There are tons of investing styles out there. When it comes to stocks and other types of securities, there are different kinds of trading strategies. Some stick to stocks and ETFs, while others explore bonds, GICs and mutual funds. Some Canadians prefer to participate in long term investing, and some prefer to earn gains in the short term. When we consider timelines in relation to investing, that’s where swing trading comes into play. So, what is swing trading exactly? In simple terms, swing trading is an investing strategy used to profit in the short run, typically a week to a month. Keep reading to find out more about swing trading and if it’s the right trading style for you!

What is swing trading?

Swing trading is a type of market security trading tactic. With this method, securities are held longer than day trading. Typically, securities are held for a few days to no longer than a month. Securities held for longer than a few weeks would normally be held using a trend trading method. Furthermore, technical analysis is the primary method of analysis used by swing traders. They use fundamental analysis and monitor price trends and patterns as well.

Swing trading aims to capture profits in security fluctuations in the short run. This is done by analyzing the market and purchasing positions to be held for a limited amount of time. Most classic stock traders are swing traders. Changes in businesses affect the securities market in relatively short timeframes. Swing traders aim for these shifts in the market to earn them profit.

Stock markets and other financial marketplaces carry risk. No amount of analysis can ever completely predict the fluctuations of a stock, not even by a seasoned swing trader. The longer a stock is held, the more overnight and weekend gaps that can occur. These can impact potential profits.

Related Reading: How To Buy Stocks

What is an example of swing trading?

An investor may notice a cup and handle pattern with Apple stock. From there, they decide to make a purchase of stocks at $170 per share. They decide they are only willing to lose $3 per share, at most. So, they place a stop-loss order to sell the stock if the price drops to $167 per share. This minimizes their loss, should the stock not grow as predicted.

Generally, swing traders will aim for at least double the reward of the risk. In this scenario, the trader is predicting the stock will grow to at least $176 per share. They will then sell and earn a profit of $6 per share. Risk and reward is one method traders use to determine when to sell during swing trades.

Related Reading: Types of Stock Orders

How does swing trading work?

Swing trading is used by traders when stock indicators predict shifting trends in the short term. Swing traders will jump in and make purchases of stocks, with shifts in the market. They earn money on the short-term movement of stocks. They do this by monitoring the stock’s overall trend. Lastly, they profit off the small changes in price of a stock, that is experiencing a larger trend. The swing trader can make significant returns. This is done by earning smaller percentages in more overall trades.

A swing trader will use multiday chart patterns to help guide their purchases and sales. There are many common trading patterns they aim to identify and take advantage of. They include the ascending/ descending triangle, head and shoulders, and many more. These patterns and indicators help a trader make an investing plan.

By setting up multiple trades with good risk-to-reward factors, swing traders aim to win overall. In other words, they do not aim to win with every single trade, there will always be a margin of error. They calculate the most money they are willing to lose for each trade. Then, they compare that to how much money they can gain for each trade. With multiple trades occurring at the same time, they gain overall to earn a profit.

What is a swing high in trading?

A swing high is a technical analysis term. It indicates that a stock has reached a peak price before it declines. Swing highs are recorded when a new peak price is moving upward. The exact height of the new peak price is not known until it begins to drop. However, if a new swing high is forming it would be higher than any of the other peak prices. The higher the swing high, the greater indication of higher demand and an uptrend. Lower swing highs indicate downtrends or loss of demand in a stock. Swing highs are used for predicting the overall trend. They can indicate strength for entering and exiting trades. It is important to compare current swing highs with prior swing highs to gauge the impact.

What is a swing low in trading?

On the other hand, a swing low is the bottom or valley between peaks, the lowest price in stock over a period. Swing lows can look different if you are looking at hourly, daily, weekly, or monthly charts. Additionally, swing lows help traders identify patterns, just like with swing highs. Swing low patterns are also how stop-loss order prices are determined by traders. When swing lows and swing highs are beside each other and rising, this indicates an upward trend, while the opposite is true as well. Lower swing lows and swing highs beside each other indicate a downward trend.

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Swing Trading by Market

Swing trading can be done on any market and does not have to be contained within stocks. Any security can be fruitful grounds for swing trading. It is most common to see swing trading on major stock exchanges. It is also possible to swing trade on the forex market and with cryptocurrencies. Ultimately, the market you are most familiar with identifying trends and actioning trades on will be the best market for you to trade on. Below are more details by market.

What is swing trading in the stock market?

Swing trading in the stock market takes advantage of trends seen in the market. Traders will watch trends and buy positions on the market to earn profits. The New York Stock Exchange, Toronto Stock Exchange, and any other exchanges are all competitive markets for swing trading. Essentially, traders are making bets on the success of businesses, which is the exact opposite of short selling. Traders then hold their position on a stock for a few days or weeks. 

What is swing trading in Forex?

Forex is a global marketplace for trading national currencies around the globe. The market is sustained online through computers. There is no physical exchange, making it a truly international exchange market. On it, currencies are bought and sold by traders. The market is open 24 hours a day for 5 and a half days a week. As Forex is a securities market, some trends can predict outcomes. Swing trading does well and is common on the Forex market. It follows the same principles as it would in the stock market. 

What is crypto swing trading?

Crypto is a modern-day currency and security. It has multiple marketplaces, all operating online. Here is a list of Crypto Exchanges. As crypto is a security that experiences price increases and decreases, it is volatile. This creates the perfect ground for swing trading. Cryptocurrencies have identifiable trends. For this reason, swing traders can use the same strategy they would in other markets. As a modern and unregulated security, cryptocurrency imposes additional risks compared to other markets. Use caution when trading in crypto and ensure you truly understand the market and related risks.

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What is the difference between swing trading and day trading?

The main difference between swing trading and day trading is the time a security is held. The goal of any type of trading is to gain profit. Using different strategies and timeframes, individual traders do this in many ways.

Day trading is completed over the course of a day. Day traders will analyze the trends of the day and make multiple trades. Furthermore, trades are made at anticipated highs and lows. Typically, more trades are made per day with day trading.

But with swing trading, traders will hold securities for more time. They can hold them for multiple days or weeks at a time. Generally, swing traders will not hold securities for longer than two months. This has the opportunity for larger gains and losses. Each method of trading pays attention to different information. Further, they have different levels of involvement. Traders should match their skills to a complementary method of trading. 

How profitable is swing trading?

Most people enter swing trading with an understanding money can be earned. This does not mean everyone is equipped to be profitable at trading securities. However, on average, Canadian swing traders earn $34,027 per year, according to ZipRecruiter. With that in mind, there is a potential to earn more or less, but ultimately you get what you put into it.

Related Reading: What’s a Good P/E Ratio?

How do I start swing trading?

Here’s some high level steps to get started on your swing trading journey today:

1. Get upfront Capital and charting software for technical analysis

The hardest part of swing trading is having enough money to invest. Then, you must learn how to invest that money wisely. You will need start-up capital that you are willing to part with while you learn. You will also want to invest in software to help you with transactional analysis. When learning to swing trade, learn the ins and outs of transactional analysis.

2. Pick the right stocks or securities

Not every type of stock or security will be best to trade on. Figure out your niche industry, or ideal of stock and educate yourself deeply in that area. After some success, you can navigate new industries.

3. Understand Bear and Bull markets

There are three types of markets. Bear markets, bull markets and in-between markets. Each market comes with its own unique trends and swing trading strategy. Become familiar with the different markets. There are strategies best used during each market. 

4. Understand trends and baseline value

You must understand trends and be able to determine a stock’s baseline value. Otherwise, you may have difficulty swing trading. After all, swing trading is highly dependent on trends. You should take time to educate yourself on market trends in general and the trends of the asset you choose to invest in. 

Is swing trading hard to learn?

The technical analysis necessary to be a profitable swing trader is a lot to learn. It may even be the most difficult part of swing trading. It is a skill that will be rewarding in the future if you decide to learn it. Overall swing trading is considered one of the best methods to learn trading with. It has a huge profit capability for advanced and intermediate traders. It is not something that you will jump into and earn significant amounts of money with. However, with time and zeal, you will learn the skills necessary to be a swing trader. Like trading on any market with any security, there are risks. Educate yourself on the risk and learn to trade in a financially responsible manner.

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