Swing trading is more popular among institutional traders instead of retails, and although there are many who uses it among retail traders, it is commonly used by traders with considerably large amount of funds. What is swing trading actually?

Swing Trading

Swing trading is one of the most common styles, alongside scalping and day trading. However, swing trading is more prevalent among institutional traders instead of retailers. Although many use it among retail traders, it is commonly used by traders with considerably large funds.


Introduction to Swing Trading 

Swing trading is a strategy that involves holding a position for days to weeks to profit from short-term price movements. Swing traders typically use technical analysis to identify trends and patterns in the market, and they often set stop-loss orders to limit their losses.

The goal of swing trading is to identify and capitalize on price movements that occur within the natural oscillations of the market. Swing traders typically use technical analysis tools like chart patterns, trend lines, and indicators to identify potential entry and exit points. They look for stocks or other assets that exhibit predictable price patterns, often focusing on market trends, support and resistance levels, and momentum indicators.

Swing traders typically have a more active approach compared to long-term investors. They seek to profit from upward and downward price swings, employing long (buy) and short (sell) positions to take advantage of market movements in either direction.

While swing trading can be lucrative, it also carries risks. Market volatility, unexpected news events, and other factors can influence price movements and result in losses.


The Best Time Frames for Swing Trading

The time frame for swing trading can vary depending on the trader's preference, the market being traded, and the trading strategy employed. Generally, swing traders focus on shorter-term price movements that occur within the context of an overall trend. The most commonly used time frames for swing trading include:

  • Daily charts: Many swing traders prefer to analyze daily charts, where each candlestick represents one trading day. This time frame allows traders to capture swings over a few days to several weeks. It balances between capturing significant price moves and avoiding excessive noise.

  • 4-hour charts: Some swing traders use 4-hour charts, where each candlestick represents four hours. This time frame can provide more frequent trading opportunities and allows traders to capture shorter-term swings within the broader trend.

  • 1-hour charts: For more active swing traders, 1-hour charts can be used to identify shorter-term price swings. This time frame requires more attention and faster decision-making but can lead to more frequent trades and potentially higher returns.

It's worth noting that the choice of time frame should be aligned with the trader's availability, trading style, and risk tolerance. Considering the time required for analysis, monitoring trades, and managing risk is essential. Additionally, different markets may have unique characteristics, and particular time frames may work better for specific assets or trading strategies.


Indicators for Swing Trading Strategy

Numerous indicators are used in swing trading, and the choice of the best indicator depends on the trader's trading style, preferences, and the market being traded. Here are a few popular indicators frequently employed by swing traders:

  • Moving Averages: Moving averages are a simple but effective way to identify trends and support and resistance levels.
  • Relative strength index (RSI): The RSI is a momentum indicator that can help you identify overbought and oversold conditions.
  • Stochastic Oscillator: The stochastic oscillator is another momentum indicator that can identify overbought and oversold conditions.
  • Average true range (ATR): The ATR is a volatility indicator that can help you determine the size of your stop-loss orders.
  • Bollinger bands: Bollinger bands are a volatility indicator that can help you identify when a market is becoming too volatile.


What Pairs are the Best for Swing Trading Strategy?

A wide range of currency pairs is available for swing trading in the forex market. The best pairs for swing trading strategy can depend on various factors, including liquidity, volatility, and the trader's preferences. Here are a few currency pairs that swing traders commonly favor:

  • EUR/USD (Euro/US Dollar)
    As the most actively traded currency pair in the forex market, the EUR/USD often provides good liquidity and price movement. It is known for its relatively low spreads and can offer ample swing trading opportunities.

  • GBP/USD (British Pound/US Dollar)
    The GBP/USD pair is another popular choice for swing trading. It exhibits solid trends and volatility, appealing to traders looking for opportunities in price swings.

  • USD/JPY (US Dollar/Japanese Yen)
    The USD/JPY pair is known for its liquidity and is influenced by the US and Japanese economies. It can offer significant price movements and is favored by swing traders who want exposure to the Japanese market.

  • USD/CAD (US Dollar/Canadian Dollar)
    The USD/CAD pair is influenced by factors such as oil prices and economic conditions in the United States and Canada. It can offer good volatility and is suitable for swing traders interested in commodity-related currencies.

  • AUD/USD (Australian Dollar/US Dollar)
    The AUD/USD pair is often influenced by commodity prices, particularly gold and iron ore, as well as Australia's economic performance. It can provide opportunities for swing traders seeking exposure to the Australian economy.


Swing Trading = Efficient Gain

Contrary to scalping and day trading, which is limited by time, swing trading emphasizes the importance of momentum and aims to gain efficiencies by holding onto a position till a trend ends. Also, different than scalping and day trading, which places more emphasis on technical analysis, swing trading needs a combination of fundamental and technical analysis.

While scalper tries to profit from many positions and day trader wants to profit from intraday transactions, swing trader aims to gain big from a few transactions maintained up to their highest profit potential.

Swing trading can be considered an application of fundamental analysis and is more common in the stock market than forex. However, swing trading is pretty versatile as its efficiency means trader does not have to continuously watch the market (like a scalper) or chase short-term targets (like a day trader).

That is why it is essential in swing trading to observe market sentiment, situation, and the latest fundamental overview before opening a particular position. Afterward, look for opportunities with the help of technical analysis or a specific event in the fundamental calendar.

When several signals support a significant price movement, a swing trader can then pinpoint entry and exit that can be utilized to gain profit. By aiming to achieve big from just one position, swing traders can avoid the hefty cost of commission and spread.


The Advantages of Swing Trading

Swing trading is a strategy that involves holding a position for days to weeks to profit from short-term price movements. Swing traders typically use technical analysis to identify trends and patterns in the market, and they often set stop-loss orders to limit their losses.

Here are some of the advantages of the swing trading strategy:

  • Potential for more enormous profits: Swing trades can be held for extended periods, increasing the potential for profits.

  • Reduced risk of day trading: Swing traders are not as exposed to the market's volatility as day traders, which can reduce the risk of losing money.

  • More time to research: Swing traders have more time to research potential trades, which can help them make more informed decisions.

  • Less time commitment: Swing trading requires less time commitment than day trading, which can benefit traders with busy schedules.

While these advantages exist, it is essential to note that there is no perfect trading strategy. Conducting a thorough analysis, managing risk wisely, and developing a solid trading plan before engaging in swing trading is essential.


Risks of Swing Trading

Swing trading is a risky strategy, even though it seems like a sure thing if prices continue to go in one direction. The forex market is the most volatile, and market volatility can trigger stop losses or even margin calls during the overlap between European and US markets. This is why swing trading is more prevalent among traders with plenty of funds.

Another risk of swing trading is the cost of a rollover, which is the interest charged when a position is held overnight. Rollover charges can be hefty, even if the trade is profitable in commission and spread.

Swing trading typically involves holding a position for longer than a day but shorter than the buy-and-hold strategy used by long-term traders. This means that if prices stay ranging for a long time, even if they eventually go in the expected direction, the cost of rollover and opportunity cost can be high.

Here are some specific examples of the risks mentioned in the text:

  • Market volatility: If the market is volatile, it can mean that prices can move quickly and unexpectedly. This can lead to stop losses being triggered or margin calls being made.

  • Swap/rollover: If a position is held overnight, a cost is associated with this, known as swap or rollover. This cost can be significant, especially for prominent positions.

  • Opportunity cost: If a position is held long, the trader cannot take advantage of other opportunities.

Overall, swing trading is risky, but it can be profitable if done correctly. With that being said, the main challenge for a trader to do swing trading is picking the correct entry and exit points, as well as preserving sufficient margins to guard floating positions against market volatility.

That is not an easy thing to do, but with knowledge and practice, swing trading may grant traders the ability to gain profit efficiently. For beginner traders, it's better to improve their expertise first before trying this strategy.