Saxo Group
Swing trading is a popular trading strategy designed to take advantage of price movements or ‘swings’ in the markets. Swing traders look to buy or sell an asset before its value makes its next substantial move, before closing their position for a profit.
Within this guide, we’ll cover the types of strategies a swing trader uses. In addition, we'll look at the variety of technical indicators swing traders master to make judgement calls on whether it's worth going long or short on an asset.
A swing trader seeks to capture a percentage of a larger market move. They trade on the assumption that the price of assets doesn’t grow linearly. Instead, prices go through many peaks and troughs during a trading session.
The job of a swing trader is to determine whether an asset’s value is likely to rise or fall next before taking a position in the market. Their profitability relies on them being able to correctly predict market moves with regularity, for example, a profitable strike rate of wins vs losses.
Swing trading is not like other medium-to-long-term trading strategies that seek substantial moves in the markets. Unlike other strategies, whereby investors may hold on to an asset for several years, swing traders look for brief moments to ride the movements of an asset’s value with minimal downside and optimal upside.
There is a fine line between swing trading and day trading. The key difference is that day traders will open and close their positions within the same trading session, attempting to extract small but regular profits from minute market moves.
Swing traders will look to hold positions overnight, sometimes over many days or weeks, to catch the full value of the predicted market move.
Another big difference between the two is the types of margin offered to day traders and swing traders. Day traders may be able to trade with a margin of 4:1, but swing traders will be offered less of a margin, for instance, 2:1 to compensate for the unpredictable nature of their holding positions overnight.
It's a good idea to familiarise yourself with the swing trading strategies that provide a framework for entering and exiting the markets if you're thinking of trying swing trading for the first time:
As part of a swing trader’s strategy, they will lean heavily on technical analysis to build confidence in a trading position. The technical analysis revolves around historical price patterns and current price action to establish appropriate entry and exit points.
Let’s look at three of the most commonly used technical indicators for opening a swing trade:
When a swing trader has identified a trend in the market, the RSI indicator can help to measure the strength of a trend’s momentum. The RSI can also identify whether an asset has moved so much that it is subsequently ‘overbought’, meaning that it is overpriced and due a market correction. Similarly, the RSI can also reveal if an asset is ‘oversold’, meaning that it is undervalued and due a market correction.
The RSI ‘score’ is on a scale of zero to 100. Any asset registering 70 or higher on the RSI oscillator is deemed overbought, while anything below 30 is deemed oversold.
An MA indicator assesses the closing price data for an asset over a set timeframe. This helps to visualise its average value for that period. It could be 30 days, 50 days or 365 days. The indicator plots the average closing values for each day on a line graph to chart the movements of an asset. The MA indicator is used to plot or confirm a trend as opposed to anticipating one, which is because the MA graph is a historical chart, so it will always be slightly behind the real-time market price.
A typical swing trading strategy involving MA indicators sees traders hunt for ‘crossovers’ between two MAs. This involves a fast-moving MA like a 50-day MA and a slower-moving 100-day MA. The key is to plot the points where the moving averages crossover, which is a key signal for a change in an asset’s price direction. If a 50-day MA crosses the 100-day MA and moves upwards, it could signal the start of a bullish trend. Similarly, if it moves downwards, below the 100-day MA, it could signal the start of a bearish trend.
A stochastic oscillator is another type of momentum indicator, like RSI. A stochastic oscillator usually works across the last 14-day trading window, comparing the latest closing price of an asset with the trading range during the last fortnight. It shows momentum shifts that are often visible before market volume peaks, making it an influential indicator for swing traders.
There are two lines on the stochastic oscillator: the black indicator and the red dotted signal. The scale for the stochastic oscillator is zero to 100, just like the RSI. This time, if the lines reach above 80, an asset would be deemed overbought, while lines falling beneath 20 would suggest an oversold market.
If you’re still unsure whether swing trading is the right trading approach for you, look at the following pros and cons to help you decide:
Swing trading is a credible option for those who don’t have the time to dedicate to day trading the markets from the opening of a trading session to its closure. Swing traders focus on technical analysis rather than fundamental analysis to inform their trading moves. They lean on technical indicators to set entry and exit points, often based on support and resistance areas. This means swing trading can be executed in almost any financial market.
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