What Is Swing Trading And How Does It Work?

What Is Swing Trading And How Does It Work?

By Yash

Investors and traders come into the share markets with different aims. Several investors want to invest for the long term. They want to increase their wealth over a period. Other people want to trade in the financial markets for short-term gains. Many investors look to do both these things in the share market. There are also many different methods and strategies for trading and investing. One of the best methods for newbies to the financial markets is swing trading. In intraday or day trading, the trading is very fast-paced. But the speed of swing trading is lower than that. This method is a good path to find out about the movements in the markets and get involved in some technical analysis regarding the direction of the financial markets. Let’s dive into what is swing trading.


What is Swing Trading?


Swing trading is a type of strategy in the financial markets where the trader or investor purchases a share or other asset and keeps it with him for a certain period. This period can range from some days to several weeks at a time. The investor looks to get some gains from the trade. Any swing trade aims to get some part of the probable movement in prices or the swing in the financial markets. The individual profits may not be that great as the investor or trader looks towards following short-term trends and tries to cut down the losses as swiftly as possible. But the small profits achieved with consistency over time can lead to a great annual return for the trader.


The Workings of Swing Trading


The person who involves himself in swing trade looks at the patterns in the overall trading activities to sell or purchase a share to get some advantage on the movements in the prices and the trends of the momentum of the shares. They usually focus on the large-cap shares because they give the investors the right insight into how the financial market looks at the firm and the price movements. This active trading gives the data required for what is known as technical analysis. As with any type of trading, there is a lot of risk in swing trading. Swing traders are exposed to many kinds of risk. The usual type is the gap risk. It is where the price of the security falls or rises a lot based on the events or the news that happen while the market remains closed, whether during the weekend or overnight. The initial price of the share will show the shock of any unpredicted news.

The risk increases when the time of the closure of the financial markets gets more. Any major changes in the direction of the financial markets also imply a risk. The people involved in swing trades may not be able to follow the long-term trends because of the shorter holding period.


The Involvement of Technical Analysis


Most of the investors opting for swing traders make use of technical analysis. This is the study of the patterns and the trends on a certain chart to get a chance to enter a trade. For this reason, swing trading can be a little complicated for some people. Technical analysis is important for swing trading as it looks at the past price movements and trading activities to predict what can be the future price movements of the share. The swing traders take the assistance of a wide variety of technical charts and indicators to get greater insight into the psychology of the financial markets. They look at the multi-day patterns to determine the probable direction of a share price.


Importance of Risk Management in Swing Trading


Risk management is important for swing trading. Investors should opt for only liquid shares. They should also diversify their overall positions among many different capitalizations and sectors. Experts say that traders should place a lot of importance on risk management. They say that each position should be less than five percent of the overall trading capital present in the account. The most professional and risk-taking traders may take the position of sizing a little higher. Having a good amount of cash in reserve permits the investors to keep adding to the best-performing trades to assist in getting big victories. The main aspect of swing trading is to reduce losses. Also, the reward should be more than double the total risk taken on the position. Orders that involve stop loss are also necessary for managing the overall risk.

When any share goes below the stop price or goes above the stop price for any swing trading position, the stop-loss order is executed, and the trade goes to the market at the market price. Using such stop losses, the investor knows when the trade will be stopped and the maximum limit of their loss on the trade. This is because the risk in every position is restricted to the overall difference between the stop price and the current price. Any stop loss is a great method to manage the overall risk per trade.


Swing Trading vs. Day Trading


Day and wing trading may look quite similar to people who do not know much about the financial markets. But the main difference between both is that they have a usual underlying theme of time. The time frame for keeping a trade position is different in both strategies. Day traders usually trade in the frame of minutes or a few hours. But swing trading is done over weeks or days. The shorter time frame of the day traders means that they do not usually keep the positions overnight. So, they do not take part in the risk that may happen from gaps in the opening prices of the next day because of announcements happening after hours and leading to a huge move against them. But swing traders have to be cautious that the share could have a highly different opening price from how it was the day before. But there is some risk with the short time frame. There may be a wide difference between the asking price, the bid price, and the commissions. This can lead to a huge part of the profits going away.


The swing traders can also get this type of condition. But the effect is much greater for the day trader. The latter can also find themselves doing most of the work and seeing the brokers and the market makers get all the gains. To take away some of the disadvantages, the day traders are given a chance to leverage their position with higher margins. This increases their overall position-taking ability. The leveraged positions can increase the percentage gains and offset some of the costs involved. But the issue is that no one can be correct at all times. There may be bad luck or an absence of discipline and focus. This can lead to a trade that can cause the trader big losses. A trade or a sequence of bad trades can vanish all the money in the account. There may be big losses to the portfolio that make it difficult to attempt a recovery. Any major losses can also have a big effect on any swing trader. But the lower leverage decreases the chance that the adverse trade may erase the whole account.


Another difference between both methods is the commitment required with regard to time. Good day trading needs concentration on many trade positions. The traders are also regularly seeking probable chances to replace the current positions throughout the day. This means that day trading cannot be a side role. It has to be a full-time role for the trader. The greater commitment of time required by day trading has its own risk. A day trader becomes reliant on getting success from trading because they are not getting a steady paycheck. This can induce greater emotions and stress in trading.



Swing trading is a great method for newbie investors to get some experience in the financial markets. It does not require a huge amount of capital to start also. But the main guideline is that the capital should be cash that the trader can lose. The unpredictable is possible in the financial markets even after good management of risk.