What Is Swing Trading & How to Build Your Strategy

What is swing trading? We’ll discuss how to build swing trading strategies and explore the pros and cons of this investment approach.

Active investing requires significant time and effort. Day traders and scalpers constantly examine chart patterns and price data to spot uptrend or downtrend signals. What if you want to reap the rewards, but you just don’t have that kind of time?

Swing trading offers a bridge between short- and long-term investing strategies for individuals who want to trade actively but don’t want to spend all day looking at charts. So, what is swing trading?

Like scalping and day trading, swing trading is an active investment approach that aims to profit from short-term price movements. Keep reading to explore what a swing trade is, examine swing trading's pros and cons, learn how to build a swing trading strategy, and discover how you can use Composer to incorporate swing trading into your portfolio.

What is swing trading?

Swing trading is a strategy that primarily uses technical analysis to trade stocks and other securities. While scalpers and day traders typically hold positions for a few minutes or hours, swing traders hold positions for several days or weeks.¹

Although this timeframe can vary depending on market conditions (some trades that close the same day or after several months qualify as swing trades), swing trading generally focuses on buying the lows and selling the highs within a larger trend.

Designing a swing trade requires you to consider four main components:

Trade direction—long or short
Entry price
The price you want to take profit
The price you will accept on a loss

Defining these parameters lets you assess a trade’s risk/reward ratio and develop constraints for each swing trade. Swing traders use stop-loss orders to establish profit and loss exit points, helping them they can lock in profits or limit losses on each trade. This also minimizes market timing risk and emotional bias.

The best swing trade stocks and ETFs possess sufficient liquidity and volatility, allowing traders to generate substantial profits from short-term price swings.

Although some swing traders use fundamental analysis, most rely on chart patterns and technical indicators when designing their entry and exit strategies. Popular swing trading indicators include the following:

Simple and exponential moving averages
Relative strength index (RSI)
Stochastic oscillators
Support and resistance levels

Pros and cons of swing trading

Like any investment strategy, swing trading has advantages and disadvantages.

Pros of swing trading

Flexibility: Swing trading doesn’t require constant monitoring, because you typically hold positions for several days or weeks. This flexibility allows you to spend more time on analysis or other activities.
Profit from short-term trends: Swing trading attempts to profit from short-term bullish or bearish price trends. By focusing on short-term movements, traders can earn significant returns within a relatively short time frame.
Reduced stress: Swing trading is significantly less stressful than other active investing methods. Swing trading doesn’t involve split-second decision-making, granting you the time and clarity to develop a solid strategy.
Easily automated: Swing trading leverages stop-loss orders, allowing you to partially automate your exit strategy. This saves you time and limits the chance emotions or order entry errors will impact your approach.

Cons of swing trading

Market volatility: Short and medium-term trading is highly susceptible to market volatility. Sudden trend reversals can result in missed profits or turn profitable positions into significant losers.
Requires skill and knowledge: To succeed at swing trading, investors must understand various technical indicators and spot stock market trends. Beginner traders may need help identifying or interpreting chart patterns and other trend signals, making it challenging to set profitable entry and exit points for swing trades.
Time-consuming: Although it demands less attention than day trading, successful swing trading still requires a substantial time commitment. Market research, chart analysis, and trade monitoring are all time-intensive activities, meaning you may not have time to swing trade if you have a busy schedule.
Market unpredictability: Markets don’t act predictably, meaning even the best-laid plans can fail. Poor earnings releases, financial news, or other market forces can lead to sudden price shifts, impacting your swing trading strategy and potentially leading to losses.

Swing trading methods

Traders employ different methods depending on their swing trading strategy. Some prefer identifying support and resistance levels when designing their entry and exit strategies, while others favor following established bullish or bearish trends with strong momentum when swing trading. Let’s look at some typical swing trading methods:

Trend following

Also known as trend trading, trend following involves recognizing and profiting from existing market trends. Once you’ve identified a trend’s direction, you can buy long positions (uptrends) or sell short positions (downtrends).

Some swing traders wait for pullbacks or corrections to enter positions, whereas others prefer positions with strong momentum. Popular signals used in trend following include moving average crossovers, momentum indicators, and trend lines.

Support and resistance trading

Support and resistance refer to lines on price charts representing points where prices historically struggled to move below (support) or above (resistance). Most swing traders buy long near support levels and either close their positions or sell short near resistance levels. Identifying support and resistance levels lets swing traders calculate stop-loss order prices and make risk/reward projections.

Breakout trading

Breakout trading attempts to profit by entering positions when the price breaks through a significant support or resistance level. To identify potential breakouts, swing traders look for price patterns like flags, triangles, and rectangles. Traders use these patterns to anticipate the breakout price and direction, allowing them to capitalize on early-stage price trends and spikes in volatility to generate profits.

Swing highs and lows

Trends contain recent swing highs (peaks) and swing lows (troughs) that signal potential reversal points. Swing traders profit by buying the swing lows and selling near the highs. They often use price charts and tools like candlestick patterns to evaluate the potential for reversals at these levels and to design their entry and exit strategy.

Moving average crossovers

Moving average crossovers occur when two moving averages intersect, usually one short and one long term. The way these lines cross can indicate a trend’s direction.

For example, golden cross signals occur when a short-term (i.e., 50-day) moving average crosses a long-term (i.e., 200-day) moving average and may indicate a bullish trend. Swing traders look for moving average crossovers and use them as signals to enter or exit trades.

Fibonacci retracement

Fibonacci retracement levels refer to horizontal lines on price charts that indicate the most likely places for support and resistance levels to occur. Each level represents a ratio based on the Fibonacci sequence—23.6%, 38.2%, 61.8%, etc.—and connects two potentially relevant price points.

Swing traders use Fibonacci retracement levels to spot possible trend reversals, often placing trades near these levels in anticipation of price corrections.

How to start swing trading with Composer

Composer makes it easy to leverage swing trading in your portfolio. In fact, it’s the only platform that allows you to swing trade from within an IRA, granting you more control over your retirement savings. Here’s how you can begin swing trading with Composer:

Visit Composer’s website and sign up for a free 14-day trial.

2. Create a new symphony

Click “Create” and select “+ New Symphony” to create a new strategy using Composer’s no-code editor.

3. Tailor your swing trading strategy

Leverage Composer’s AI tool to help you create or update your strategy. Head over to the Discover tab, where you can use Composer’s screener to sort for assets that meet specific metrics and create Watchlists for symphonies you want to monitor. Backtest your swing trading symphony to see what works and calculate risk/reward projections for your swing trades.