Day trading and intra-day trading focus intentionally on very short entry-to-exit timeframes.
Traders use charts of very small time spans and may take profits within a matter of moments. In comparison, swing trading uses many of the same short-term trend and reversal signals but involves a holding period of at least three days, and in most applications, not more than five days.
Swing traders rely on specific set-up signals for both entry and exit. Because swing traders are playing the swing of price, the current trend’s exit set-up may also serve as the next swing’s entry set-up.
There are four important price patterns for swing trading.
When two or more of these signals occur together, they confirm one another and provide the strongest possible indication that the price is likely to stop moving in the established direction and will probably turn and move in the opposite direction.
As valuable as reversal signals are that swing traders use, when two or more show up together, the strength of the confirmation is very strong.
The philosophy behind swing trading is based on two observations. First is the basic contrarian strategy. This is the belief that the majority is more often wrong than right. So when prices begin moving upward, a growing number of people buy, with most buyers at the top of the short-term trend. And when prices begin moving downward, a growing number of people sell, with most sellers at the bottom of the short-term trend.
Second is the belief that market decisions are made based on two primary emotions: greed and fear. As prices rise, new buyers come in to get a piece of the action and existing owners of stock do not take profits, because they do not want to miss out on even higher gains. When prices fall, current owners of stock panic and sell, mostly at the bottom of the price swing.
The swing traders acknowledge the strength of greed and fear as motivating forces in the market, but they resist acting in response. They make decisions rationally and without emotion. When greed drives prices up, swing traders look for signs that the trend is slowing or coming to an end. When that happens, they sell long positions or open short positions. When prices are falling, swing traders wait for signals that the trend is bottoming out. At that point, they buy to close any short positions or open long positions.
This swing is normally going to last between three and five sessions. Swing traders want to move in and out of positions that quickly, because part of the strategy recognizes that the short-term emotional reaction is always exaggerated; but it also corrects at the end of that three- to five-day period. In fact, it is the emotional reaction and overreaction that creates the short-term swing.