Markets never move in a straight line. They trend up or down when they’re not moving sideways. But even in a major trend, markets still fluctuate, up and down; the classic “drunken walk” that characterizes most financial assets.

You can see this meandering take place across the entire time spectrum of an asset’s price cycle, from seconds to years. Opportunities abound across the spectrum–years presenting an opportunity for long-term investors, seconds to minutes, for scalpers and day traders, and days to weeks, an arena for swing traders.

• Swing trading is a style of speculation that attempts to capture short-term market movements.
• A swing trade typically lasts days to a week, rarely going beyond that duration.
• Swing traders often use a combination of technical and fundamental approaches.

What is Swing Trading?

If you’re old enough to remember all the things the 1970’s was infamous for, swing trading is not what you did behind closed doors with other “partners.” But it is a way to exploit attractive assets, going along for a ride, perhaps even a thrill, until the party is over. Okay, let’s get serious.

Swing trading is a style of market speculation that seeks to capture quick gains over a period of days or weeks.

Swing traders go long or short the market to capture price “swings” toward the upside or downside, respectively. Ideally, you try to capture a move from the start to the end of a price swing.

Because the short-term movement you’re trading is part fundamentals and part noise (micro supply and demand), the best approach to finding and trading a swing setup would be to use a technical analysis framework. Think of it as a tactical style of trading. And what you need to know to place a swing trade can be distilled into four critical components:

1. A direction, up or down (long or short);
2. An entry point;
3. A profit target; and
4. A stop loss level.

Technical analysis is critical in swing trading because your time in the trade is short and finite. You have to be able to know beforehand why you’re entering the trade, how much of a stake you’re risking, where you’re entering, and where you’re exiting.

If you can’t figure this out beforehand, then you’ve got a loose setup, which isn’t necessarily a good thing. A swing trade is not a day trade (unless you reach your target or get stopped out within a day). A swing trade is not an investment (a “trade” is a short-term engagement). So, know your target and your means before you engage in the trade.

If this isn’t clear to you, let’s further explore the differences.

Where Swing Trading and Day Trading Diverge

Although both swing and day trading are about seeking short-term profits, they differ significantly when it comes to duration, frequency, size of returns, and even market analysis.

Day traders are often in and out of a trade in a matter of seconds to minutes. This allows them to trade multiple times in a single day. Because the time frame is ultra-narrow, day traders often try to capture smaller gains with greater frequency.

To make it worthwhile, it’s not uncommon for day traders to use large position sizes so that a few ticks comes with a return (or loss) worth a good chunk of money. Obviously, large position sizes accompanying a quick win or loss is also what makes day trading both exciting and stressful.

Market fundamentals play a small part in day trading unless it concerns a scheduled economic release (e.g., GDP, jobless claims, earnings, consumer sentiment, etc.). Fundamentals can take months to play out, while day traders are focused on the next few seconds or minutes. They react to micro supply and demand, which longer-term trades might dismiss as market noise.

In contrast, swing traders attempt to trade larger market swings that can last from a single day to a week. Given the longer time frame, fundamentals – or rather, the market’s perception and response to fundamentals – play a critical role in driving price. Hence, swing traders can rely on both technical and fundamental models to drive the swing trading setup.

Where Swing Trading and Investing Diverge

Although both swing and day trading are about seeking short-term profits, they differ significantly when it comes to duration, frequency, size of returns, and even market analysis.

Day traders are often in and out of a trade in a matter of seconds to minutes. This allows them to trade multiple times in a single day. Because the time frame is ultra-narrow, day traders often try to capture smaller gains with greater frequency.

To make it worthwhile, it’s not uncommon for day traders to use large position sizes so that a few ticks comes with a return (or loss) worth a good chunk of money. Obviously, large position sizes accompanying a quick win or loss is also what makes day trading both exciting and stressful.

Market fundamentals play a small part in day trading unless it concerns a scheduled economic release (e.g., GDP, jobless claims, earnings, consumer sentiment, etc.). Fundamentals can take months to play out, while day traders are focused on the next few seconds or minutes. They react to micro supply and demand, which longer-term trades might dismiss as market noise.

In contrast, swing traders attempt to trade larger market swings that can last from a single day to a week. Given the longer time frame, fundamentals – or rather, the market’s perception and response to fundamentals – play a critical role in driving price. Hence, swing traders can rely on both technical and fundamental models to drive the swing trading setup.

Where Swing Trading and Investing Diverge

As we said earlier in this article, swing trading occupies a space between day trading and investing. You might think that the difference between a swing trade and an investment may be in duration. But a change in duration changes everything – from the way you view the markets to the profit potential of the trade all the way to your personal experience of the process.

Like investing, the longer and larger the trajectory, the greater the potential returns (if you position size your trade correctly and carefully). But instead of waiting months to years for a return, you aim for a medium size return in a matter of days.

And like a longer-term investment, you can even have several swing trades happening at the same time, diversifying your strategies and markets. You can’t always do that when you’re day trading or scalping a market (as you’re likely focused on one instrument and on every second that you’re in the trade).

Swing Trading Is Not Without Risks

Swing trading may be less stressful or even less risky than day trading, but if you’re not careful or if you get too reckless, you’re making yourself vulnerable to risks and financial loss.

Position sizing is everything, as with all trades. Don’t risk more than you can lose. Find a % risk level (e.g. 2%, 3%, etc.) that works not only with your risk tolerance but also the number of trades you plan to place within a week or month. For instance, risking 2% of your trading account may seem small. But if you’re planning on placing up to 50 scalps per day, you may not last until the end of the week if you encounter a losing streak. So, size your positions carefully, especially if you’rxe planning on doing multiple swing trades across a large number of instruments simultaneously.

Trading frequency is one potential benefit of swing trading. Short-term trading opportunities can occur frequently. Bear in mind, however, that the more frequently you trade, the more frequently you expose yourself to risk.

Complex setups can not only get clunky but also risky. The more complex the trading setup, the riskier it can become. This is especially true when using overly complex analytical approaches or trade setups. The greater the complexity, the easier it is to misread the market or to make errors when executing your trade.

The Bottom Line

Swing trading is a specialised approach. It isn’t for everyone. But if you find that it gives you the right amount of time to plan your trades, the right amount of frequency to seek profits on a regular basis, and the right amount of stress that isn’t unmanageable, then it might be a skill worth developing.