

Fade the move is a swing trading strategy for traders who love to move against the trend. This strategy is ideal for professional traders capable of identifying key support and resistance levels in a trending market.

Once you identify a strong momentum you move into a resistance or support level, the idea is to look for a strong price rejection. In trending markets, prices often reverse at key support and resistance levels, resulting in reversals or pullbacks. In the case of an uptrend, a swing trader would enter a short position. In the case of a downtrend, a swing trade would enter a long position.