Swing Trading 101: How to trade stocks beyond a day
Stanislav Bernukhov
Senior Trading Specialist at Exness
This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.
Share
Are you ready to take your stock trading to the next level? Then swing trading might be a good trading style to try.
In this article, we go through valuable insights, practical tips, and strategic advice for your trading journey, focusing particularly on the perks and challenges of using swing trading in the stock market. So, let's get started.
What is swing trading?
For those just starting out in trading, Swing trading is one of the most popular trading styles. This style of trading is used by both part-time and full-time traders to trade in various financial markets, including stocks, forex, and commodities. It involves taking advantage of short-term to medium-term price movements – also called ‘swings’ – in the market.
Unlike day trading, which requires opening and closing positions within a single day, swing trading lets you hold your stance for several days or even weeks, aiming to catch profitable price movements within that period.
Risks of swing trading in the stock markets
The main feature of swing trading is the holding of a position overnight. This potentially involves overnight risks when it becomes quite difficult to hold a position with a tight stop; whereas with day trading you can have relatively more peace of mind by stepping away from your trading station with no open positions.
Overnight risk in the stock market is associated with price gaps. These might happen due to the NYSE and Nasdaq exchanges being closed during the Asian and European sessions. It’s better to not leave a position open overnight, as there’s too much uncertainty involved regarding price gaps, and especially if the risk you are taking involves a large amount of capital or leverage.
Specific risks also include the publication of earnings reports. When these reports are released, they may cause an individual stock to experience price volatility. For example, in August 2023, the earnings call for AAPL caused high volatility and a bearish gap in Apple stocks.
This bearish gap for AAPL stock occurred after earnings were published in August 2023. The price fell by about 5% on the day of publication. Source: Tradingview.com. Disclaimer: This image is shared as an example. Past performance is not a reliable indicator of future results.
Swing trading advantages
Despite the risks, there are several advantages to being a swing trader.
Advantage no.1: more free time
Among the basic advantages of swing trading is the ability to have potentially more free time. As a swing trader you tend to spend less time on immersive observation on the computer, in comparison to day trading.
People who value freedom and a flexible lifestyle, often gravitate towards long-term trading styles such as swing and position trading.
Though you would need to implement a decent amount of work into preparation and analysis of entry and exit points, the execution part is relatively simple. Working time frames for swing traders start from M30 (30-minute period of time), and H1 (1-hour updated chart) up to D1 (4-hour updated chart), so a swing trader would have plenty of time to place orders and manage a trade.
Advantage no.2: capitalizing on market volatility and trends
Another major advantage of swing trading is the ability to capitalize on market volatility and trends. Profits of day traders are usually limited by the volatility of a single day. When swing trading, you keep the position open for three, five, or more days which could potentially multiply your profit by the number of days.
Of course, price movements rarely follow a straight line; instead they often include pullbacks. However, adhering to the old trading adage of "let the profit run" is what appeals to swing traders.
When applying a swing trading style to trading stocks for longer-term trends, you may notice that stock markets tend to make extended price swings of 10 days and more in one direction. This makes swing trading in stocks a comfortable trading style, especially in the bullish phase of the market.
Advantage no.3: less time-sensitive trades
Another characteristic of swing trading is its relative lack of sensitivity to timing trades. Swing trading is less about getting the timing perfect in comparison to day trading. For example, as a day trader, if you are anticipating a large breakout from a range, it’s relatively difficult to find the exact moment when this breakout happens. You would need to constantly take risks to join the trade. This carries potential costs, and there’s still a chance of missing trading opportunities.
But if you’re a swing trader you tend to leave your positions open for longer periods of time. So, when a breakout happens, you’re already set with your open position, whether it happens early in the morning or later at night. Swing traders therefore have the advantage of over day traders who might miss out on trading opportunities if they happen outside their usual trading hours.
3 popular swing trading strategies for stock trading
Swing trading is not particularly unique in comparison to other trading styles, and the swing trading strategies we discuss here are not exclusive to stock trading. However, the trading approaches usually applied for swing trading stocks can be categorized into three major swing trading strategies: trend-following, momentum or breakout, and mean-reversion swing trades.
Now, let’s dive deeper into each of these swing trading strategies for a more comprehensive understanding.
Swing trading strategy no.1: trend-following
Trends in the markets usually move in waves — impulses and corrections. The average impulse phase lasts for 3-10 days, including days of a big range and days of small ranges.
A reversal – or a potential swing low – is when a correction phase turns back into an impulse phase.
Swing traders aim to get into the trade early and exit near the potential swing high.
An example of a trend-following swing trading opportunity. The price tests a dynamic support area, showing a responsive activity, and continues to move in the direction of the trend again. Source: Tradingview.com
Identifying reversal points for swing trading
As a swing trader, the key element of trend-following is correctly identifying the swing low (or for a downtrend, swing high). To do that you need to determine support areas to make sure that a price reversal is not temporary but has the potential to transition to a more meaningful move.
For a moving trend, support and resistance levels are usually dynamic. This means they move with the price. Static support and resistance levels, on the other hand, are linked to specific prices only.
Dynamic levels exist in the form of trendlines, channel borders, and moving average indicators as seen in the three examples below.
Three patterns for trend-following swing trades: The square signifies a potential entry point. The first pattern indicates an entry near the trendline. The second pattern shows two potential entry points near a lower channel border which acts as a support. The third pattern shows an entry point around the moving average. Source: Exness
Once the price enters a support area, you will need to keep an eye out for some kind of a reversal pattern, for example, a confirmed low or a ‘ring’ low. Usually, it is visible when there’s a new daily candlestick with a lower low and a lower high, after which the price breaks it to the upside. As seen in the chart below, if the displayed situation happens, it might be an indication of a possible reversal and a point where one can take a directional risk.
In this swing trading bullish pattern for Mastercard stock in 2023, we can see the reversal of the moving average and an opportunity for building a bullish swing trade. Source: Tradingview.com
Exiting a trade is a different story. You may need to apply different strategies, such as a trailing stop, or even a fixed profit-loss ratio. A position management swing trading strategy depends on the market you are trading. For example, stock markets tend to create elongated price swings, which last for 5-10 days, while currency markets (forex) usually make shorter price moves ( of between three and five days).
Swing trading strategy no.2: momentum trading
Momentum techniques for stock markets are similar across different time frames and asset classes and assume buying something that is already priced high to sell it even higher (for selling, it’s vice versa). One type of momentum approach includes a breakout trading technique, when a trader hits the market aggressively as it tries to cross some level or a border of a range.
As applied to swing trading, momentum trading usually means still moving with a stronger-than-usual trend, and entering positions when price is away from the support or resistance zones.
It works as follows: if the price moves substantially higher than the dynamic support area, it is unlikely that it will reverse anytime soon. This usually means price discovery and a continuation of a current trend.
In this case, you would not wait until the price pulls back to the support (since it would be extremely unlikely). Instead, you need to monitor your trade for a continuation chart pattern and spot the moment of a breakout of its trendline. The chart pattern may be in any shape: a triangle, flag, pennant diamond, so understanding the various chart patterns is key here.
Here we have an example of a momentum swing trading entry. The price emerges from a short-term trading range and continues moving in the direction of a trend above the border of the trading range. This is known as a ‘breakout’. Source: Exness
As strong trends usually move fast, it doesn’t take much time to complete a consolidation (the area that establishes a chart pattern of continuation). You will need to act relatively quickly and operate with quite small time frames (such as M30/H1).
The rule of thumb is that the location of the price should be far from the dynamic support area and positioned at 2.3 - 3 levels of average daily volatility. The example on the chart below shows a quick strong trend for NVDA stock in 2023, which pushed the price $80 above the support area (the area between moving averages below). The average daily volatility for this stock at the time was around $8. Therefore, the location of the price was 8 times higher from the support than the average volatility. It would be an extremely unlikely scenario for the price to reverse, so the continuation of a trend is a dominant scenario, given the strong guidance for the next quarter, mentioned during the earnings call.
This D1 candlestick chart shows the price gap for NVDA stock after the earnings call in 2023, when the price jumped eight times higher than the average daily volatility. Source: Tradingview.com
How to swing trade breakouts
There are two potential ways that you can trade the momentum as a swing trader: the first is a breakout of a triangle, and the second is the pullback to the line of a breakout. In both cases, the position is held overnight and, if held for 5-10 days, represents an asymmetrical trading opportunity.
This chart offers a closer look at the same situation as the previous chart. You can see two entry points for momentum swing trading for NVDA stock on this H1 time frame. Source: Tradingview.com
Swing trading strategy no.3: mean-reversion
Another strategy for swing trading stocks is mean-reversion trading. This approach aims to pursue relatively short-term price moves when the price returns to the range.
In this case, you would need to monitor the price in case of a false breakout occuring at a strong support or resistance area. Moving averages with parameters of 20, 50, and 200 may help you to identify such an incident.
You can see an example in the chart below where there was a potential breakout in two instances, but then it reversed almost instantly, causing a false breakout – sometimes referred to as a fakeout.
In this chart we see two trading opportunities for bearish swing trading entries for PYPL stock in 2023. Source: Tradingview.com
In this example PYPL was trying to push above the 200-day moving average, and every time, it resulted in a pullback lower. That happened during the first half of 2023. As a swing trader you could potentially capitalize on such trading opportunities by finding entry points on lower time frames, with the help of candlestick patterns.
The H4 chart below shows an example of a candlestick engulfing pattern. The red arrow indicates a possible entry point for a short position.
In this image we see an example of an engulfing pattern for H4 chart for NVDA stock. Source: Tradingview.com
Ready to master swing trading in the stock market?
As a swing trader, the main risk you need to be aware of is that associated with holding positions overnight and over the weekend. So, it’s important to pay close attention to the economic calendar and publications that can potentially boost volatility, especially during the weekends. The risk is that during this time price gaps and slippage can occur. This is where choosing a broker such as Exness, that offers protection features such as no slippage and negative balance protection, can make all the difference.
If you want to open a trade, but there’s an important publication the following day, it may affect your open position either by erasing gained profit, or giving a trade a boost in a favorable direction. Some of these publications include: non-farm payrolls ( NFP), the Consumer Price Index (CPI), the US Federal Reserve’s ’s interest rate decision, or a press conference by its chair, Jerome Powell.
If you are stock trading, the most influential publication to keep in mind is, of course, the company’s quarterly earnings report, where a stock can experience a substantial price gap on either side of the publication. Whatever your risk management and protection features are, it is still wise to be extremely cautious trading during this period.
Bottom line:
- Swing trading is a less demanding trading style than day trading and may give you more free time.
- The main risk of swing trading is overnight risk.
- As a swing trader you must carefully monitor the economic calendar to anticipate volatility spikes.
Could swing trading stocks be a good choice for you?
If you're ready to take the plunge into swing trading, Exness provides tailored account types, including Standard and Pro accounts, for your specific needs and preferences.
These accounts come with a host of benefits such as low and stable spreads, fast execution, instant withdrawals, and pioneered risk management tools such as Stop Out and Negative Balance Protection.
So, whether you're a seasoned trader or just starting out, Exness can be the ideal partner to help you navigate the exciting world of swing trading the stock markets.
Start your trading journey with Exness today and unlock your financial potential.
Share
Start trading
This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.