What to know about swing trading and how to minimize risks of this speculative trading strategy (2024)

Our experts answer readers' investing questions and write unbiased product reviews (here's how we assess investing products). Paid non-client promotion: In some cases, we receive a commission from our partners. Our opinions are always our own.

  • Swing trading is a speculative strategy where investors buy and hold assets to profit from expected price moves.
  • Swing traders leverage technical analysis to determine entry (buy) and exit (sell) points.
  • Swing traders are exposed to gap risk, where a security's price changes while the market is closed.

What to know about swing trading and how to minimize risks of this speculative trading strategy (1)


Sign up to get the inside scoop on today’s biggest stories in markets, tech, and business — delivered daily. Read preview

What to know about swing trading and how to minimize risks of this speculative trading strategy (2)

Thanks for signing up!

Access your favorite topics in a personalized feed while you're on the go.

What to know about swing trading and how to minimize risks of this speculative trading strategy (3)

Investors approach the stock market with a variety of goals. Many invest for the long-term, seeking to build wealth over time, while others trade for short-term profits — and many people do both. There are a variety of strategies for trading, but one of the most accessible to newcomers is swing trading.

Unlike day trading, where trading is extremely fast-paced, swing trading is slower. This strategy is a great way to understand market movements and dip your toe into technical analysis. Here's what the curious trader should know.

What is swing trading?

Swing trading is a trading strategy where investors buy a stock or some other asset and hold it — known as holding a position — for a short period of time (usually between a few days and up to several weeks) in the hopes of turning a profit.


The goal of the swing trader is to capture a portion of any potential price movement or "swing" in the market. Individual gains may be smaller as the trader focuses on short-term trends and seeks to cut losses quickly. However, small gains achieved consistently over time can add up to an attractive annual return.

How does swing trading work?

The swing trader analyzes patterns in trading activity to buy or sell a stock in order to capitalize on price movements and momentum trends of stocks, typically focusing on large-cap stocks since they are the most heavily traded. Because these stocks have high trading volumes, they offer investors insight into how the market perceives the company and its security price movements. This active trading offers the information necessary for what's called technical analysis, which we'll cover in the next section.

As with any style of trading, swing trading carries plenty of risks. Swing traders are exposed to several types of risk, the most common being gap risk, where a security's price rises or falls significantly based on news or events that occur while the market is closed, whether overnight or during a weekend.

The opening price will reflect the shock of any unexpected news. The longer the market is closed, the greater the risk. Abrupt changes in the market's direction also pose a risk, and swing traders may miss out on longer-term trends by focusing on shorter holding periods.


Example of swing trading

Let's take a look at a real-world example of how a swing trader may analyze Amazon's stock and determine when to buy or sell.

What to know about swing trading and how to minimize risks of this speculative trading strategy (4)

Jasmine Suarez; Alyssa Powell/Insider

The candlestick chart above illustrates the "cup and handle" consolidation pattern, where the cup is u-shaped and the handle points slightly downward. This pattern is considered a bullish signal.

If a swing trader wants to make a profitable trade in Amazon, they would likely purchase the stock at the top of the "cup," at or above the most recent high of $3,555. They should place a stop-loss orderat the most recent low in the cup handle ($3,395). Therefore, the risk — the maximum loss on the trade — is $160 ($3,555 - $3,395 = $160).

At the recommended reward/risk ratio of 3:1, which is considered good, you'd need to sell at $480 (3 x $160 = $480) above the entry price, or $4,035 ($3,555 + $480).


Why risk management is critical in swing trading

Risk management is the most essential component in a successful swing trading strategy. Traders should choose only liquid stocks and diversify positions among different sectors and capitalizations.

Mike Dombrowski, head of capital markets at InterPrime Technologies, emphasizes the importance of risk management, saying that "each position should be roughly 2%-5% of total trading account capital. The most aggressive and professional traders may go up to 10% per position. That means a portfolio of five concentrated swing trades would represent 10%-25% of total trading account capital on average.

Having cash in reserve allows you to add to the best-performing trades to help generate larger winners. As always, the key to swing trading is to minimize losses." He also notes that a desirable reward/risk ratio is 3:1, or 3 times the amount at risk.

Stop-loss orders are a vital tool in managing risk. When a stock falls below the stop price (or rises above the stop price for a short position), the stop-loss order converts to a market order, which is executed at the market price. With stop losses in place, the trader knows exactly how much capital is at risk because the risk of each position is limited to the difference between the current price and the stop price.


A stop loss is an effective way to manage risk per trade.

Swing trading strategies

Traders can deploy many strategies to determine when to buy and sell based on technical analysis, including:

  • Moving averages look for bullish or bearish crossover points
  • Support and resistance triggers
  • Moving Average Convergence/Divergence (MACD) crossovers
  • Using the Fibonacci retracement pattern, which identifies support and resistance levels and potential reversals

What to know about swing trading and how to minimize risks of this speculative trading strategy (5)

Rachel Mendelson/Insider

Traders also use moving averages to determine the support (lower) and resistance (upper) levels of a price range. While some use a simple moving average (SMA), an exponential moving average (EMA) places more emphasis on recent data points.


For example, a trader may use 9-, 13-, and 50-day EMAs to look for crossover points. When the stock price moves above, or "crosses" the moving averages, this signals an upward trend in price. When a stock price falls below the EMAs, it's a bearish signal and the trader should exit long positions and potentially put on shorts.

Market extremes make swing trading more challenging. In a bull or bear market, actively traded stocks do not exhibit the same up-and-down movements within a range as they do in more stable market conditions. Momentum will propel the market up or down for an extended period. "[Traders should] always trade in the direction of the trend, taking long positions in bull markets and shorts when the markets trend downward," says Dombrowski.

Swing trading vs. day trading

Swing trading and day trading have many similarities, but the most marked difference is the frequency of trades. Swing traders focus on short-to-medium term positions while day traders close out their positions at the end of each trading day. Day trading is a full-time job, requiring the trader to monitor market movements throughout the day and trade frequently. A swing trader can manage and trade on the side while still maintaining a full-time job.

Let's look at the principal differences.


Swing tradingDay trading
Trading frequencyMultiple trades per weekMultiple trades per day
Time required to tradeCan be done periodicallyRequires constant attention
Number of transactionsFewer transactionsMany intra-day transactions
Profit potentialGains and losses accumulate slowlyGains and losses accumulate more quickly
Trading outletBrokerage accountSpecialized trading software

The bottom line

Swing trading is an easy way for new traders to get their feet wet in the market, with traders typically starting with $5k-$10k, although less is acceptable. The cardinal rule though is that this capital should be money the investor can afford to lose. Even with the strictest risk management, the unexpected is always possible.

More importantly, swing trading doesn't demand the same level of active attention as day trading, so the swing trader can start slowly and build the number of trades over time. But it does require the investor to take a deep dive into technical analysis, so an aptitude for charts and numbers is necessary.

For traders willing to spend time researching stocks and developing an understanding of technical analysis, swing trading offers the potential to accumulate attractive profits, slowly but steadily, over time.

Rebecca Baldridge

Rebecca Baldridge, CFA, is an investment professional and financial writer with more than twenty years of experience in the financial services industry. In addition to a decade in banking and brokerage in Moscow, she's worked for Franklin Templeton Asset Management, The Bank of New York, JPMorgan Asset Management and Merrill Lynch Asset Management. She is a founding partner in Quartet Communications, a financial communications and content creation firm.

I'm an experienced financial professional with extensive knowledge in investing and trading strategies. My background includes over two decades in the financial services industry, with roles in banking, brokerage, and asset management. Throughout my career, I've gained a deep understanding of market dynamics, risk management, and technical analysis.

Now, let's delve into the concepts mentioned in the article about swing trading:

Swing Trading Defined: Swing trading is a speculative strategy where investors buy and hold assets for a short period, typically between a few days and several weeks, aiming to profit from expected price moves. Unlike day trading, swing trading is slower-paced, making it accessible for newcomers to understand market movements.

How Swing Trading Works: Swing traders leverage technical analysis to identify entry and exit points. They analyze patterns in trading activity, focusing on large-cap stocks with high trading volumes. The goal is to capture a portion of the price movement or "swing" in the market. However, swing traders face risks, including gap risk, where a security's price changes significantly while the market is closed.

Example of Swing Trading: The article provides an example of swing trading using Amazon's stock. It mentions the "cup and handle" consolidation pattern as a bullish signal. The swing trader aims to buy at the top of the "cup" and set a stop-loss order to manage risk. The recommended reward/risk ratio is crucial for successful swing trading.

Risk Management in Swing Trading: Risk management is emphasized as the most critical component in a successful swing trading strategy. Traders should diversify positions, limit each position to a percentage of total trading account capital, and use stop-loss orders to control risk. The desirable reward/risk ratio is suggested to be 3:1.

Swing Trading Strategies: Various technical analysis strategies are mentioned, including moving averages, support and resistance triggers, MACD crossovers, and Fibonacci retracement patterns. Traders use these strategies to determine when to buy and sell, focusing on market trends.

Swing Trading vs. Day Trading: The article highlights the differences between swing trading and day trading. While both involve short-term trading, day trading requires constant attention and frequent transactions, making it a full-time job. Swing trading allows for more flexibility as traders can manage it alongside a full-time job.

Conclusion: Swing trading is portrayed as an accessible way for new traders to enter the market. It offers the potential for steady profits over time, with lower trading frequency compared to day trading. However, it requires a deep dive into technical analysis and a commitment to risk management for long-term success.

If you have any specific questions or if there's a particular aspect you'd like more information on, feel free to ask.

What to know about swing trading and how to minimize risks of this speculative trading strategy (2024)


What do you need to know about swing trading? ›

Key Takeaways. Swing trading involves taking trades that last a couple of days up to several months in order to profit from an anticipated price move. Swing trading exposes a trader to overnight and weekend risk, where the price could gap and open the following session at a substantially different price.

What is the best strategy for swing trading? ›

Swing Trading Strategies
  • Fibonacci Retracement. Fibonacci retracement levels originate from the Fibonacci sequence. ...
  • Support and Resistance. ...
  • Bollinger Bands Method. ...
  • Trend-catching Strategy. ...
  • Breakout Swing Strategy. ...
  • Breakdown Swing Strategy. ...
  • Fading Trading Strategy.
Nov 3, 2023

Is swing trading speculative? ›

Swing trading is a speculative trading strategy in financial markets where a tradable asset is held for one or more days in an effort to profit from price changes or 'swings'.

What are the most important indicators for swing trading? ›

Top 10 swing trading indicators in stock market
  • Relative strength index (RSI) ...
  • Stochastic oscillator. ...
  • Ease of movement (EOM) ...
  • Bollinger bands. ...
  • Fibonacci retracements. ...
  • Support and resistance. ...
  • OBV (On-Balance Volume) ...
  • MACD (Moving Average Convergence Divergence)
Aug 10, 2023

What is swing trading pros and cons? ›

Swing trading is one of the most simple, profitable styles of investing. And it doesn't take much time. Sure – you take on some risk during after-hours, and you may lose out on long-term profits. And technical analysis is complicated and boring.

What is the 1 rule in swing trading? ›

Rule 1: If you have to look, it isn't there.

The best trades jump out of nowhere and create a sense of urgency. Take a deep breath, and then act quickly before the opportunity disappears.

What is No 1 rule of trading? ›

Rule 1: Always Use a Trading Plan

You need a trading plan because it can assist you with making coherent trading decisions and define the boundaries of your optimal trade. A decent trading plan will assist you with avoiding making passionate decisions without giving it much thought.

What is the best risk control strategy? ›

Five common strategies for managing risk are avoidance, retention, transferring, sharing, and loss reduction. Each technique aims to address and reduce risk while understanding that risk is impossible to eliminate completely.

How do swing traders make money? ›

Swing trading has been described as a type of fundamental trading in which positions are held for longer than a single day. Traders attempt to capture short-term profits by using technical analysis to enter into positions, hold for several days or weeks, and exit soon thereafter.

What is the best time for swing trading? ›

Generally, a swing trader holds the stock between a few days to a few weeks. The best time frame for swing trading if you have just started investing is between 6 months to 1 year. Technical analysis is the tool that is often used to select a stock and perform trades.

How much do swing traders make per month? ›

The average salary for a Swing trader is ₹1,00,000 in New Delhi, India.

What is speculative trading strategies? ›

Speculative trading is the act of trading stocks in anticipation of their value going up. If the expected increase in value is accurately predicted, the trader will make a profit. If not, the purchase or sale may result in loss, to some extent.

What is the risk in swing trading? ›

Swing trading involves significant overnight risk as the trades are held for more than a day. Hence without a stop loss, any runway gap ups or gap downs can lead to significant erosion of capital.

What is an example of a speculative trade? ›

These are high-risk, high gain investments that are made for a short amount of time and once the investor gets the desired profit, the investment is sold. For example- An investor who invests in foreign currency buys some currency in the hopes of selling it at an appreciated rate when market fluctuations happen.

Should a beginner do swing trading? ›

It allows beginners to learn at a comfortable pace, manage risk effectively, and fit trading into their daily routine. While no trading method is without risk, swing trading offers a balanced approach for those starting in stock trading.

Is swing trading good for beginners? ›

Beginners can use swing trading strategies that are relatively simple and adapt to changing market conditions. The provided reference suggests that swing trading is fantastic for beginners, as it allows them to gain experience and learn to navigate the markets while potentially making profits.

Is swing trading really profitable? ›

Of course, the answer is yes – it can be. But in that guide, we discussed that a good profit return to expect over the course of a year is between 10-30%. If you earn just 1-2% profit every month, you'll earn 12-24% annually – which we would consider a very successful year.

What is the downside of swing trading? ›

The biggest con of this trading tool is the overnight risk. Swing traders hold positions for several days, which increases the risk of market gaps due to unexpected news or events. Another drawback is that many new traders may mistake false signals for trends.


Top Articles
Latest Posts
Article information

Author: Greg O'Connell

Last Updated:

Views: 6229

Rating: 4.1 / 5 (62 voted)

Reviews: 85% of readers found this page helpful

Author information

Name: Greg O'Connell

Birthday: 1992-01-10

Address: Suite 517 2436 Jefferey Pass, Shanitaside, UT 27519

Phone: +2614651609714

Job: Education Developer

Hobby: Cooking, Gambling, Pottery, Shooting, Baseball, Singing, Snowboarding

Introduction: My name is Greg O'Connell, I am a delightful, colorful, talented, kind, lively, modern, tender person who loves writing and wants to share my knowledge and understanding with you.