Swing trading is not as well-known as other types of trading such as day trading. Therefore many traders aren’t completely sure of how swing trading works or how to use it in their trading strategy. So let’s cover swing trading basics…

To fully understand what swing trading really is, you first need to identify which state the market is in, specifically uptrends and downtrends.

1. Uptrend: This is when a market is making a series of higher highs and higher lows. The rallies are almost always interrupted by declines which terminate above the low point of the preceding sell-off. Often the high of the last “swing” in the trend will serve as support for the next low in a kind of zigzag (or staircase) pattern.

2. Downtrend: This is the exact opposite of an uptrend where a market makes a series of lower highs and lower lows. Just as with an uptrend, there are normally counter-trend rallies (a.k.a. pullbacks) before the downward fall resumes. The previous low in the trend often acts as resistance for the pullback.

3. No Trend: If a market is going sideways with no apparent new highs or lows, it’s not suitable for swing trading – you’ll see why in a moment.

Once either trend has been identified, you look for buying or selling opportunities in the direction of that trend. These swing trading opportunities take the form of those pullbacks against the main trend.

Essentially, you determine that the price has retraced as far as it should, then enter in the direction of the larger trend and protect yourself with a stop that will only get hit if the trend is truly over.

For this reason, swing trading is also sometimes known as ‘momentum trading’ because it takes advantage of brief price swings to ride the momentum of the existing trend.