Swing trading explained

Swing trading refers to the medium-term trading strategy that involves taking a position on a security for a period of a few days to a few weeks, aiming to profit from price swings. Swing trading strategies employ fundamental or technical analysis to determine whether a particular security could go up or down in price in the near future.

Highlights

• Swing trading is a trading strategy that involves taking a position on a security over a period of days or weeks, in an attempt to profit from expected price swings in the market.
• Swing traders use fundamental and technical analysis to identify potential trading opportunities. One of the key differences between swing trading and day trading is time.
• Swing trading tends to be more medium-term with positions kept open for days or weeks, while day trading positions are opened and closed on the same day.

Fundamental analysis for swing trading

Fundamental analysis is a method of analysing securities by examining the underlying economic, financial and other qualitative and quantitative factors that could influence their value. 

This may involve keeping aware of the state of the economy, news releases regarding a particular security, analysing a company’s financial statements such as its quarterly earnings reports, and studying market conditions to determine a company’s intrinsic value and potential for future growth.

Technical analysis for swing trading

Technical analysis is a method of analysing price and volume data over specific time frames, to identify trends and forecast future price movements. It is a form of chart analysis that uses historical price data and various chart patterns to identify trends and make predictions about the future direction of markets.

Technical indicators are mathematical calculations that use historical price data and volume data to provide insight into the potential direction of a security. These indicators can be used to identify trends, gauge market sentiment, identify support and resistance levels and more. 

Examples of technical indicators include moving averages (MAs), the Relative Strength Index (RSI), Bollinger Bands® and stochastic oscillators.

Building a swing trading strategy

There are a number of steps a trader could take if they hope to build an effective swing trading strategy.

1. Identifying their market. As a first step traders could identify which market they wish to trade in. This could be shares, indices, forex, commodities, or cryptocurrencies.
2. Utilising fundamental and technical analyses. These analyses could be helpful in letting traders determine when to enter and exit trades. 
3. Setting risk parameters. This could include setting stop-losses – or guaranteed stop-losses, which have no risk of slippage but incur a fee if triggered – profit targets and position sizing. 
4. Developing an entry and exit strategy. An entry and exit strategy could include criteria for entering and exiting trades, as well as any trailing stops or profit targets traders may choose to utilise. 
5. Backtesting the strategy. Traders may find it useful to test their strategy before risking any funds, to help identify potential weaknesses and improve their strategy over time.
6. Executing the trades. Once traders have developed and tested their strategy, they may decide to begin executing trades. However, it’s important to remember that even with a carefully thought-out strategy there is always the risk of making a loss. Before making any decision, traders should consider how comfortable they are losing money, their expertise in the market and the diversity of their portfolio among other factors. They should also never trade money they can’t afford to lose.

Swing trading strategies and techniques

How do you swing trade? There are several different swing trading strategies often implemented by traders. Below are some of the most popular.

Breakout

A breakout technique is an approach where a trader takes a position on the early side of the uptrend, looking for a market or stock that is most likely to ‘break out’. The trader gets into the trade as soon as they see the desired level of volatility and movement of a stock that breaks a key point of stock’s support or resistance.

Breakdown

A breakdown strategy is the opposite of a breakout. The market price goes lower than a defined support level and the chart points toward lower prices. Then, traders monitor the same fundamentals as with breakouts.

Reversal

This swing trading technique uses price-changing momentum when its growth or fall slows down before having a complete reversal. 

Retracement

A concept that is quite similar to reversal. Retracement is applied when the price reverses within a larger trend, but not to its high or for any length of time. A stock temporarily retraces to an earlier price point and then continues to move in the same direction later.

What instruments do swing traders typically trade?

There are many types of financial instruments that can be used for swing trading. As usual, each type has its own advantages and disadvantages. The choice of an instrument depends on the trader’s risk profile, level of experience and present market conditions.

We will list the most popular of the instruments for this type of trading:

Currencies. When working with currencies, the swing trading trader is looking for a particular currency to move in an expected direction (both down and up) in comparison to another currency. 

Individual stocks. Another choice for swing trading is with individual company stocks. The idea behind it is exactly the same: swing traders buy a stock for a specific period of time, then sell it for a profit. 

Swing trading helps the traders to diversify their investments. Yet, it is important to remember that every trading method has its pros and cons, and it is up to the trader which one of them he or she will choose. 

What is position trading?

Position trading is a common trading strategy where an individual holds a position in a security for a long period of time, typically over a number of months or years. Position traders ignore short-term price movements in favour of pinpointing and aiming to profit from longer-term trends. It is this type of trading that most closely resembles investing, with the crucial difference being that buy-and-hold investors are limited to only going long. 

Out of all the trading strategies, position trading encompasses the longest time-frame.

The potential advantages of position trading can include limited maintenance of positions, capitalising on more substantial trends and dampening the ‘noise’ of the market.

How to use a trend-trading strategy

Highlights

Position trading involves holding a position open over a long period of time. 

• While it is similar to investing, position traders can speculate on market downturns by going short and do not own the underlying asset, unlike regular investors. 
• Position trading can apply to a range of markets, including stocks, cryptocurrencies, forex, commodities, and indices.

Position trading vs other trading strategies

Position trading differs from day trading due to the length of time involved. While day traders attempt to open and close their trades within the course of a day, position traders take a longer approach. This could have other implications, such as the amount of money required to reach a profit target. 

Likewise, swing trading differs from position trading as it involves holding positions for a few days to a few weeks, with the aim of capturing price movements in what could be described as a medium-term trading strategy. Position trading, meanwhile, largely picks up where swing trading leaves off. Again, swing traders and position traders could often have different goals and utilise different analytic techniques. 

Why choose position trading?

Here are some potential benefits of position trading. 

• Reduced trading frequency: Position trading involves taking longer-term positions, which means traders don’t have to monitor the market constantly. This could reduce stress and allow traders to focus on other activities or strategies.
• Long-term profit potential: Position traders are aiming to capture larger moves in the market, and as such, they could potentially earn greater profits than shorter-term traders. However, there is also a possibility of bearing a loss.
• Reduced transaction costs: Position traders enter and exit the market less frequently than day traders, which could result in lower transaction costs.

Risks of position trading

• Market risk: Position traders are exposed to market risk, which means that their positions can experience significant losses if the market moves against them. This risk is higher for longer-term positions as market conditions can change over time.
• Opportunity cost: Position traders are committing their capital to longer-term positions, which means they may miss out on other trading scenarios that arise in the short term.
• Margin requirements: Position trading may require larger margin requirements, as traders are holding positions for longer periods. This can tie up more of a trader’s capital, potentially limiting their ability to trade in other markets or take advantage of other opportunities.

Tools and techniques for position trading

There are a range of tools that position traders may consider.

Technical analysis

Technical analysis utilises tools that potentially identify patterns and trends that could help traders make informed trading decisions. Traders could use a variety of technical indicators, such as moving averages, relative strength index (RSI), and stochastics, to analyse the market and identify potential entry and exit points.

Fundamental analysis

Another important tool position traders may use is fundamental analysis. This involves analysing macroeconomic data, such as gross domestic product (GDP) growth rates, interest rates, and inflation, as well as company-specific information, such as earnings reports and financial statements. Using fundamental analysis could help traders identify undervalued or overvalued assets.

Risk management

Risk management may also be a key aspect of formulating a position trading strategy. Traders may consider a variety of tools to manage risk, such as stop-loss orders, which automatically close a losing trade if the price falls below a certain level. Note, however, that an ordinary stop-loss does not protect from slippage. For a fee, a trader may consider a guaranteed stop-loss order, which will close the position regardless of how volatile the market is. 

Traders could also consider take-profit orders, which close a profitable position when it hits a particular level of profit a trader is willing to take, and a careful measuring of the risk vs reward ratio.

Developing a position trading plan

Position traders may consider taking these steps to design their trading strategy:

• Choose their trading instrument: Position traders will need to decide whether they want to work with underlying assets, or derivatives. 
• Learn about technical and fundamental analysis: Doing so could prove useful, as it offers a wider range of tools that have the potential to help a trader understand the dynamics of the market trends. 
• Choose entry and exit points: A trader will need to decide when to get into the market and when to leave it.
• Be aware of reversals: As position traders hold positions open over a long period of time, they may choose to ignore minor market fluctuations. However, that means they may fall victim to a trend reversal.

Key factors for position trading

Some of the key factors for position traders to consider include:

Long-term outlook: Since position trading involves taking a long-term view, having a strong understanding of market fundamentals, macroeconomic trends, and long-term trends may be important.

Patience: Position trading requires patience, as it could take time for a trade to develop and reach its profit target. Traders should be willing to hold onto their positions even during periods of market volatility.

Position sizing: Determining the appropriate position size may be important for position trading. Traders should ensure they have enough capital to withstand market fluctuations while still having enough buying power to take advantage of market opportunities. Position sizing could also impact risk management, as larger positions may require tighter stop-loss orders

Conclusion

In conclusion, position trading is a form of trading which involves holding a position open for an extended period of time, making it somewhat different from shorter-term strategies such as day trading and swing trading. Position traders may choose to trade a variety of instruments such as CFDs on assets like cryptocurrencies, stocks, forex, commodities or indices.

A position trader could use a variety of technical and fundamental analysis tools, coupled with research, to form a position trading plan. 

However, position trading carries a lot of risk with it. Therefore, position traders need to make sure that they conduct their own due diligence, remembering that the market can move against them, and never trade with more money than they could afford to lose. 

What is trend trading?

Trend trading or trend following is a trading strategy that involves identifying the direction of a prevailing trend in the financial markets and then buying or selling assets in accordance with that trend. 

Trend traders tend to use technical analysis tools, such as moving averages (MA), trend lines, and momentum indicators, to determine trends in the market. They will look for patterns in price movements and analyse charts to establish areas of support and resistance.

Once a trend has been recognised, trend traders tend to enter a trade in the direction of that trend and the goal is to ride the trend for as long as possible. As a trend trader, you may enter into a long position when the price is trending upward or a short position when the price is trending downward.

Key takeaways

• Trend trading is a strategy that identifies market trends and trades assets accordingly.
• It relies on technical analysis tools, such as moving averages, trend lines, and momentum indicators.
• Trend types include secular, primary, secondary, intermediate, and minor trends.
• Trend-following strategies can involve moving averages, trend lines, and momentum indicators
• Trend trading is versatile, suitable for various markets and timeframes, as its goal is to capitalise on market momentum.
• Risks include false signals, lagging indicators, and trend reversals.
• Backtesting and demo trading can help refine strategies before trading real money.

Trend trading explained

The Turtle trading experiment in the 1980s is often credited with popularising the trend-trading system. The experiment was conducted by the legendary commodities trader Richard Dennis, who believed that trading skills could be taught and that anyone could learn to become a successful trader.

Dennis selected a group of inexperienced traders, known as the “Turtles,” and taught them his trend-following system, which involved using technical analysis to identify and trade trends in the markets. The Turtles were taught to use a variety of indicators and risk-management techniques and it was a success. 

It’s difficult to estimate exactly how much the Turtle traders made, but some sources state it was over $100 million. Several of the Turtle Traders went on to become successful traders in their own right, including Jerry Parker, who founded Chesapeake Capital and reportedly generated over $1 billion in profits for his clients, and Paul Rabar, who founded Rabar Market Research and reportedly achieved annual returns of over 20% for over two decades.

Note, however, that all trading, including trend following, contains high risk of a loss. Markets move up and down, trends reverse, and past performance is not a guarantee of future results.

Different types of trends

There are several types of trends trend followers may want to be aware of.

• Secular trends: Secular trends are long-term trends that last for years or even decades. They are usually caused by structural changes in the economy or changes in demographic trends. 
• Primary trends: Primary trends are shorter-term trends that last for months or a few years. They are usually caused by changes in the business cycle or by political or economic events.
• Secondary trends: Secondary trends are shorter-term trends that last for weeks or a few months. They are usually caused by changes in investor sentiment or by technical factors. 
• Intermediate trends: Intermediate trends are shorter-term trends that last for days or a few weeks. They are usually caused by changes in the supply and demand for a particular asset or by changes in the level of volatility in the market.
• Minor trends: Minor trends are very short-term trends that last for only a few days, and are the bread and butter of day traders and swing traders. They are usually caused by news events or changes in the level of trading activity in the market.

How to use a trend-trading strategy

Traders may choose to use a combination of trend-trading strategies, depending on their style and risk tolerance. 

Moving averages

This strategy involves using the moving average (MA) indicator, which measures the average price of an asset over a specified time period. 

A trader may look for a “golden cross” signal, this occurs when a short-term moving average (eg 50-day) crosses above a long-term moving average (eg 200 day). This signal may be seen as a bullish indication that the trend is shifting upwards.

Trend lines 

Trend lines connect the highs and lows of an asset’s price movements. They are straight lines that connect two or more price points on a chart, representing the direction and slope of a trend.

Trend lines can be used to pinpoint the direction of a trend. They can also be used in conjunction with other technical indicators and candlestick patterns to spot potential trading scenarios. For example, a trader may look for a bullish chart pattern, such as a double bottom, to form near an uptrend line, which may indicate a bullish momentum.

Trend momentum 

Momentum indicators are used to measure the strength of a trend and can help traders identify potential entry and exit points. 

The indicators used are: 

• Relative Strength Index (RSI): This measures the speed and change of price movements. It oscillates between 0 and 100 and is typically used to identify overbought and oversold conditions. A reading above 70 indicates an overbought condition, while a reading below 30 indicates an oversold condition.
• Moving Average Convergence Divergence (MACD): The MACD is a trend-following momentum indicator that consists of two lines: the MACD line and the signal line. When the MACD line crosses above the signal line, it indicates a bullish trend, while a cross below the signal line indicates a bearish trend.
• Stochastic Oscillator: The stochastic oscillator indicator compares an asset’s closing price to its trading range over a specified period. It oscillates between 0 and 100 and is typically used similarly to RSI – to identify overbought and oversold conditions.

Trend-trading example

The chart above highlights activity over a few weeks and shows the 9-day moving average and 21-day moving average, trendlines and the RSI indicator below.

When the RSI falls below 30, indicating that the asset is oversold and a trend reversal is likely, it’s followed by a cross of 9 and 21-day moving averages, which too signals a potential bullish trend reversal. A trend-trader may have decided to buy the asset since there are two indicators confirming the reversal, and followed the trend until RSI shoots above 70, suggesting the asset is overbought. 

Why choose trend trading?

• Suitable for various markets: Trend trading can be applied to various financial markets, including cryptocurrencies, stocks, forex, commodities, and indices, making it a versatile strategy.
• Capitalise on market momentum: ​​ The basic idea behind trend trading is to identify the direction of the market, and then take positions that are aligned with the direction of the trend. 
• Adaptable for various time frames: Trend trading can be used for various timeframes, which means it may be suitable for many strategies, from day trading to swing trading. 

Risks of trend trading

• False signals: One of the downsides of trend trading is that it can generate false signals, leading to losses. Trends can be short-lived, and price movements can be volatile, making it challenging to identify the direction of the trend accurately.
• Lagging indicators: Trend trading often uses lagging indicators such as moving averages, which may not provide an accurate picture of the current market situation. By the time a trend is identified, it may have already been in place for some time, and the price may have already moved significantly.
• Risk of trend reversals: Trends can reverse at any time, and traders who have taken long or short positions based on the trend may suffer significant losses if the trend reverses.

How to start trend trading

The key steps involved in trend trading include:

Identifying trends: The first step in trend trading is to find out the direction of the trend. This can be done by analysing price charts and looking for higher highs and higher lows in an uptrend or lower lows and lower highs in a downtrend. Technical indicators such as moving averages and trend lines can also be used to highlight trends.

Selecting entry and exit points: Once a trend has been identified, the next step is to select entry and exit points. Entry points can be determined using technical indicators such as momentum oscillators and chart patterns. 

Managing risk: Risk management is an important aspect of trend trading. Traders can use appropriate position sizing and risk-management techniques. Stop-loss orders can be used to limit potential losses. It should be noted that ordinary stop-losses do not protect from slippage, while guaranteed stop-losses do, however there is a fee associated with them.

Conclusion

In summary, trend trading is a widely employed and adaptable trading strategy, which focuses on capitalising on market momentum through the identification and pursuit of prevailing trends. 

Using technical analysis tools, such as moving averages, trend lines, and momentum indicators, traders can ascertain trends and evaluate their potential potency. By recognising the distinct types of trends – secular, primary, secondary, intermediate, and minor – traders can adapt their strategies for varying market conditions and timeframes.

Trend-following strategies may use moving averages, trend lines, and momentum indicators, including to establish entry and exit points while assessing a trend’s strength. The versatility of trend trading allows its application across diverse financial markets, including stocks, cryptocurrencies, forex, commodities, and indices. 

What is day trading?

Day trading is the practice of buying and selling financial instruments within the course of a day. A day trader typically starts trading when the market opens and finishes when the market closes. The idea is to speculate on small price movements. 

Day traders can speculate using a variety of instruments from financial derivatives to assets such as stocks, foreign exchange, indices and commodities.

Highlights

• Day trading involves opening and and closing a position within the same market session.
• Day traders speculate on an asset’s short-term price fluctuations.
• Day trading is highly risky, so traders should do their own research, remember that prices can go down as well as up, and should never trade with more money than they can afford to lose. 
• Day trading differs from conventional, long-term investing that aims to buy and hold in an asset or an instrument in the hope that its value will increase over the course of time. 
• Historically, day trading was an activity exclusive to big financial firms, banks and financial professionals. However, with the growth of online trading platforms, day trading has become more accessible to retail clients outside the financial sector. 

Day trading explained

Day trading is based around a market or asset’s price fluctuations. This means that, in many cases, traders may consider assets that move around, meaning there are more fluctuations. The relative liquidity of an asset is also something day traders may consider keeping in mind.

Derivatives, such as contracts for difference (CFD) are popular instruments for day trading, as they allow short selling and the use of leverage (restrictions may apply), which can magnify both profits and losses.

CFDs allow traders to speculate on the price movement without owning the underlying asset.

Day trading strategies

There are a range of strategies that traders could consider to day trade. These include, but are not limited to:

Day trading rules and risk

The rules of day trading vary from place to place, depending on which jurisdiction a trader is under. Make sure to conduct your own research, looking at the government websites and other official sources.

There are, however, market risks that are universal. Markets can move against a trader’s position. If this happens, a trader could lose their money. When learning to day trade make sure to also conduct due diligence on the asset you’re trading. Remember that prices can move against your position, and never trade with more money than you can afford to lose. 

How to start day trading

You may consider taking these steps to start day trading:

1. Choosing the instrument you want to trade: You can choose between share dealing, a derivative or something else. This choice would depend on your risk tolerance, experience in the markets and trading goals.
2. Setting up a trading account with a broker: There are a number of brokers available to retail traders from discount brokers to full-services. Make sure to conduct your own due diligence finding a broker based on your personal needs.
3. Designing a day trading strategy: You can use technical analysis and fundamental analysis, forming your own trading strategy suitable for your goals. 

Day trading example

A potential example of day trading stocks comes in the form of Tesla’s (TSLA) performance on 14 February 2023. 

Following the news that a senior analyst at Barclays initiated stock coverage, giving it a “Buy” rating and a $275 price target (versus $192 share price on the day), the stock went up by more than 7% in the course of the day, reaching as high as 9% increase intraday.

A day trader could have entered the market by buying Tesla when it opened at $191.94, around the time that the analyst made his forecast, and exited the market by selling it when it reached its intraday high of $209.25.

Note that this example is for illustrative purposes only. Of course, if the stock didn’t react to the rating, or reacted differently, the trader could have lost money. 

Things to watch out for when day trading

The are a few mistakes traders could avoid when day trading:

• Not doing their own research: A trader who does not do their own research is at risk of losing their money because they are not as well informed as they could be. 
• Trading illiquid assets: If a trader’s assets are not liquid enough, then they may not be able to sell them. 
• Not controlling their emotions: Traders who keep their emotions in check may be more likely to make rational decisions than those who let their hearts rule their heads. 

Conclusion

Day trading refers to a trading approach in which a position is open and closed within the same trading session or day. Day trading strategies include, but are not limited to, range trading, contrarian trading, pairs trading and news trading. 

To start day trading, you may consider choosing an instrument you want to trade (for example via derivative products); then open a brokerage account, and design a trading strategy that’s suitable to your goals. Day traders may benefit from doing their own research, avoid trading illiquid assets and keeping their emotions under control.

Day trading carries a lot of risks. This is why you may need to do your own research, remember that prices can go down as well as up, and never trade more money than you can afford to lose.