Swing Trading Strategies

December 19, 2022
Swing trading strategies attempt to capitalize on price fluctuations over the short term. Learn how traders use swing trades.

Markets rise, and markets fall. Sometimes prices move a lot in a short period; sometimes they stay within a tight range over a long time, underscoring the market's always-on fluctuations.

If you're a long-term investor, your focus may be the bigger picture—the larger market trends and cycles, such as bull and bear markets. But within the larger currents exist a multitude of minor price fluctuations: "swings" in the form of smaller rallies and declines. Simply put, several trends may exist within a general trend.

Some traders attempt to capture returns on these short-term price swings. The term "swing trading" denotes this particular style of market speculation. Perhaps you've been tempted to venture into this style yourself. If you're not familiar with it, read on for a brief explanation.

As a form of market speculation, swing trading strategies involve opportunity but also risks. And as is evident in all market speculation, past performance is no guarantee of future outcomes.

What is swing trading?

In its simplest form, swing trading seeks to capture short-term gains over a period of days or weeks. Swing traders may go long or short the market to capture price swings toward either the upside or downside, or between technical levels of support and resistance.

Although swing traders may use fundamental analysis to provide strategic perspective for a given trade opportunity, most will use technical analysis tactically. There are four components that are widely considered critical to a trade setup:

  • Which direction to trade—long or short
  • Where to enter the market
  • At what price to take profits 
  • At what price to cut losses

The technical component is critical in swing trading because of the tight time constraints of the trades. Think of it this way: You're projecting that an asset will reach a specific price (or profit) within a relatively specific window of time.

So, when entering a swing trade, you often must determine why you're buying or selling at a specific price, why a certain level of loss might signal an invalid trade, why price might reach a specific target, and why you think price might reach your target within a specific period of time.

Some professionals believe fundamental analysis, with its focus on economic cycles, company and sector earnings, and other longer-term trends, isn't typically suited for specific entry and exit points. However, it may inform the decision to trade a particular asset.

Technical analysis and chart patterns, which can focus on narrower time and price context, might help traders visually identify specific entry points, exit points, profit targets, and stop order target levels.

At this point, you might be noticing other patterns and asking:

  • If swing trading is about seeking short-term profits, then isn't it similar to so-called "day trading"?
  • If a swing trader can hold a market position for several weeks, isn't that similar to long-term position trading, almost like "investing"?

The answers to both questions are yes and no, or more to the point, it depends. Swing trading sits somewhere between the two. Let's explore the differences.

Swing trading vs. day trading

Although both swing trading and day trading aim to achieve short-term profits, they can differ significantly when it comes to trading duration, trading frequency, size of returns per profit target, and even the style of market analysis.

Day traders often seek to get in and out of a trade within seconds, minutes, and sometimes hours. This means they may place multiple trades within a single day. Because of the ultra-narrow time frame, day traders often aim to capture smaller gains more frequently—unless they're trading a major news event or economic release, which can cause an asset to skyrocket or nosedive.

The effects of market fundamentals can be slow to emerge. Fundamentals tend not to shift within a single day. Much of the seemingly "random walk" of prices from minute to minute throughout the day may appear as noise. Yet, some day traders might consider these smaller fluctuations "tradable." And as fundamentals may not necessarily influence every single change in price, day traders often rely on technical analysis to gauge these micro-movements of supply and demand.

In contrast, swing traders attempt to trade larger market swings within a more extended time frame and price range. Larger price action within a span of days or weeks can often be sensitive to investor response toward fundamental developments. Hence, swing traders rely on technical setups to execute a more fundamental-driven outlook. If you're new to technical analysis, you might want to review the basics. Here are a few common patterns.

Common price patterns

Common price patterns traders may see include an ascending triangle, descending triangle, pennant, bearish flag, and bullish flag.

For illustrative purposes only. Past performance does not guarantee future results.

Swing trading vs. long-term position trading

Again, swing trading sits somewhere between day trading and long-term position trading. Position traders, not unlike investors, may hold a position for weeks to months. But this may also change the nature of how they conduct market analysis.

Because position traders look at the market's long-term trajectory, they may base their trading decisions on a more expansive view of the fundamental environment, aiming to see the big picture and seeking to capture potential returns that may result from correctly forecasting the large-scale context.

The longer the time horizon, the more prices swing within the trajectory. A position trader might hold through many smaller swings. A swing trader would likely consider trading them.

Advantages of swing trading strategies

Swing trading can be a means to supplement or enhance a longer-term investment strategy. Swing trading is one of the few ways traders attempt to capture frequent short-term price movements in a market landscape that tends to evolve at a much slower pace.

With that said, if you decide to implement a swing trading approach, you might want to consider being conservative with the capital you allocate to this trading style because it has specific risks.

Risks of swing trading

Trading frequency and risk: Short-term trading opportunities can sometimes occur more frequently than their longer-term counterpart. Bear in mind that more frequent trading brings more frequent risk exposure. Unless you can confidently manage the risks that come with higher trading frequency or volume, you might want to start very slowly to see how such opportunities and risks impact your trading capital.

And remember, the shorter your time horizon and the more trades you make, the more you'll rack up in transaction costs. This can water down your overall return, even if your swing trading strategy is otherwise profitable.

Trading complexity and risk: Because every trading opportunity can present a unique market scenario, your approach can vary considerably—and that introduces complexity. Remember, too, the greater the complexity, the greater your risk of misreading the market or making mistakes in your execution.

Swing trading strategy: Adopt or avoid?

Swing trading is a specialized skill. It isn't for every investor and not every investor can succeed at it. It takes time, practice, and experience to trade price swings.

As the saying goes: It's one thing to know what a chart is. It's another to actually know how to read a chart.

If you have a low risk tolerance, or if you don't have sufficient risk capital, then you might want to avoid it altogether. But if you have the tolerance, risk capital, and willingness to learn to swing trade, you might find it a valuable skill that could potentially supplement your longer-term investments.

But remember to keep things simple. The right combination is different for every trader, so it's important to start with the basics and work your way into using the indicators and patterns that make the most sense to you.

There is no guarantee that a stop order will be executed at or near the stop price.

Schwab does not recommend technical analysis as a sole means of investment research.

This material is intended for informational purposes only and should not be considered a personalized recommendation or investment advice. Investors should review investment strategies for their own particular situations before making any investment decisions.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.