Trading strategies

Swing trading explained

Swing trading is a medium-term style of trading that aims to capture gains in an asset over a period of a few days to several weeks, profiting from price swings. Swing traders use fundamental or technical analysis – often both – to determine whether a particular security could go up or down in price in the near future.

Highlights

• Swing trading is a trading strategy that involves taking a position on a security over a period of a few days to a few weeks, in an attempt to profit from expected price swings in the market.
• Swing traders use fundamental and technical analysis to identify potential trading opportunities.
• One of the key differences between swing trading and day trading is time: swing trading positions are kept open for days or weeks, while day trading positions are opened and closed on the same day.
• Swing trading carries overnight and weekend risk, as prices can gap between sessions.
• Swing trading is an approach for traders who want to profit from market movements but can't monitor charts all day.

Fundamental analysis for swing trading

Fundamental analysis is a method of analysing securities by examining the underlying economic, financial and other qualitative and quantitative factors that could influence their value.

This may involve keeping aware of the state of the economy, news releases regarding a particular security, analysing a company's financial statements such as its quarterly earnings reports, and studying market conditions to determine a company's intrinsic value and potential for future growth. Swing traders may also use it to confirm that a technical setup is supported by the underlying picture – for example, by checking earnings dates, central bank meetings or economic releases before entering a trade.

Technical analysis for swing trading

Technical analysis is a method of analysing price and volume data over specific time frames to identify trends and forecast future price movements. It is a form of chart analysis that uses historical price data and various chart patterns to make predictions about the future direction of markets.

Technical indicators are mathematical calculations that use historical price and volume data to provide insight into the potential direction of a security. They can be used to identify trends, gauge market sentiment, identify support and resistance levels and more.

Examples of technical indicators include moving averages (MAs), the relative strength index (RSI), MACD, Fibonacci retracements, Bollinger Bands® and stochastic oscillators.

Building a swing trading strategy

There are a number of steps traders could take if they hope to build an effective swing trading strategy.

• Identifying their market: as a first step, traders could identify which market they wish to trade – shares, indices, forex, commodities or cryptocurrencies.
• Identifying the trend: use moving averages or trendlines to determine the prevailing direction.
• Utilising fundamental and technical analysis: these analyses can help traders determine when to enter and exit trades.
• Setting risk parameters: this could include stop-losses – or guaranteed stop-losses, which have no risk of slippage but incur a fee if triggered – profit targets and appropriate position sizing on every trade.
• Developing an entry and exit strategy: set clear criteria for when to enter, take profit and cut losses, including any trailing stops or profit targets you choose to use.
• Backtesting the strategy: testing a strategy before risking any funds can help identify potential weaknesses and improve it over time.
• Executing the trades: once a strategy has been developed and tested, traders may begin executing trades. Even with a carefully thought-out strategy there is always the risk of making a loss. Before making any decision, consider how comfortable you are losing money, your expertise in the market and the diversity of your portfolio, among other factors – and never trade money you can't afford to lose.
• Reviewing performance: keep a trading journal to measure and refine your approach.

Swing trading strategies and techniques

How do you swing trade? There are a number of swing trading strategies that can be used, depending on the market and conditions. Below are some of the most popular.

Breakout

A breakout occurs when price moves outside a defined support or resistance level with increased volume. With a breakout technique, a trader takes a position early in a potential trend, looking for a market or stock that is likely to 'break out', and enters as soon as they see the desired level of volatility and a move through a key support or resistance point – expecting the move to continue.

Breakdown

A breakdown is the opposite of a breakout: the price falls below a defined support level and the chart points towards lower prices, signalling potential further declines. Traders monitor the same fundamentals as with breakouts.

Reversal

A reversal strategy looks for a change in the direction of a trend, using the slowing momentum of a rise or fall before a complete reversal. Reversals are often identified using candlestick patterns, divergence on momentum indicators or failed breakouts.

Retracement

A retracement is quite similar to a reversal: the price temporarily moves against the prevailing trend – but not to its high or for any length of time – before continuing in the same direction. Swing traders may enter during such a pullback in anticipation of the trend resuming, often using Fibonacci levels as guides.

What instruments do swing traders typically trade?

There are many types of financial instruments that can be used for swing trading, and each has its own advantages and disadvantages. The choice of instrument depends on the trader's risk profile, level of experience and current market conditions. Swing traders can trade a wide range of markets, including stocks, indices, forex and commodities. Liquid markets with clear trends tend to suit the strategy best, since they offer tighter spreads and more reliable technical signals.

The most popular instruments for this type of trading include:

• Currencies: when trading currencies, the swing trader is looking for a particular currency to move in an expected direction (up or down) against another currency.
• Individual stocks: the idea is exactly the same – swing traders take a position on a company's stock for a specific period of time, aiming to close it at a profit.

Swing trading can help traders diversify their activity. Yet it is important to remember that every trading method has its pros and cons, and it is up to each trader to choose the one that suits them.

What is position trading?

Position trading is a long-term trading strategy in which traders hold a position in a security for weeks, months or even years. Position traders ignore short-term price movements in favour of pinpointing and aiming to profit from longer-term trends, relying heavily on fundamental analysis supported by long-term technical signals. It is the type of trading that most closely resembles investing, with the crucial difference that buy-and-hold investors are limited to only going long.

Out of all the trading strategies, position trading encompasses the longest time frame. Its potential advantages include limited maintenance of positions, capitalising on more substantial trends and dampening the 'noise' of the market.

Highlights

• Position trading involves holding positions open over long periods to capture major price movements.
• While it is similar to investing, position traders can speculate on market downturns by going short and do not own the underlying asset, unlike regular investors.
• Position trading can apply to a range of markets, including stocks, cryptocurrencies, forex, commodities and indices.
• It relies mainly on fundamental analysis, with technical analysis used for timing.
• Position traders need patience and the ability to tolerate interim drawdowns.

Position trading vs other trading strategies

Position trading differs from day trading due to the length of time involved. While day traders attempt to open and close their trades within the course of a day, position traders take a longer approach. This could have other implications, such as the amount of money required to reach a profit target.

Likewise, swing trading differs from position trading as it involves holding positions for a few days to a few weeks, with the aim of capturing price movements in what could be described as a medium-term trading strategy. Position trading largely picks up where swing trading leaves off. Again, swing traders and position traders often have different goals and use different analytical techniques.

Why choose position trading?

Here are some potential benefits of position trading.

• Reduced trading frequency and less screen time: position trading involves taking longer-term positions, so traders don't have to monitor the market constantly. This could reduce stress and allow traders to focus on other activities or strategies.
• Long-term profit potential: position traders aim to capture larger moves in the market, as long-term trends can deliver substantial price changes – so they could potentially earn greater profits than shorter-term traders. However, there is also a possibility of making a loss.
• Reduced transaction costs: position traders enter and exit the market less frequently than day traders, which could result in lower transaction costs.

Risks of position trading

• Market risk and trend reversals: positions can experience significant losses if the market moves against them. This risk is higher for longer-term positions, as market conditions – and long-term trends – can change over time, sometimes unexpectedly.
• Overnight funding: holding leveraged positions for long periods incurs funding charges.
• Opportunity cost and capital tied up: committing capital to longer-term positions means traders may miss out on other trading opportunities that arise in the short term.
• Margin requirements: position trading may require larger margin, as positions are held for longer periods, and sharp interim moves may trigger margin calls. This can tie up more of a trader's capital, potentially limiting their ability to trade in other markets.

Tools and techniques for position trading

There are a range of tools that position traders may consider.

Technical analysis

Technical analysis uses tools that can identify patterns and trends to help traders make informed decisions. Traders could use indicators such as moving averages, the relative strength index (RSI) and stochastics to analyse the market and identify potential entry and exit points. Long-period moving averages, such as the 50-day and 200-day, help position traders identify the dominant trend.

Fundamental analysis

Another important tool for position traders is fundamental analysis. This involves analysing macroeconomic data, such as gross domestic product (GDP) growth rates, interest rates and inflation, as well as company-specific information, such as earnings reports, financial statements and industry trends. Fundamental analysis could help traders identify undervalued or overvalued assets.

Risk management

Risk management may also be a key aspect of a position trading strategy. Wide stop-losses, conservative position sizing and diversification are important given the longer holding periods. Stop-loss orders automatically close a losing trade if the price moves past a certain level – note, however, that an ordinary stop-loss does not protect from slippage. For a fee, a trader may consider a guaranteed stop-loss order, which will close the position at the set level regardless of how volatile the market is.

Traders could also consider take-profit orders, which close a profitable position when it hits a particular level of profit, and a careful measuring of the risk vs reward ratio.

Developing a position trading plan

Position traders may consider taking these steps to design their trading strategy:

• Choose the trading instrument and time horizon: decide whether to work with underlying assets or derivatives, which markets to trade and for how long.
• Learn about technical and fundamental analysis: this offers a wider range of tools that can help a trader understand the dynamics of market trends.
• Define the fundamental thesis for each trade.
• Choose entry and exit points: decide when to get into the market and when to leave it, using technical tools to time entries and exits.
• Set risk parameters before opening a position.
• Be aware of reversals: as position traders hold positions for a long time, they may choose to ignore minor market fluctuations – which means they could fall victim to a trend reversal. Review your positions regularly against your thesis.

Key factors for position trading

Some of the key factors for position traders to consider include:

• Long-term outlook: since position trading involves taking a long-term view, a strong understanding of market fundamentals, macroeconomic trends and long-term trends may be important.
• Patience: it could take time for a trade to develop and reach its profit target, so traders should be willing to hold onto their positions even during periods of market volatility.
• Discipline: sticking to the plan is essential.
• Research: a solid understanding of the markets you trade underpins the strategy.
• Position sizing: traders should ensure they have enough capital to withstand market fluctuations while keeping enough buying power to take advantage of market opportunities. Position sizing also affects risk management, as larger positions may require tighter stop-loss orders.

Conclusion

Position trading involves holding a position open for an extended period of time, which makes it different from shorter-term strategies such as day trading and swing trading. Position traders may choose to trade a variety of instruments, such as CFDs on cryptocurrencies, stocks, forex, commodities or indices.

A position trader could use a variety of technical and fundamental analysis tools, coupled with research, to form a position trading plan.

However, position trading carries a lot of risk. Position traders need to conduct their own due diligence, remember that the market can move against them, and never trade with more money than they can afford to lose.

What is trend trading?

Trend trading, or trend following, is a strategy that attempts to capture gains by identifying the direction of a prevailing trend in the financial markets and then buying or selling assets in line with it. When the price is moving in one overall direction, such as up or down, that is called a trend.

Trend traders tend to use technical analysis tools, such as moving averages (MA), trend lines and momentum indicators, to determine trends in the market. They look for patterns in price movements and analyse charts to establish areas of support and resistance.

Once a trend has been recognised, trend traders enter a trade in the direction of that trend, aiming to ride it for as long as possible: a long position when an asset is trending upward, and a short position when it's trending downward.

Key takeaways

• Trend trading is a strategy that identifies market trends and trades assets accordingly, aiming to profit from the continuation of an established market direction.
• It relies on technical analysis tools, such as moving averages, trend lines and momentum indicators – which can also be used to set entry and exit points.
• Trend types include secular, primary, secondary, intermediate and minor trends.
• Trend trading is versatile and suits various markets and timeframes, as its goal is to capitalise on market momentum.
• Risks include false signals, lagging indicators and trend reversals, so exits and stop-losses are essential.
• Backtesting and demo trading can help refine strategies before trading real money.

Trend trading explained

The Turtle trading experiment in the 1980s is often credited with popularising the trend-trading system. The experiment was conducted by the legendary commodities trader Richard Dennis, who believed that trading skills could be taught and that anyone could learn to become a successful trader.

Dennis selected a group of inexperienced traders, known as the "Turtles", and taught them his trend-following system, which involved using technical analysis to identify and trade trends in the markets. The Turtles were taught to use a variety of indicators and risk-management techniques, and the experiment was a success.

It's difficult to estimate exactly how much the Turtle traders made, but some sources state it was over $100 million. Several of them went on to become successful traders in their own right, including Jerry Parker, who founded Chesapeake Capital and reportedly generated over $1 billion in profits for his clients, and Paul Rabar, who founded Rabar Market Research and reportedly achieved annual returns of over 20% for over two decades.

Note, however, that all trading, including trend following, carries a high risk of loss. Markets move up and down, trends reverse, and past performance is not a guarantee of future results.

Different types of trends

Trends can be described by their direction:

• Uptrend: a series of higher highs and higher lows.
• Downtrend: a series of lower highs and lower lows.
• Sideways trend: price moves within a range without clear direction.

They can also be classified by their duration. These are the types of trends trend followers may want to be aware of:

• Secular trends: long-term trends that last for years or even decades. They are usually caused by structural changes in the economy or changes in demographic trends.
• Primary trends: shorter trends that last for months or a few years. They are usually caused by changes in the business cycle or by political or economic events.
• Secondary trends: shorter-term trends that last for weeks or a few months. They are usually caused by changes in investor sentiment or by technical factors.
• Intermediate trends: shorter-term trends that last for days or a few weeks. They are usually caused by changes in the supply and demand for a particular asset or in the level of market volatility.
• Minor trends: very short-term trends that last for only a few days, and are the bread and butter of day traders and swing traders. They are usually caused by news events or changes in the level of trading activity.

How to use a trend-trading strategy

Traders may choose to use a combination of trend-trading strategies, depending on their style and risk tolerance.

Moving averages

This strategy uses the moving average (MA) indicator, which measures the average price of an asset over a specified time period. A trader may look for the price to cross above a moving average to signal an uptrend, or below it to signal a downtrend.

Crossovers between short- and long-term averages can also be used. For example, a trader may look for a "golden cross", which occurs when a short-term moving average (e.g. 50-day) crosses above a long-term moving average (e.g. 200-day). This may be seen as a bullish indication that the trend is shifting upwards.

Trend lines

Trend lines are straight lines that connect two or more price points on a chart – for example, a series of higher lows in an uptrend or lower highs in a downtrend – representing the direction and slope of a trend. They help visualise the trend and spot potential breaks.

Trend lines can also be used in conjunction with other technical indicators and candlestick patterns to spot potential trading scenarios. For example, a trader may look for a bullish chart pattern, such as a double bottom, to form near an uptrend line, which may indicate bullish momentum.

Trend momentum

Momentum indicators measure the strength of a trend and can help traders identify potential entry and exit points, as well as spot potential exhaustion before a reversal. The indicators used are:

• Relative strength index (RSI): measures the speed and change of price movements. It oscillates between 0 and 100 and is typically used to identify overbought and oversold conditions: a reading above 70 indicates an overbought condition, while a reading below 30 indicates an oversold condition.
• Moving average convergence divergence (MACD): a trend-following momentum indicator made up of two lines, the MACD line and the signal line. When the MACD line crosses above the signal line, it indicates a bullish trend, while a cross below the signal line indicates a bearish trend.
• Stochastic oscillator: compares an asset's closing price to its trading range over a specified period. It oscillates between 0 and 100 and is typically used, like the RSI, to identify overbought and oversold conditions.

Trend-trading example

Picture a chart covering a few weeks of activity, showing the 9-day and 21-day moving averages, trendlines and the RSI indicator below.

When the RSI falls below 30, indicating that the asset is oversold and a trend reversal is likely, it's followed by a cross of the 9-day and 21-day moving averages, which also signals a potential bullish trend reversal. A trend trader may decide to buy the asset, since two indicators confirm the reversal, and follow the trend until the RSI shoots above 70, suggesting the asset is overbought.

Why choose trend trading?

• Simplicity: trading in the direction of the market is a straightforward concept.
• Suitable for various markets: trend trading can be applied to cryptocurrencies, stocks, forex, commodities and indices, making it a versatile strategy.
• Capitalise on market momentum: the basic idea is to identify the direction of the market and take positions aligned with the direction of the trend.
• Adaptable for various time frames: it can be used across timeframes, which means it may suit many strategies, from day trading to swing trading.
• Potential for large gains: strong trends can run for long periods.

Risks of trend trading

• False signals: trend trading can generate false signals, leading to losses. Trends can be short-lived and price movements volatile, making it challenging to identify the direction of the trend accurately.
• Lagging indicators: trend trading often uses lagging indicators such as moving averages, which may not give an accurate picture of the current market. By the time a trend is identified, it may have been in place for some time and the price may have already moved significantly.
• Risk of trend reversals: trends can reverse at any time, and traders who have taken positions based on the trend may suffer significant losses if it does.

How to start trend trading

The key steps involved in trend trading include:

• Identifying trends: find the direction of the trend by analysing price charts and looking for higher highs and higher lows in an uptrend, or lower highs and lower lows in a downtrend. Technical indicators such as moving averages and trend lines can also highlight trends.
• Selecting entry and exit points: once a trend has been identified, select entry and exit points – for example, using momentum oscillators and chart patterns.
• Managing risk: use appropriate position sizing and risk-management techniques. Stop-loss orders can be used to limit potential losses. Note that ordinary stop-losses do not protect from slippage, while guaranteed stop-losses do – however, there is a fee associated with them.

Conclusion

Trend trading is a widely used and adaptable trading strategy that focuses on capitalising on market momentum by identifying and following prevailing trends.

Using technical analysis tools such as moving averages, trend lines and momentum indicators, traders can identify trends, assess their strength and establish entry and exit points. By recognising the different types of trends – secular, primary, secondary, intermediate and minor – traders can adapt their strategies to varying market conditions and timeframes.

The versatility of trend trading allows it to be applied across diverse financial markets, including stocks, cryptocurrencies, forex, commodities and indices.

What is day trading?

Day trading is the practice of buying and selling financial instruments within the same trading day, so that all positions are closed before the market closes. A day trader typically starts trading when the market opens and finishes when it closes, aiming to profit from short-term price movements and avoid the risk of overnight gaps.

Day traders can speculate using a variety of instruments, from financial derivatives to assets such as stocks, foreign exchange, indices and commodities.

Highlights

• Day trading involves opening and closing a position within the same market session.
• Day traders speculate on an asset's short-term price fluctuations.
• Day trading is highly risky, so traders should do their own research, remember that prices can go down as well as up, and never trade with more money than they can afford to lose.
• Day trading differs from conventional, long-term investing, which aims to buy and hold an asset in the hope that its value will increase over time.
• Historically, day trading was an activity exclusive to big financial firms, banks and financial professionals. With the growth of online trading platforms, it has become accessible to retail clients outside the financial sector.

Day trading explained

Day trading is based around a market's or asset's price fluctuations, so traders often look for assets that move around more. The relative liquidity of an asset is also something day traders keep in mind. Day traders typically rely on technical analysis, real-time data and high liquidity. They may make several trades a day, using tight stop-losses and taking small but frequent profits.

Derivatives such as contracts for difference (CFDs) are popular instruments for day trading, as they allow short selling and the use of leverage (restrictions may apply), which can magnify both profits and losses. CFDs allow traders to speculate on price movements without owning the underlying asset.

Day trading strategies

There are a range of strategies that traders could consider to day trade. These include, but are not limited to:

Day trading rules and risk

The rules of day trading vary from place to place, depending on the jurisdiction a trader is under. Make sure to conduct your own research, looking at government websites and other official sources.

There are, however, market risks that are universal. Markets can move against a trader's position, and if this happens, a trader could lose their money. When learning to day trade, make sure to also conduct due diligence on the asset you're trading, and never trade with more money than you can afford to lose. Good practice includes:

• Choosing the right market: focus on liquid, volatile markets with tight spreads.
• Managing time: set aside dedicated hours for trading and analysis.
• Setting a stop-loss on every trade: protect your capital from sharp moves.
• Controlling emotions: stick to your plan and avoid revenge trading.

How to start day trading

You may consider taking these steps to start day trading:

• Choosing the instrument you want to trade: you can choose between share dealing, a derivative or something else. This choice depends on your risk tolerance, experience in the markets and trading goals.
• Setting up a trading account with a broker: there are a number of brokers available to retail traders, from discount brokers to full-service ones. Conduct your own due diligence to find a broker that suits your personal needs.
• Designing a day trading strategy: use technical and fundamental analysis to form a trading strategy suited to your goals.

Day trading example

A potential example of day trading stocks comes in the form of Tesla's (TSLA) performance on 14 February 2023.

Following the news that a senior analyst at Barclays had initiated coverage of the stock with a "Buy" rating and a $275 price target (versus a $192 share price on the day), the stock rose by more than 7% over the day, reaching as much as 9% higher intraday.

A day trader could have entered the market by buying Tesla when it opened at $191.94, around the time the analyst made the forecast, and exited by selling when it reached its intraday high of $209.25.

Note that this example is for illustrative purposes only. If the stock hadn't reacted to the rating, or had reacted differently, the trader could have lost money.

Things to watch out for when day trading

There are a few mistakes traders could avoid when day trading:

• Not doing their own research: a trader who doesn't do their own research is at risk of losing money because they are not as well informed as they could be.
• Trading illiquid assets: if an asset is not liquid enough, a trader may not be able to sell it when they want to.
• Not controlling their emotions: traders who keep their emotions in check may be more likely to make rational decisions than those who let their hearts rule their heads.
• Ignoring costs: trading costs can add up quickly with frequent trades.
• Underestimating leverage: leverage magnifies both gains and losses.
• Over-trading: it can erode profits and increase stress.

Conclusion

Day trading is a trading approach in which a position is opened and closed within the same trading session or day. Day trading strategies include, but are not limited to, range trading, contrarian trading, pairs trading and news trading.

To start day trading, you may consider choosing an instrument you want to trade (for example, via derivative products), opening a brokerage account and designing a trading strategy that suits your goals. Day traders may benefit from doing their own research, avoiding illiquid assets and keeping their emotions under control.

Day trading carries a lot of risk. This is why you need to do your own research, remember that prices can go down as well as up, and never trade more money than you can afford to lose.

Each trading strategy suits a different personality, time commitment and risk tolerance. Whichever approach you choose, combining clear rules with disciplined risk management is key to long-term success.