What is swing trading?

Swing trading is a trendy type of active trading. In active trading, investors look to make quick profits over the short term by deploying technical analysis. You must, therefore, be familiar with different types of technical analysis if you want to be a successful swing trader.

The basic idea of swing trading is to accurately anticipate stock market trends and make gains by leveraging this forecast. Traders use technical analysis to take advantage of the prevailing security trend to make profitable transactions.

Swing trading and day trading incur commission costs and specific risks that are greater than conventional investment strategies. As a trader, you can leverage swing trading to earn profits by making well-timed transactions on stocks and other assets. While day trading positions last less than a day, swing trading positions can last from 2 to 6 days and even up to 2 weeks. More on this later.

Understanding swing trading

Swing traders determine the worth of a trade based on risk and reward analysis. They analyze a chart to determine essential aspects like the point of entry, stop loss and a point at which they can exit with a gain.

For instance, if the risk involved is $1, while the expected gain is $3, then the risk/reward ratio is favourable. But if the risk is $1 while the expected gain is $1 or less, then the trade is not worth it.

How does analysis work with swing trading?

Due to the short-term nature of swing trading, traders primarily rely on technical analysis. But they may also employ fundamental analysis, in addition to considering price patterns and trends. This can help them to make a more in-depth assessment than with technical analysis alone.

For instance, if traders sense a bullish scenario, they verify this by following the fundamentals of the asset. For bullish stocks, the fundamentals should improve or at least be favourable.

What about volatility?

Swing trading aims to secure gains based on an expected price movement. Some swing traders prefer volatile stocks, which can show plenty of movement in a short time frame. But other swing traders like to go along with more stable stocks.

Key takeaways

A bit more info about swing trading to add to your back pocket:

  • Make Predictions, Not Blind Guesses: No matter what kind of stock you prefer, as a swing trader, you have to predict where the price of the stock will go next. Based on this prognosis, you can enter a position. If your prediction was right, then you stand to make a gain on your trade. After earning gains on a correct price prediction, swing traders look for the next opportunity to obtain further profits.

  • There are Risks to Swing Trading: Swing trading may leave traders exposed to weekend and overnight risks. The price gap can widen during this time duration, meaning that the next session will start at a significantly different price. Swing traders can make gains based on a specific risk/reward ratio that is determined by profit and stop-loss target. They can also leverage a technical indicator in an attempt to make a successful trade.

  • Watch Market Trends Closely: Swing traders identify the overall current trend with the help of the relevant chart. If the security shows an upward trend, then the trader will exploit this trend by purchasing shares, futures contracts, or call options. If there is an overall downward trend, then swing traders will respond with short selling of shares and futures contracts and may also purchase put options. Swing traders search for opportunities by poring over daily charts or by watching one-hour charts. This can help them to locate more precise points for stop loss and entry.

  • When In Doubt, Leverage Predictable Patterns: Often, there is no bearish or bullish trend. However, securities follow somewhat predictable patterns between support areas and parallel resistance. When the market goes up and then falls, the highest point reached before going down is known as resistance. As the market continues to fall, it will reach the lowest point, after which it will start rising once more – this lowest point is known as support. Both points present swing trading opportunities. Investors can embrace a short position near the resistance area and a long position near the support area.

Pros and cons of swing trading

Here are some pros and cons of swing trading:


  • Involves less trading time compared to day trading
  • By exploiting overall market swings, traders can maximize short-term gains
  • Swing trading is possible with technical analysis alone, which can simplify the procedure


  • Trade positions face weekend and overnight market risks
  • Trades can incur substantial losses in case of abrupt market reversals
  • By focusing on short-term gains, swing traders can miss out on long-term gains

Day trading vs. swing trading

The critical distinction between swing trading and day trading is the duration of positions. In swing trading, you must hold the asset overnight at the very least. Day traders, on the other hand, close their positions before the closing of the market. Therefore, day trading positions do not extend more than a single day.

Since swing trading involves holding assets for multiple days, several issues must be considered. You will face a higher risk with swing trading since you will be exposed to the overnight risks, which can be unpredictable. To address this risk, swing trades have a smaller position size than day trading for similar-sized accounts. Day traders can make use of bigger position sizes and utilize a 25 percent day trading margin. Swing traders, on the other hand, can employ leverage or a margin of 50 percent.

Swing trading strategy

Bullish traders

Stocks rarely move along a level line, but they exhibit a step-like behaviour. For example, stocks might trend upwards for a few days, followed by downward trends during the upcoming few days before increasing once more. If you see this zig-zag pattern on a chart, you might notice that the overall movement is upwards. This pattern is often referred to as an “uptrend.”

Bullish swing traders find initial upward movement followed by a downward movement, which is also referred to as a ‘counter-trend.’ After this countertrend, upward movement may resume once more.

Securing gains on upward trends

Since the duration of the pullback is not known, you can go for bullish swing trade after the original uptrend has resumed. One way in which you can determine this is to follow the countertrend. If stocks climb higher than the previous day’s high of the pullback, you should carry out a risk analysis before entering a trade.

As the name implies, “entry point” is the possible point of entry. You can compare this with two other price points to determine risk and find the upside target.

Your first action should be to establish the pullback lowest point. This will help you determine the ‘stop out’ point. In case the stock falls below this point, then you should exit the trade to lower losses. After this, you ought to determine the highest point of the previous uptrend.

This presents the profit target. In case the stock actually reaches the target price or climbs higher, you ought to exit at least a part of your position to secure gains.

The approximate reward for the trade is the difference between the entry point and the profit target. The relative risk is the difference between the stop-out point and the entry point. To establish whether a swing trade is actually realistic, make use of a minimum reward-to-risk ratio of two-to-one.

At a minimum, the potential profit has to be twice as high as the potential loss. If the ratio should go higher than this, the trade may well be more attainable. If it goes lower, then it will likely be less feasible.

Bullish swing trade

If you are purchasing stock as part of swing trading, you can enter the trade with the help of a buy-stop limit order. You can utilize a contingent buy order for in-the-money options trading. Your order is activated when the stock reaches the entry point. The trade is then executed immediately.

When either one of the call options or stock positions is open, you can utilize a one-cancels-other order. This will sell your call option or stock when it reaches the profit-taking price or the stop-loss price. An advanced order like this ensures the cancellation of the other order when a sell order is executed.

Although it might appear a little involved initially, you can quickly and efficiently manage advanced orders such as one-cancels-other and contingent orders by leveraging a reliable trading platform.

Bearish swing traders

Downtrends move in a similar step-wise or zig-zag fashion as uptrends. For instance, a stock may undergo a decline over several days. It may then go on an upward trend for a few days before once again going downwards. When this behaviour is seen on a chart, then the downtrend becomes more apparent. The downward movement is the overall trend, whereas the retracements and bear rallies here are the counter-trends.

How bearish swing traders secure gains

The same tactics can be used for making profits on downtrends as on uptrends. Since it is not easy to predict how long the countertrend or bear rally will last, you can the bearish swing trade if it appears that the stock is going downwards. To make this happen, you should scrutinize the bear rally very carefully. If the stock reaches a lower point than the previous day’s low of the countertrend, you can then enter a bearish position.

As always, you should assess the risks and rewards before entering a bearish swing trade. Just like bullish swing trades, you can compare the entry point with the profit target and stop-out points to determine the risks and rewards of this trade. In the bearish swing trade, the highest price of the previous countertrend is the stop-out point. Hence, when the stocks rise beyond this price, you should exit the trade to cut short your losses.

The lowest point on the previous downtrend is the profit target. When the stock reaches this point or goes lower, you can exit some of the positions at a minimum to secure gains.

The targeted reward is the difference between the profit target and the entry point. The assumed risk is the difference between the entry point and the stop-out point. You should aim for a reward-to-risk ratio that is two-to-one or more.

Entering the bearish swing trade

Just like bullish swing trades, you can enter the trade with the sell-stop limit order if the reward-to-risk ratio is suitable. The stock will be sold short once the entry point is reached. Selling short involves getting shares from an online broker to sell them in the open market.

The expectation here is to buy back the shares for a lower amount in the future. An in-the-money put option is a short-selling alternative. If you decide to go for put options, you have to utilize the contingent order for purchasing the put when the stock reaches the entry price.

When the trade is open, you can enter a one-cancels-other order for both profit-taking price and stop-loss price. When one trade is executed, then the other trade is cancelled.


Swing traders follow the overall trend of the stock. But some traders prefer the countertrend instead of the overall trend. This type of trading is called “fading.” There are also other names for this such as “trading the fade,” “contrarian trading,” and “countertrend trading.”

When there is an uptrend, you adopt a bearish position close to the swing high since you are expecting that the stock will fall. To trade the fade in a downtrend, you must purchase shares close to the swing low if you think that the stock will rebound and rise.

While fading, you would certainly like to exit the trade before the countertrend finishes. This applies to both bearish and bullish scenarios.

Where to do your swing trading

If you’re eager to get started and comfortable with DIY investing, it’s easy to buy and sell stock through a discount brokerage. Check out our ultimate guide to Canada’s discount brokerages to find one that best suits your needs.


These were just the fundamentals of swing trading. You should do your research for more advanced swing trading methods. You should also have some mastery over technical analysis. Expertise in fundamental analysis is helpful for swing trading. But now that you have the basics under your belt, you can give it a shot!

About the Author

Chris Muller

Chris Muller


Chris has an MBA with a focus in advanced investments and has been writing about all things personal finance since 2015. He’s also built and run a digital marketing agency, focusing on content marketing, copywriting, and SEO, since 2016. You can connect with Chris on Twitter @moneymozartblog.

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