What is Swing Trading?
Swing trading involves holding positions for 2-10 days to capture medium-term price movements or "swings". It sits between day trading (same-day closes) and position trading (weeks to months), offering a balanced approach for traders who can't monitor markets all day.
Why Swing Trading Works
- Less time intensive: Check charts 1-2x per day, not every hour
- Larger profit potential: Capture 5-20% moves vs 1-3% day trades
- Better reward/risk: 3:1 or higher common with proper entries
- No PDT rules: Can trade with under $25K (not pattern day trading)
- Lower transaction costs: Fewer trades = less commissions
Swing trading requires patience and discipline. Unlike day trading's instant feedback, swing trades develop over days. Backtesting helps identify high-probability setups and builds confidence to hold through normal intraday volatility.
Core Swing Trading Strategies
Breakout Trading
Enter when price breaks above resistance or below support. Best performed at consolidation breakouts or new highs/lows.
Entry Rules:
- • Wait for close above resistance
- • Confirm with volume (2x average)
- • Enter on pullback to breakout level
Exit Rules:
- • Stop loss below breakout
- • Target: 2-3x risk distance
- • Trail stop once profitable
Pullback to Support/Resistance
Buy dips in uptrends or sell rallies in downtrends. Wait for price to return to key levels before entering.
Bullish Setup:
- • Stock in clear uptrend
- • Pulls back to 20 or 50 MA
- • Bullish reversal pattern forms
- • Entry on confirmation
Risk Management:
- • Stop below support level
- • Risk 2-3% per trade
- • Target previous high
- • Scale out at milestones
Fibonacci Retracement
After a strong move, price often retraces to Fibonacci levels (38.2%, 50%, 61.8%) before continuing the trend.
Strategy:
- Identify strong trend (up or down)
- Wait for pullback to Fib level
- Look for reversal confirmation (candlestick, volume)
- Enter with stop below next Fib level
- Target: Extension levels (127%, 161.8%)
Gap Trading
Trade stocks that gap up or down on news/earnings. Gaps often get filled or extended.
Gap Fill Strategy:
- • Gap up > 3% on low volume
- • Short when momentum fades
- • Target: Gap fill (previous close)
Gap Continuation:
- • Gap on strong news + volume
- • Buy consolidation after gap
- • Ride continuation move
Key Indicators for Swing Trading
Moving Averages
The backbone of swing trading. Identify trends and support/resistance levels.
- 20 MA: Short-term trend, swing trade reference
- 50 MA: Medium-term trend, strong support/resistance
- 200 MA: Long-term trend, major levels
- Strategy: Buy pullbacks to 20/50 MA in uptrends
RSI (Relative Strength)
Measures momentum. Identifies overbought (>70) and oversold (<30) conditions.
- Mean reversion: Buy RSI < 30, sell RSI > 70
- Trend following: Buy when RSI > 50 in uptrends
- Divergence: Price makes new high but RSI doesn't = reversal
- Best timeframe: Daily chart for swing trades
MACD
Trend and momentum indicator. Shows trend changes through crossovers.
- Bullish cross: MACD line crosses above signal line
- Bearish cross: MACD line crosses below signal line
- Histogram: Growing = strengthening trend
- Zero line: Cross above = bullish, below = bearish
Volume
Confirms price moves. High volume = strong conviction, low volume = weak move.
- Breakouts: Need 2x average volume to be valid
- Reversals: Look for volume spikes at bottoms/tops
- Volume MA: Compare daily volume to 50-day average
- Warning: Price moves on low volume often reverse
Position Management for Swing Trades
The 2% Rule
Never risk more than 2% of account per swing trade. This accounts for overnight gap risk that day traders don't face.
Example: $50,000 account
2% risk = $1,000 max loss per trade
Entry: $100, Stop: $95 = $5 risk per share
Position size: $1,000 / $5 = 200 shares
Scaling In
Build positions gradually to improve average entry price:
- • 1/3 position at initial entry
- • 1/3 when trade confirms (moving your way)
- • 1/3 on pullback to moving average
- • Never add to losing positions
Scaling Out
Take profits gradually to lock in gains:
- • 1/3 at 1:1 risk/reward (break-even stop)
- • 1/3 at 2:1 risk/reward
- • Let final 1/3 run with trailing stop
- • Psychological benefit: Can't lose
Backtesting Swing Trading Strategies
Swing trading backtests are more forgiving than day trading but still require attention to detail.
Key Metrics to Track
| Metric | Good | Red Flag |
|---|---|---|
| Win rate | 45-60% | >70% with tiny R:R |
| Profit factor | 1.5-2.2 | >3.0 with low trade count |
| Average R per trade | 0.5-1.0R | Negative after gaps/costs |
| Max drawdown | <20% | >30% or unrecovered |
| Trades/month | 10-40 quality swings | >80 low-quality entries |
| Gap impact | Modeled at open, post-earnings sized down | Ignored in simulation |
Data Requirements
- Daily OHLC data: Sufficient for most swing strategies
- Adjusted for splits/dividends: Critical for accurate results
- Minimum history: 2-3 years to capture different market conditions
- Include volume data: Essential for breakout validation
Gap Risk Modeling
Unlike day trading, swing trades face overnight gap risk. Your backtest must account for this:
- • Stop gaps: If price gaps through your stop, fill at open (not stop price)
- • Target gaps: If price gaps to target, fill at open (not target price)
- • Weekend gaps: Friday close to Monday open can be significant
- • Earnings gaps: Avoid or size smaller before earnings announcements
Realistic Costs
Costs matter less for swing trading than day trading, but still include: $5-10 per trade in commissions (or $0 with modern brokers), 0.1-0.3% slippage per trade (buy at ask, sell at bid), and borrowing costs if shorting (2-8% annual rate).
Common Swing Trading Mistakes
Turning Swing Trades into Investments
"I'll just hold until it comes back" destroys accounts. If your stop is hit, exit. Don't average down or convert to long-term hold. That's how small losses become account-ending disasters.
Ignoring the Overall Market
Individual stocks follow the market 70-80% of the time. Great setup in a downtrending market = lower probability. Always check SPY/QQQ trend before taking swing trades. In bear markets, trade smaller or sit out.
Poor Entry Timing
Buying at resistance or selling at support = poor risk/reward. Wait for confirmation: breakout above resistance or bounce off support. Patience improves win rate by 20-30%. The trade will still be there after confirmation.
Wide Stop Losses
"I need room for volatility" = risking too much. If natural stop is too wide for 2% risk, reduce position size or skip the trade. Wide stops don't improve win rates, they just lose more money when wrong.
Not Taking Partial Profits
Holding for the "home run" often results in giving back gains. Scale out at logical levels. Taking 1/3 off at 2:1 locks in profit and makes the rest "free". You can let runners run without stress.
Frequently Asked Questions
How much capital do I need for swing trading?
What's a realistic monthly return for swing trading?
How many swing trades should I hold at once?
Should I swing trade stocks, forex, or crypto?
How do I find swing trade setups?
Can I swing trade with a full-time job?
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