What Is Swing Trading? Definition and Characteristics

Swing trading is a medium-term active strategy that aims to capture multi-day to multi-week price swings for profit. Unlike day trading, which closes all positions within the same session, swing trading presumes holding positions overnight. Conversely, its holding period is shorter than position trading, with a focus on exploiting short- to intermediate-term market volatility.

The crux is threefold.

  • Directionality: Identify inflections and accelerations that occur within trends or ranges.
  • Time frame: Make decisions primarily on the daily and 60-minute charts.
  • Risk management: Use stop-losses, take-profits, and position sizing to keep expectancy (expected value) positive.

Swing trading is especially suitable for working professionals and beginners. You don’t need to be glued to the screen intraday; you can build a routine of after-hours analysis—execution the next day. However, overnight gap risk from adverse news exists, so strict risk management is essential.

Core Principles: Expectancy, Risk, Psychology, Costs

Expectancy and Risk-Reward (R:R)

The P&L profile of swing trading is defined by win rate and the risk-reward ratio (R:R). For example, with a 45% win rate and a 1:2 risk-reward, expectancy is positive. You can improve R:R by keeping stops tight and, when trends persist, extending winners via partial scale-outs and/or trailing stops.

Position Sizing

Fix your risk per trade. Example: account KRW 10,000,000, 1% risk per trade → max loss KRW 100,000. Divide the difference between entry and stop by the per-share risk to determine position size. This approach protects the account even through losing streaks.

Psychology and Discipline

Swing is a “waiting game.” Don’t trade before an entry signal, don’t move your stop lower on a whim, and adhere to your planned exit rules. Emotional decisions erode both R:R and win rate.

Trading Costs and Liquidity

Commissions and slippage compound and eat into returns. Favor stocks with ample liquidity, and focus on high-quality setups over excessive frequency. Corporate filings/disclosures and earnings dates increase overnight gap risk, so they must be tracked.

Strategy and Tools: What to Watch and How to Enter

Reading Market Structure
  • Trend-following: moving averages (MAs) aligned upward, higher highs and higher lows. Buy pullbacks.
  • Range breakout: enter when price breaks above the box top/resistance with volume confirmation.
  • Leverage relative strength in strong sectors/themes: prioritize names outperforming the index.
Key Indicators and How to Use Them
  • MAs (20/50/200): trend filter. Pullbacks toward the 20MA are candidates for short-term entries.
  • RSI: less about overbought/oversold, more about staying above 50 and confirming bullish regimes.
  • ATR (Average True Range): volatility-based stop width. Example: stop = entry − 1.5×ATR.
  • Volume: assess breakout credibility. A surge relative to average volume increases signal quality.
Example Rules for Entry, Stop, and Exit
  • Entry: in an uptrend above the 20MA, buy a breakout above the prior day’s high after a small pullback near recent highs.
  • Stop: below the recent swing low or 1.5×ATR beneath entry.
  • Exit: scale out at 1R/2R; trail the remainder using a moving stop (e.g., loss of the 20MA or break of the prior bar’s low).
Conditions to Avoid
  • The day before major events (earnings, FOMC, etc.) when volatility spikes
  • Names with collapsing volume and wide bid-ask spreads
  • Choppy, directionless ranges with excessive noise

A Simple Practical Example: One Swing Trade by the Numbers

Assumptions:

  • Account: KRW 10,000,000
  • Risk per trade: 1% = KRW 100,000
  • Symbol: ABC
  • Setup: above the 20MA, breakout through the box top at KRW 50,000. ATR ≈ KRW 1,200

Plan:

  • Entry: KRW 50,000
  • Stop: KRW 48,500 (about 1.25×ATR below and under the recent swing low)
  • Per-share risk: KRW 1,500
  • Position size: KRW 100,000 ÷ KRW 1,500 ≈ 66 shares
  • Targets: 1R = KRW 51,500; 2R = KRW 53,000; 3R = KRW 54,500

Execution flow:

  1. Buy 66 shares at the breakout day’s close or the next day’s open. Immediately place the stop order at the defined stop price.
  2. At 1R (KRW 51,500) take 30% off; at 2R (KRW 53,000) take another 40%.
  3. Trail the last 30% using a stop: exit on a 20MA break or a breach of the prior day’s low.

Hypothetical outcome:

  • If it hit 1R and 2R, then pulled back and the remainder was exited on a 20MA break,

    • Realized profit: roughly 1R×0.3 + 2R×0.4 + 1.2R (assumed trailing stop) × 0.3 ≈ 1.34R
    • In cash terms, about KRW 134,000 Conversely, if price drops right after entry and hits the stop, the loss is capped at KRW 100,000 as planned. This fixed-loss, variable-gain profile is the essence of swing trading.

Cautions:

  • If earnings are within a week, cut position size in half or postpone until after the event.
  • Because gap-downs can skip your stop, stick to liquid names and reasonable stop distances.

Practical Routine and Checklist

Evening routine (scan and plan)
  • Market context: index trend, volatility (VIX or similar) check
  • Candidate scan: above 20/50MAs, rising volume, top relative strength names
  • Event calendar: earnings, dividends, company disclosures
  • Document the trade plan: entry/stop/exit prices, size, scenario A/B
Intraday/Pre-market execution
  • Set price alerts: breakout/breakdown levels
  • Use limit and stop orders: automate entries and stops
  • Don’t chase: if price runs beyond your planned band, let it go
After-hours review
  • Trade journal: reasons, emotions, execution fidelity, improvement points
  • Check stats: win rate, average R, max drawdown (DD), performance by strategy
Risk management checks
  • Keep per-trade risk within 0.5–1.5%
  • Consider correlation across holdings; avoid overconcentration in one sector
  • Limit the number of concurrent positions (e.g., 3–5) for manageability

Summary and Conclusion

Swing trading systematically seeks to confirm clear trends or breakouts while capping losses and letting profits expand. The essentials boil down to four points.

  • Quality of setups: aligned trends, volume confirmation, event-date checks
  • Mechanical risk management: fixed per-trade loss, rational stop and exit rules
  • Consistent routine: after-hours analysis—next-day execution—journaling—stat review
  • Psychological discipline: patience, respect for stops, avoid chasing

If you’re new, start with paper trading or very small size and build your stats. Pick one simple strategy—such as buying pullbacks to the 20MA or a basic box breakout—collect at least 30–50 samples, and scale up gradually once expectancy is validated. Swing trading isn’t about capturing every move; it’s a discipline of patience, taking only the moments when the odds are in your favor.