Swing trading is a method of speculating on financial markets that relies on significant changes in the direction of an asset’s price, potentially helping you to trade on larger price movements.
In this guide, I’ll show you some of the best swing trading strategies, how to use them, and a few ways to manage risk while trading this way.
Also consider: My guide to scalping versus swing trading
3 of the best swing trading strategies
- Moving averages
- Support and resistance swing trading
- Fibonacci levels
What are the best swing trading strategies?
There are different methods of employing a swing trading strategy when speculating on financial markets. These normally involve different indicators to reveal critical price points for executing trades.
So, as each individual trader is likely to find swing trading methods useful for different reasons, it can help to give yourself an overview of each type. This way, you have a better idea of which method suits you the best.
Moving averages are technical indicators that can be used as part of a swing trading method by tracking the average price of an asset over specific periods of time.
Using them correctly can help traders identify shifts in momentum as well as points of “support” or “resistance” – lows and highs that an asset’s price typically won’t move beyond.
There are different types of moving average indicators that can be used for tracking prices:
- Simple moving average (SMA) – tracking the average price over a specific period
- Exponential moving average (EMA) – similar to SMAs, though placing more weight on recent data
- Weighted moving average (WMA) – also weighted towards recent data but the rate of decline between one price and its preceding price is exponential, rather than consistent.
You can normally customise the length of time over which the averages are calculated to allow for more detailed analysis of the price movement. Moving averages over time units numbering 50, 100, and 200 are commonly used by traders.
Traders may be able to detect changes in the momentum of an asset’s price according to how different moving averages interact with each other. For example, if a shorter moving average (50) was to cross one measured over a longer period (200), this indicates that the average price in the last 50 units of time has increased beyond the average price of the last 200 units of time.
As such, this could indicate that a wider trend may be breaking and the price may increase.
Meanwhile, traders could look to use moving averages as areas of support and resistance. Prices often interact with them in one of these two ways, and so could inform traders of positions to target.
Example of moving average swing trading
Since moving averages are represented as single lines that track prices along a chart, traders rely on two or more moving averages reacting with each other to identify changes in short-term trends.
For example, if the EMA50 were to cross downwards through the EMA100, this would indicate that the shorter-term price has dropped below a longer-term average price, providing a potential sell signal (short position).
The opposite would be true for a potential buy signal (long position) – if a shorter moving average crosses above a longer moving average, this indicates that the near-term trend may have reversed upward into a bullish trend.
Traders may look to open positions soon after these crosses happen, since moving averages are somewhat lagging as the data used is slightly old.
Pros and cons of moving averages swing trading strategies
- They’re automatically calculated
- No need for a high level of trading knowledge to use them
- You can customise their ranges to your needs.
- Data used to calculate its values may be old, meaning it could be out of date
- Doesn’t factor short-term volatility or the effect of outside forces on prices, such as seasonality or market sentiment
- Accurate signals require precise configuration of their settings.
Support and resistance
Technical analysis can also be used by traders to identify specific points of support and resistance at different price levels.
These are levels where the price of an asset fails to break above (resistance) or fall below (support) a specific point, allowing traders to speculate on a reversal in price after interacting with either level.
These price levels can be historical, going back years, or as recently formed as the last few hours. Interestingly, it’s completely possible that current price action could respect such levels from years in the past – there is no expiry date on levels of support or resistance.
These can be useful in revealing oversold and overbought conditions, as an asset’s price will normally rebound in the opposite direction, respectively.
A common way to identify these plateaus in an asset’s price is by drawing vertical lines on a chart that should reveal the price’s constant interaction at the given level.
As such, swing traders could use levels of support and resistance to try and identify the very beginning of a potential trend reversal, which could help to capture the majority of a move.
Example of support and resistance swing trading
For example, if the price of Amazon shares had decreased from $100 to $75, before increasing again to $100, this means the $75 level could act as a support the next time it falls.
If the price constantly rebounds at $75, traders could use this as confirmation of it being a level of support. Traders may then look to open long orders around areas of support, speculating that the price will increase from there.
On the other hand, levels of resistance work in the opposite way – constant rejection of the price action at a specific value could indicate this is somewhere the price struggles to break beyond and could be a level of resistance.
Using the above example of Amazon, if the price was to rally to $100 again but fail to break above it, this is likely its point of resistance. Traders may consider opening a short position around levels of resistance, anticipating a fall in price.
Pros and cons of support and resistance swing trading
- They are relatively simple to use
- Invalidation of a trading theory using support and resistance is usually clear once the given level is broken beyond or below
- Little fundamental analysis is required as you only evaluate a few basic metrics.
- There may be little room for error if your theory is incorrect
- You rely on your own analytical ability
- Shifting market sentiment or announcements could affect prices and result in an unexpected redirection.
Fibonacci retracements are chart patterns that can be projected onto an asset’s chart to reveal hidden levels of support and resistance.
The sequence is calculated by adding the sum of the previous two numbers with the previous number itself in order to reveal the next digit.
The sequence of numbers starts at 1 and uses the sum of itself and the preceding number to reveal the next digit in the sequence.
For example: 0+1=1, 1+1=2, 1+2=3, 2+3=5, 3+5=8, 5+8=13,and so on.
The numbers forming the sequence are then subdivided, giving specific ratios to be used in the tool.
These ratios are 23.6%, 38.2%, 61.8%, and 78.6% – the 50% level isn’t a Fibonacci ratio but is still often used to determine levels of support and resistance.
The Fibonacci retracement tool is used by drawing a straight line from the lowest point of a given movement to the highest point.
This produces a grid that overlays the Fibonacci ratios, often revealing hidden areas where the price has reacted to a specific level of the total movement, as well as areas you could expect the price to rally or descend from in the future.
As such, it’s possible that these could be points of reversal where the price takes a significant redirection, offering ideal market conditions for a swing trader.
Example of Fibonacci retracement swing trading
A useful time to draw Fibonacci retracement overlays on a chart could be during a noticeable trend in one direction.
This is because an asset’s price could react in the opposite direction once a certain ratio of a previous price movement has been extended or reversed.
For example, during an uptrend, the price may start to decline. Using the Fibonacci retracement tool, you could use the overlay to identify once the reversal has removed 38.2% of the previous uptrend.
This is because price movements could reverse upon interacting with different Fibonacci levels.
As a result, a trader may look to open a buy order at a price around the 32.8% mark of the previous move, in speculation of the price reacting positively.
Here, it could be useful to consider placing a stop-loss order shortly after the given Fibonacci level in the event that your theory is wrong.
If this is the case, the price could move far beyond the Fibonacci level and cause heavy losses.
Pros and cons of Fibonacci swing trading
- Levels of support and resistance revealed with the Fibonacci retracement tool could be difficult to detect with alternative methods of analysis
- The price levels identified with the tool could be quite precise
- Price movements, after interacting with Fibonacci levels, could be decisive.
- It can be difficult for beginner traders to understand or implement successfully
- Larger market movements influenced by external factors could lead to price movements that ignore Fibonacci levels
- Interactions with the Fibonacci levels could be brief, giving little time to open positions.
What is the most profitable swing trading strategy?
There is no surefire way of determining which trading strategy is the most profitable, as the trader themself is the biggest factor in determining this.
So, it’s likely for the profitability of a given trading strategy to come down to the individual trader.
Having said that, this doesn’t mean you can’t try and find the best swing trading strategy for your own circumstances.
In fact, acknowledging your own skill level and avoiding strategies or indicators that might further complicate things for you could have real utility in improving your trading profitability.
As a result, it could be worth reconsidering the strategies you use and whether or not these are suitable for your level of skill.
If you’re new to trading, it could help you to use strategies and indicators that aren’t overly complex to understand.
Because trading carries significant, inherent risk, using complicated methods is likely to only increase your risk exposure and could make you less likely to make winning trades.
As a result, the support and resistance swing trading strategy could be an ideal way for newer retail traders to get to grips with swing trading.
Not only does it require basic charting skills but it could also prevent the inexperienced from heavy losses by providing a clear and visual level at which to cut a losing trade.
Those with more time in the market may be comfortable using strategies and indicators with slightly greater complexity.
As such, using the Fibonacci retracement tool could be a useful strategy for intermediate traders since it requires a fairly intimate understanding of how the markets work without totally relying on it.
For traders with the necessary level of skill, using multiple strategies simultaneously could allow you to become even more confident with your trading and give you valuable insights.
For example, a trader with enough skill could use a moving average in combination with line drawing levels of support and resistance to search for corroboration between the two.
Some traders with enough experience may feel comfortable using a combination of indicators to form their own strategies.
What is swing trading?
Swing trading methods are defined by speculating on large movements in an asset’s price, either upward or downward, and are generally regarded as “breakout strategies”.
Traders use buy and sell orders in order to trade in either direction, just like other methods of trading.
Swing trading is usually partnered with technical analysis to seek out the best possible entries to profit from large swings in an asset’s price – whether it be on the stock market, forex market, or on other assets.
Another important factor of swing trading is the length of time trades are held open for – compared to day trading, swing trading usually involves keeping a position open from days to weeks at a time to try and profit from longer-term trends.
Day trading, on the other hand, uses short-term trades and seeks to close any positions by the end of the day. It also normally involves taking more positions that usually require constant monitoring.
Because swing trading normally speculates on larger moves that often take longer to materialise, swing traders generally make fewer trades and are less sensitive to short-term fluctuations.
However, they can be more prone to long-term market changes, such as significant news announcements or shifting market sentiment.
How does swing trading work?
Most swing trading strategies use technical analysis and technical indicators to identify the formation of a counter-trend.
In the context of an asset’s price continuously decreasing, the counter-trend would be for the price to increase.
The apex of two contradicting trends is seen as the ideal place for a swing trader to open positions in order to profit from the majority of the market movement, up or down.
Other popular trading strategies such as day trading crossover with each other, as some popular swing trading indicators are relevant to both methods. However, day traders are much more likely to use these over a shorter time frame to reach a faster conclusion.
As opposed to speculating with multiple trades on small price movements over a short period, swing trading typically seeks to profit from large market swings over a longer period of time. This often results in there being fewer swing trading opportunities.
Even though leverage is sometimes used with swing trading, using too much could be dangerous as the price could swing in the opposite direction to your trade, which could cause heavy losses by magnifying an already large price movement.
To prevent this, traders could place stop-losses just above or below the level they expect a swing reaction from.
Because of the utility that sudden and strong price reversals can have to the swing trader, volatile markets are often targeted for their abundance of such conditions.
Is swing trading safe?
It’s important to remember that no trading style should be considered “safe” – trading carries significant risk and you could lose money faster than you expected.
While swing trading strategies may be less complex than other methods of trading, this does not make it “safe” by any means.
That said, there are ways to manage risk when swing trading. You could tailor your risk management by:
- Using responsible position sizes
- Limiting your amount of leverage, if using any at all
- Using a target profit to indicate when might be sensible to close your trade before sacrificing any returns
- Setting strict stop-loss orders to prevent losses beyond a certain point if the price breaks its resistance or support.
Best Swing Trading Strategies FAQs
Do you need a large portfolio to swing trade?
How long should you hold a swing trade?
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.