A Beginners Guide for Swing Traders: What Is Swing Trading?

Swing trading of Contract for Difference (CFDs) involves a strategic approach aimed at capitalising on short- to medium-term fluctuations in the value of an underlying financial asset, such as stocks, over a span ranging from a few days to several weeks. Traders employing this method primarily rely on technical analysis to identify potential trading prospects, although they may also incorporate fundamental analysis into their strategy.

In swing trading, traders typically hold positions for more than one trading session but usually not beyond a few weeks or months. However, there can be exceptions where trades extend beyond this timeframe yet still qualify as swing trades. Although less common, swing trades may also occur within a single trading session under highly volatile conditions.

The objective of swing trading is to capture a portion of a projected price movement. While some traders target stocks CFDs with high volatility, others may opt to open positions on assets that are generally more stable. Regardless, swing trading entails analysing an asset's price trends and opening a position based on anticipated movements with the ultimate goal of profiting from a portion of the underlying asset's expected price change.

Savvy swing traders focus on capturing a segment of the projected price shift before moving on to the next opportunity, in the quest to capitalise on short- to medium-term market movements efficiently.

Swing Trading Markets

Swing trading of CFDs encompasses a versatile strategy applicable to various underlying securities, with large-cap stocks being particularly suitable due to their active trading volume on major exchanges. These stocks often oscillate between well-defined high and low points in active markets, presenting potential opportunities for swing CFD traders to exploit short- to medium-term trends. Traders typically ride these price fluctuations in one direction for several days or weeks before reversing their position as the stock's direction changes.

Moreover, swing trading strategies are also well-suited for actively traded commodities and the forex market when implemented through CFDs. Commodities, such as gold, oil, and agricultural products, are prone to significant price swings driven by factors like supply and demand dynamics, geopolitical events, and economic indicators. On a similar note, the forex market, renowned for its high liquidity and continuous trading, offers abundant prospects for swing traders to get exposure to currency pair fluctuations via CFDs.

In essence, swing trading of CFDs in stocks, commodities, and forex involves adeptly identifying and leveraging short- to medium-term price movements in these markets. By strategically entering and exiting positions based on market trends, swing traders seek to harness the inherent volatility of CFDs.

Swing Trading Example

Consider an example of a swing trade involving a CFD on a large-cap technology stock, such as Apple (AAPL). Suppose a new CFD trader, Sarah, conducts technical analysis and identifies a bullish trend forming in AAPL's price chart. The stock has been trading within a well-defined range, oscillating between $150 and $160 over the past few weeks.

Sarah decides to open a CFD long position on Apple shares when the price reaches $155, anticipating a continuation of the upward trend. She sets a stop-loss order at $148 to limit potential losses if the trade goes against her and a profit target at $165 to capture potential gains.

Over the next few days, the underlying share’s price climbs steadily, reaching $162 as the bullish momentum persists. Sensing that the stock may encounter resistance near $165, Sarah decides to close her position and take profits. She closes her CFD position on Apple at $162, realising a profit of $7 per share.

However, if over the same time period the underlying Apple share drops in price to $155, and Sarah closes her position despite the fact that it hasn’t yet reached her chosen stop-loss order level of $148, she will take a loss of $7 per share.

Sarah's swing trade exemplifies the essence of swing trading CFDs. By analysing price trends and employing strategic entry and exit points, she made trading decisions and adjusted her strategy. However, it is crucial for those thinking about following Sarah’s example to understand the risk of financial loss attached to CFD trading.

How to Swing Trade

Now let’s take a deeper look at the exact mechanics of swing trading when it comes to CFDs:

How a Swing Trade Works

Swing trading of contracts for difference entails the trader opening & then maintaining a trading position over an extended period from days to even weeks or months, with the ultimate goal of gaining a profit due to price changes. Unlike day trading, where positions are opened and closed within the same trading day, swing trading allows traders to ride the waves of longer-term market trends.

In general, CFD swing traders may make an effort to steer clear of volatile markets that lack clear trends in either direction. Instead, traders in this style gravitate towards CFDs on more stable markets, where they can anticipate and exploit fluctuations in asset prices. The primary objective is to identify financial instruments poised for predictable movements over a relatively short time frame.

Typically, swing traders of CFDs may choose to conduct intensive technical analysis to identify potential opportunities. By scrutinising price charts and employing various indicators, they are able to better discern which CFDs have underlying assets with patterns suggestive of forthcoming price shifts. Moreover, technical analysis aids in pinpointing optimal entry and exit points for trades, crucial for maximising profit potential, although the potential for losses rises in tandem as well.

Furthermore, holding CFD positions overnight incurs financing costs due to the Overnight Funding fee charge, so it's important for traders to factor in these costs when planning their trades.

In summary, swing trading CFD involves strategically navigating market movements over short to medium-term periods, leveraging technical analysis to identify opportune moments to enter and exit trades, all while managing associated financing costs.

Swing Trading vs Day Trading

CFD day trading is characterised by a rapid pace and frequent trading activity, and day traders strive to carry out numerous trades within a single trading day. It relies heavily on technical analysis and advanced charting tools to identify short-term price movements. The objective of day trading is to seize small price fluctuations of a given CFD's underlying asset multiple times throughout the day, with all positions being liquidated by the day's end.

In contrast, CFD swing trading involves a longer-term approach, with traders refraining from closing positions daily. Instead, swing traders may keep their positions open for extended periods. While swing traders also utilise technical analysis, they may also integrate fundamental analysis into their strategies to assess broader market trends and company fundamentals.

Day traders predominantly rely on technical analysis to make trading decisions, focusing on intraday price movements and short-term indicators. Their aim is to exploit temporary market inefficiencies for price shifts within the same trading session.

Conversely, swing traders take a more patient approach, seeking to capitalise on medium to long-term trends. They analyse charts and indicators to identify potential entry and exit points but also consider fundamental factors related to the CFD's underlying assets such as company earnings, market sentiment, and economic indicators to gauge the broader market landscape.

In summary, the key distinction between day trading and swing trading of CFDs lies in their time horizons and trading strategies. While day trading emphasises quick, intraday trades based primarily on technical analysis, swing trading involves holding positions for longer periods, potentially incorporating both technical and fundamental analysis to capture broader market movements.

Swing Trading vs Position Trading

Another important distinction to understand when it comes to the CFD market is the difference between swing and position trading since each has its own set of characteristics and advantages.

Position trading involves holding positions for a longer period rather than daily price fluctuations. Traders employ fundamental analysis extensively to identify assets with favourable long-term prospects. Technical analysis aids in determining entry and exit points, with tools like the 200-day Moving Average being commonly used. While potentially lower in risk compared to shorter-term strategies, position trading requires substantial capital and thorough market understanding.

On the other hand, swing trading targets intermediate highs and lows within overall trends, typically holding positions for days or weeks. Unlike position trading, it relies more on technical analysis, as CFD swing traders aim to capture market swings, trading breakouts, bounces, and support/resistance levels.

The choice between position and swing trading depends on individual goals and market conditions. Position trading suits long-term investors seeking stability and gradual growth, while swing trading may appeal to those seeking more active trading with shorter holding periods. Regardless of the strategy chosen, thorough research, and proper risk management are crucial, though not sufficient, for successful trading.

Swing Trading Strategies

There are several key trading strategies that may help traders navigate the CFD market successfully.

Fibonacci Retracements: One such strategy involves utilising Fibonacci retracements, which pinpoint optimal entry areas during price retracements in trending markets. By observing key retracement levels like 23.6%, 38.2%, and 61.8%, traders can identify potential entry and exit points, enhancing risk/reward ratios.
Channels: Channels are valuable tools for swing traders, especially in strongly trending markets. By identifying assets trending within parallel trendlines, traders can place trades in the direction of the main trend, targeting price swings within the channel boundaries. Breakouts from channels signal potential shifts in market conditions, prompting traders to reassess strategies accordingly.
Moving Averages: Educated usage of this data offers another effective swing trading strategy, particularly through moving average crosses. Combining multiple moving averages helps gauge prevailing price trends, with crosses indicating potential entry or exit points. For instance, a downward cross of shorter-period moving averages below longer-period ones suggests a downward swing in progress, prompting sell trades.
Candlesticks: Candlestick patterns provide vital price action cues for swing traders, signalling the continuation or reversal of trends. Patterns like wedges and flags indicate trend resumption after consolidation, while reversal patterns like double tops and head and shoulders suggest trend exhaustion and potential reversals. By interpreting candlestick patterns, traders can identify high-probability trading opportunities in the market.
Support/Resistance Levels: These levels are crucial to swing trading, as they represent areas where supply and demand dynamics influence asset prices. Traders may enter buy trades when prices bounce off support levels and sell trades when they rebound from resistance levels. These levels can reverse roles when breached, transitioning from support to resistance and vice versa, providing crucial trading cues.

Incorporating these swing trading strategies and indicators into a comprehensive trading plan may assist traders in capturing short to medium-term price movements, as well as enhancing risk management in the dynamic CFD markets.

Advantages & Risks of Swing Trading

Swing trading offers traders a middle ground between the fast-paced world of day trading and the longer-term perspective of position trading. Here are some key advantages and disadvantages of swing trading for the novice's further consideration:

Advantages:

Swing trading demands less time commitment compared to day trading, making it suitable for traders with other commitments.
By capitalising on short-term market swings, swing traders can potentially benefit within relatively brief timeframes, although potential losses are just as significant.
The reliance on technical analysis enhances the trading process, enabling traders to focus on chart patterns and indicators for decision-making.

Disadvantages:

Swing trade positions are vulnerable to overnight and weekend market risks, potentially exposing traders to unexpected price fluctuations.
Sudden market reversals can lead to significant losses for swing traders, particularly if stop-loss orders are not effectively implemented.

Conclusion

In conclusion, swing trading of Contract for Difference (CFDs) offers traders a flexible approach to capitalising on short- to medium-term fluctuations in the value of underlying financial assets. By strategically navigating market movements and employing various technical and fundamental analysis techniques, swing traders aim to capture profits within relatively brief timeframes.

While swing trading presents advantages such as requiring less time commitment and the potential for maximising short-term profit potential, it also entails risks such as overnight market exposure and the possibility of substantial losses due to abrupt reversals. Therefore, aspiring swing traders must carefully weigh these pros and cons and develop robust trading strategies to navigate the dynamic CFD markets effectively.

With proper risk management and diligent execution, swing trading can offer rewarding opportunities for those willing to engage in the intricacies of short- to medium-term market movements.

FAQs

Is swing trading good for beginners?

Before engaging in CFD swing trading, the beginning trader must first familiarise himself with market dynamics and the attendant risks.

What is an example of a swing trade?

An example of a swing trade is opening a position on a stock after it has experienced a temporary decline and holding it to capture an anticipated price rebound.

Which instruments can I swing trade?

You can apply swing trading strategy on various instruments such as CFDs on stocks, forex pairs, commodities, and cryptocurrencies.

What time frame is best for swing trading?

The best time frame for swing trading of CFDs typically ranges in time, so a trader has enough time to assess the price movements without getting bogged down in short-term ups and downs.

Which markets can you swing trade?

CFD swing trading can be applied to multiple markets from contracts for difference on stocks and forex to those on commodities and futures.

What are the ‘swings' in swing trading?

The 'swings' in swing trading refer to the price movements swinging between highs and lows within the given trading time frame.

What are the most popular swing trading strategies?

Some popular swing trading strategies include making use of channels, Fibonacci retracements, moving averages, candlestick charts, and support or resistance levels.