What is swing trading? Definition & Meaning - nextmarkets Glossary

Swing trading is largely dependent on extensive and detailed technical analysis of market trends to determine whether particular stocks might make sudden swings up or down in the very near future. There are various technical indicators that need to be examined, and swing traders use them to identify stocks that show momentum in their price movements. nextmarkets provides traders with up to date information in order to help them make a decision.

This helps to signal the best times to buy or sell a position but requires technical know-how and experience to carry out effectively. Swing traders don’t concern themselves with the long-term value of stocks; their approach is all about recognising the signs of momentum and profiting from price swings. For more information on Momentum Strategies, make sure to read our detailed guides.

Most markets spend the majority of their time going nowhere fast. The typical pattern is that they rally for a bit, decline, then rally again. Small swings are far more common than large ones, and by the end of the month a market will have gone up and down several times over. The art of swing trading is to capture profits from these small swings.

So the best swing trading candidates are the most actively traded stocks that tend to swing within broad, visible channels. The nextmarkets platform allows you to enter channel lines on price charts, so you should monitor a list of stocks each day to become familiar with their price actions. A popular choice of asset for swing trading is Forex (FX) trading. Before you get started with FX, make sure to take some notes from our What is Forex? guide.

For beginners, the technical terminology in swing trading can be confusing. In simple terms, it is a style in which users seek to make profits by holding an asset for between 24 hours and several weeks. In this slightly longer timeframe, you are more likely to see a greater price shift than you would see in a single day, but you must undertake more planning and analysis to minimise your risk of losses.

The technical analysis required involves understanding some more advanced concepts and terminology, so it will be a learning process that could really benefit you in the long run. With discipline and a studious approach, swing trading is a great thing to master. The nextmarkets platform is ideal for those who want to learn the ropes of swing trading.

One of the common favourites among swing traders is the classic breakout trade. This type of setup is identified using advanced technical analysis, taking advantage of price momentum, and it works best when the market environment is healthy.

The specific price pattern involved can come in a number of different shapes and sizes, so it is best described in the following way: A clear and direct transition from a state of mean reversion to a state of momentum or trend, signalled by an expanding range through a clear trendline or pattern. The move should be a little intimidating as it is deemed as a risky move. Traders can practice these strategies on their nextmarkets demo account.

The ultimate goal of the swing trader is to work with multi-day, or sometimes multi-week, stock. For this reason, it’s not really possible to develop a trading system that is based solely on the fundamentals. Technical analysis is the bread and butter of the swing trader, but the fundamentals can play a supporting part in the development of a strategy.

The approach will be predominantly driven by technical analysis, but knowledge and understanding of the fundamentals is definitely a good thing to have when forming your strategies and systems. At nextmarkets, we offer a range of analysis on all kinds of trading strategies so you can make the best decisions.

A committed swing trader on nextmarkets will start early in the day, using the time before the market opens to get an overall feel for the day ahead; finding potential trades, creating a watch list and checking existing positions. Taking time to browse the latest financial news is important, looking for market sentiment, sector sentiment and updates on current holdings.

The search for potential trades should identify special opportunities and sector plays, drawing up a definitive watch list. Once the market opens, it’s all about observing and trading based on given strategies and algorithms that the swing trader will be well-practised in.

An example of a swing trade would be to identify a stock where the weekly trend is up, and the lows on the day’s bar chart are short and sharp. You would then analyse how the stock has behaved since the trend began. If it has returned to its moving average three or more times, and penetrated it by more than 1.5% of its price on average, this is the time to place a buy order.

You would then place a protective stop fairly close to your entry point, and cash out on profits near the upper channel line. The experienced trader will factor in other variables for their decision-making, but this is an example of what it means to execute a swing trade on nextmarkets.

The key to risk management in swing trading is to have well-defined entry criteria. A good approach is to have a clear transition from a state of mean reversion to a state of momentum, or trend. This will be signalled by an expansion of range through a strategically defined trendline or pattern. If that transitional state can’t be held, and you fall back to the prior range or pattern, it’s time to move on.

So breakout trades work well with tight stop-loss parameters. In terms of setting profit targets, you should assess the size of the base pattern the stock is emerging from, and look back at the lengths of previous price swings. For a more in-depth look at strategy, check out the nextmarkets forex trading strategies that really work.