Understanding swing trading

01 What is swing trading?

Swing trading is a trading strategy aimed at capturing short-term price fluctuations, typically spanning from several days to a few weeks.

This approach stands in contrast to long-term investing, which focuses on broader market trends and cycles over an extended period.

Swing traders primarily use technical analysis to seek trading opportunities due to the short-term nature of these trades. Fundamental analysis, on the other hand, can enhance their decision-making process.

02 Swing trading strategies

The essence of swing trading involves predicting short-term price movements, initiating a position, and securing profits if the trade unfolds favorably.

Simply put, there are three main questions to consider before making a swing trade:

• What direction should the trade take?

• At what point should the market be entered?

• When should profits be taken or losses stopped?

The first question determines whether to adopt a long or short position. The subsequent questions help in pinpointing the potential entry and exit points for the trade.

There are many popular swing trading strategies, such as trading based on price patterns, channel trading, breakout trading, and the use of technical indicators.

Trading with price patterns involves recognizing common formations like head and shoulders, flags, and triangles. These patterns not only suggest possible directions for trades but also assist traders in setting potential price targets.

Channel trading typically refers to using price channels to enhance short-term trading decisions. Once a price channel is identified, a “buy low and sell high” strategy within the channel may work. When it comes to ranging markets, however, traders can use some technical indicators like Bollinger Bands, to help identify potential trading “channels.”

Breakout trading aims to capture potential trading opportunities when the price breaks out of a major support or resistance level. A breakout suggests a significant change in supply and demand, which could be a potential starting point for a strong move. It is important to identify a breakout from a “fakeout” as the market often generates false breakout signals.

Using technical indicators can help traders identify potential trading signals. These signals may arise from various indicators, including moving averages, the MACD (Moving Average Convergence Divergence) indicator, and numerous momentum oscillators that offer overbought and oversold signals.

03 Case study

Chart 1 illustrates how the price oscillates between two horizontal lines following a gap-up breakout, suggesting that the market has entered a consolidation phase. This period of consolidation presents potential swing trading opportunities to “buy in the lower range and sell in the upper range” within the bounds of these two horizontal lines.

We can be pretty certain that the market will sooner or later break through this trading range. The question is, which direction it is likely to move? To work this out, traders may take advantage of some trend-following indicators like moving averages.

Chart 2 displays the 50-day moving average (MA50) on the price chart. The MA50 may serve as potential support after a period of price consolidation, indicating that the bulls are likely to take control of the market, and a potential breakout to the upside could be imminent.

Chart 3 shows that the market finally makes a decisive move above the horizontal resistance line, along with a sharp increase in price. To distinguish a true breakout from a false one, traders often scrutinize trading volume for further confirmation. A noticeable decline in trading volume as the price nears the resistance line before the breakout can imply that selling pressure is waning and the bearish trading bias is likely to reverse. Conversely, a spike in trading volume accompanying the price breakout suggests increased participation by traders, reinforcing the likelihood of a continued upward trend in the short term.

This presentation discusses technical analysis, other approaches, including fundamental analysis, may offer very different views. The examples provided are for illustrative purposes only and are not intended to be reflective of the results you can expect to achieve.

All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.