Welcome to the swing trading glossary, your comprehensive guide to the essential terms and concepts to understand the terminology to understand a trading strategy.
Swing trading involves capturing profits from intermediate-term price movements, typically lasting from a few days to a few weeks. This patient approach contrasts with day trading, where traders exit their positions within the same trading session.
A comprehensive understanding of swing trading terminology is crucial for effective execution and risk management. This glossary provides a concise overview of essential swing trading terms, equipping you with the vocabulary to navigate the market confidently.
ADX Indicator: (complete definition) The Average Directional Index (ADX) Indicator is a technical analysis tool used in swing trading to measure the strength and trendiness of a financial instrument’s price movement. It quantifies the degree of price movement and helps traders identify potential trends. ADX values range from 0 to 100, with higher values indicating stronger trends. Swing traders use ADX to assess whether to enter or exit a trade based on the prevailing trend’s strength.
ATR (Average True Range): (complete definition) ATR (Average True Range): A key indicator in swing trading, ATR measures a security’s price volatility over a defined period. It quantifies the average range between a stock’s daily high and low prices, providing traders with insight into potential price movements. Higher ATR values suggest greater volatility, while lower values indicate stability. Swing traders often use ATR to set stop-loss and take-profit levels, helping manage risk and optimize trade entries and exits.
Backtesting (complete definition): Backtesting refers to the process of evaluating a trading strategy by applying it to historical market data. Traders use backtesting to assess how a particular strategy would have performed in the past. This analysis helps them gauge the strategy’s effectiveness, identify potential weaknesses, and refine it for future use. Backtesting involves simulating trades using historical prices, allowing traders to optimize their strategies for real-time trading in financial markets. (backtesting glossary)
Bollinger Bands (complete definition): Bollinger Bands are a widely used technical analysis tool consisting of three lines on a price chart. The central line is a simple moving average, and the other two lines are standard deviations of the price data from the moving average. These bands help traders gauge price volatility and potential reversals. When prices touch or exceed the outer bands, it can signal overbought or oversold conditions, potentially indicating a change in the market trend.
Breakout Trading (complete definition): Breakout Trading: A swing trading strategy that involves identifying price levels at which an asset’s value is poised to break out of its current trading range. Traders aim to capitalize on the potential for significant price movement by buying when the asset’s price breaks above a resistance level or selling when it breaks below a support level. Breakout trading seeks to profit from momentum shifts and is often accompanied by high volatility and increased trading volume.
Candlesticks: (complete definition) Candlestick charts are a visual representation of price movements in trading. Each “candle” represents a specific time period, displaying the opening and closing prices as well as the high and low points. The candle’s body is formed by the price difference between opening and closing, with color indicating gains (green/white) or losses (red/black). Candlesticks help traders analyze market sentiment, trends, and potential reversals, aiding decision-making in swing trading strategies.
CCI Indicator: (complete definition) The Commodity Channel Index (CCI) Indicator is a momentum-based technical analysis tool used in swing trading. It measures the relative strength of an asset’s price in relation to its recent average. Traders often use CCI to identify overbought or oversold conditions, potential trend reversals, or divergences between price and indicator movement. A positive CCI suggests bullish momentum, while a negative CCI implies bearish momentum, aiding swing traders to improve decision making.
Day Trading: (complete definition) Day Trading is a short-term trading strategy where traders buy and sell financial assets within the same trading day. It aims to profit from short-term price fluctuations by capitalizing on intraday market movements. Day traders typically don’t hold positions overnight and focus on technical analysis, charts, and real-time data to make quick decisions. This strategy requires strong discipline, risk management, and a deep understanding of market volatility to navigate the fast-paced nature of day trading successfully.
Divergence: Divergence occurs when the price of an asset moves in a different direction from a related technical indicator, such as the Moving Average Convergence Divergence (MACD) or the Relative Strength Index (RSI). Divergence can be bullish or bearish and often suggests a potential shift in market momentum, which traders use to identify potential trading opportunities.
Exhaustion Gap: (complete definition) An “Exhaustion Gap” in swing trading is a price gap on a chart that typically occurs after a prolonged trend. It suggests that market participants are exhausted or fatigued from pushing the price in the same direction. This gap often signals a potential reversal in the trend, as it reflects a shift in sentiment. Swing traders may use exhaustion gaps as a key indicator about buying or selling assets.
Entry Point: The entry point is the specific price level at which a trader decides to initiate a trade. This decision is typically based on the trader’s analysis, strategy, and assessment of potential market conditions. A well-defined entry point is crucial for risk management and maximizing profit potential.
Exit Point: The exit point is the predetermined price or condition at which a trader decides to close a trade. Traders use exit points to realize profits (via a take-profit order) or limit losses (via a stop-loss order). Establishing clear exit criteria is essential for effective risk management and trade execution.
Fibonacci Retracement (complete definition): Fibonacci retracement is a technical analysis tool that uses key Fibonacci ratios (such as 23.6%, 38.2%, 50%, 61.8%, and 78.6%) to identify potential support and resistance levels within a price chart. Traders use Fibonacci retracement levels to predict potential price reversals or retracements within an existing trend, aiding in the identification of entry and exit points.
Gap (complete definition): A gap in the price chart occurs when there is a noticeable price difference between the closing price of one trading session and the opening price of the subsequent session. Gaps typically occur due to significant news events or market sentiment shifts during non-trading hours. Traders analyze gaps to assess their significance and potential impact on future price movements.
Head and Shoulders Pattern (complete definition): The Head and Shoulders pattern is a significant technical analysis formation in the world of trading and investing. It typically appears on price charts and serves as a powerful indicator of potential trend reversals. This pattern consists of three distinct peaks: a higher central peak called the “head” and two lower peaks on either side referred to as the “shoulders.” The formation signifies a shift from a bullish trend (upward price movement) to a bearish trend (downward price movement). Traders often use this pattern to anticipate a future decline in an asset’s price, making it a valuable tool for decision-making in the financial markets.
Impulse Wave: In the realm of technical analysis and Elliott Wave Theory, the term “Impulse Wave” describes a specific type of price movement within financial markets. It represents a strong and decisive directional movement in an asset’s price, either upward or downward. An Impulse Wave typically consists of five smaller waves, with three waves moving in the direction of the prevailing trend (the impulse) and two waves acting as corrective phases. Understanding Impulse Waves helps traders identify potential entry and exit points within larger market trends.
Japanese Candlestick Charting:
Key Reversal Pattern: A Key Reversal Pattern is a significant price chart formation in swing trading. It occurs when an asset experiences a sudden change in direction after a prior trend, signaling a potential reversal. This pattern typically consists of a candlestick that engulfs the previous candle, implying a shift in market sentiment. Swing traders often use Key Reversal Patterns as a signal to enter or exit trades, as they suggest a potential trend reversal is underway.
Limit Order: A limit order is an order placed by a trader to buy or sell an asset at a specific price or a better one. Unlike market orders, which are executed immediately at the prevailing market price, limit orders are only executed if the market reaches the specified price level. Traders use limit orders to enter or exit positions with more control over execution prices.
Liquidity: Liquidity refers to the ease with which an asset can be bought or sold in the market without significantly affecting its price. High liquidity assets have many buyers and sellers, making it easier to execute trades without substantial price slippage. Low liquidity assets, on the other hand, may experience larger price swings when trades are executed.
Market Order: A market order is an order to buy or sell an asset immediately at the current market price. Unlike limit orders that specify a particular price, market orders prioritize execution speed over price. Traders use market orders when they want to enter or exit positions quickly, regardless of the prevailing market price.
Mean Reversion (complete definition): Mean Reversion: In swing trading, Mean Reversion is a strategy based on the belief that asset prices tend to move back toward their historical average or “mean” over time. Traders identify assets that have deviated significantly from their mean and bet on their return to this average. It involves buying low when prices are below the mean and selling high when prices exceed it, aiming to profit from price corrections to achieve a more balanced value.
Related reading: Trading Glossary
Moving Average: A moving average is a statistical calculation that smoothens price data over a specified period. It helps traders identify trends by providing a clearer picture of an asset’s price direction. Common types of moving averages include simple moving averages (SMA) and exponential moving averages (EMA), with different timeframes catering to various trading strategies.
Moving Average Convergence Divergence (MACD): The MACD is a popular momentum oscillator and trend-following indicator. It is calculated by subtracting the 26-period EMA from the 12-period EMA. The MACD line is then smoothed with a 9-period signal line. Traders use MACD crossovers and divergences to identify potential trend changes and generate trading signals.
Money Management (complete definition): Money management in swing trading refers to the strategic allocation and protection of your trading capital. It involves setting limits on how much you’re willing to risk on each trade, determining position sizes, and implementing stop-loss orders to limit potential losses. Effective money management is crucial for preserving your capital and ensuring long-term success, as it helps traders avoid excessive risks while navigating the volatile swings of the market.
Momentum (complete definition): Momentum (Momo Trading) in swing trading refers to the strength and direction of a stock’s recent price movement. Momo traders focus on assets that are exhibiting upward or downward price trends, believing that these trends will continue. They rely on technical indicators like moving averages and Relative Strength Index (RSI) to identify potential entry and exit points. Momo trading aims to capitalize on short to medium-term price movements, emphasizing the importance of staying aligned with prevailing market momentum.
Moving Average (complete definition): A moving average in swing trading is a key technical indicator that smooths out price data over a specified period, revealing trends. It helps traders identify potential buy and sell signals based on crossovers with the current price. A “simple moving average” (SMA) treats all data points equally, while an “exponential moving average” (EMA) gives more weight to recent prices. Traders use moving averages to gauge trend direction about when to enter or exit positions.
MOMO trading (complete definition): MOMO trading, short for “momentum trading,” is a strategy where traders buy or sell financial assets based on recent price trends, believing that assets with strong recent performance will continue to move in the same direction in the near future. This approach focuses on short- to medium-term price momentum and often involves using technical indicators to identify trading opportunities. However, it carries risks and requires careful monitoring and risk management.
News Trading (complete definition): News Trading is a swing trading strategy where traders capitalize on market movements triggered by significant news events. This approach involves closely monitoring economic releases, earnings reports, geopolitical developments, and other impactful news to make short-term trades. Traders aim to predict how the market will react to this information, often taking positions just before or immediately after the news breaks, seeking to profit from swift price fluctuations. It requires quick decision-making and risk management skills to navigate the volatility associated with news-driven trading.
Opening Gap (complete definition): An “Opening Gap” in swing trading refers to the price difference between the closing price of a financial asset on one trading day and its opening price on the following trading day. If the opening price is significantly higher (a “gap up”) or lower (a “gap down”) than the previous day’s closing price, it creates a gap on the price chart. Traders often analyze these gaps for potential trading opportunities, as they can indicate market sentiment and potential price direction changes.
Order Types: In swing trading, “Order Types” refer to various instructions given by traders to execute their buy or sell transactions. The most common order types include Market Orders (for immediate execution at current market prices), Limit Orders (to buy or sell at a specific price or better), and Stop Orders (to trigger a trade when a certain price level is reached). These order types help traders manage their positions and capitalize on market opportunities with precision.
Pairs Trading (complete definition): Pairs Trading is a strategy in swing trading where investors simultaneously buy one asset while selling another related asset, typically from the same industry or sector. The goal is to capitalize on the relative price movements between the two assets. Traders seek to profit from the price spread between the paired assets, making it a market-neutral approach that relies on statistical and fundamental analysis to identify mispriced assets and exploit their convergence or divergence.
Position (complete definition): In swing trading, a “position” refers to the specific security (like a stock or cryptocurrency) that a trader has purchased or sold with the intention of profiting from short to medium-term price fluctuations. Traders establish positions by buying (going long) or selling (going short) an asset and aim to close these positions once their price targets or stop-loss levels are met, typically holding them for days to weeks rather than minutes or seconds as in day trading.
Position Sizing: Position sizing involves determining the appropriate quantity of an asset to trade based on risk management principles. Traders consider factors such as account size, risk tolerance, and the specific trade setup to determine the size of their positions. Effective position sizing is critical for preserving capital and managing risk.
Pullback: A pullback is a temporary reversal in the price of an asset within an existing trend. It represents a short-lived move against the prevailing trend before the trend resumes. Traders often view pullbacks as opportunities to enter trades at more favorable prices within a broader trend.
Quadruple Witching (complete definition): Quadruple Witching refers to a notable event that occurs in the financial markets on the third Friday of March, June, September, and December. During this day, four different types of financial derivatives expire simultaneously. These include stock index futures, stock index options, stock options, and single stock futures. Quadruple Witching often leads to increased market volatility as traders and investors rush to adjust their positions or execute new ones before these derivatives expire. Understanding the dynamics of Quadruple Witching is essential for those involved in options and futures trading to manage risk effectively during these volatile periods.
Relative Strength Index (RSI) (complete definition): The RSI is a momentum oscillator that measures the speed and magnitude of price movements. It ranges from 0 to 100 and is used to identify overbought and oversold conditions. Traders typically consider RSI values above 70 as overbought, suggesting a potential reversal, while values below 30 indicate oversold conditions, potentially signaling a rebound.
Resistance Level: A resistance level is a specific price level at which an asset tends to encounter selling pressure, preventing or impeding its upward movement. Traders often pay attention to resistance levels as potential barriers to further price appreciation.
Risk/Reward Ratio: The risk/reward ratio is a metric used by traders to evaluate the potential profitability of a trade relative to the associated risk. It compares the expected profit (reward) to the potential loss (risk). A favorable risk/reward ratio is typically one where the potential reward outweighs the potential risk, making the trade more attractive.
Risk Management (complete definition): Risk management encompasses a set of strategies and techniques aimed at minimizing potential losses and protecting a trader’s capital. It involves various elements, including position sizing, stop-loss orders, diversification, and overall portfolio risk assessment.
Runaway Gaps (complete definition): Runaway Gaps: In swing trading, runaway gaps represent price gaps that occur within an established trend, signaling the continuation of that trend. These gaps usually manifest when there is strong momentum and investor sentiment driving the market. They suggest that the prevailing trend is likely to persist, making them favorable for traders seeking to capitalize on ongoing price movements. Runaway gaps are characterized by a gap between the high or low of the previous candlestick and the opening price of the subsequent one, confirming the existing trend’s strength.
Support Level: A support level is a specific price level at which an asset tends to find buying interest and support from traders, preventing or slowing its downward movement. Traders often view support levels as potential entry points for long positions or areas where stop-loss orders may be placed.
Short Selling (complete definition): Short Selling is a trading strategy where an investor borrows shares of a stock from a broker and sells them in the market with the expectation that the stock’s price will decrease. The goal is to buy back the shares at a lower price to return them to the lender, pocketing the difference as profit. Short selling involves betting against a stock’s performance and can be risky, as losses can be unlimited if the stock price rises significantly.
Stop-Loss Order (complete definition): A stop-loss order is an order placed by a trader to automatically sell an asset when it reaches a predetermined price level. This order helps limit potential losses by ensuring that a trade is closed if the market moves against the trader’s position. Stop-loss orders are crucial components of risk management.
Support and Resistance (complete definition): Support and Resistance: In swing trading, support represents a price level where an asset tends to find buying interest, preventing it from falling further. Resistance, on the other hand, signifies a price level where selling pressure typically caps an asset’s upward movement. Traders use these levels to make entry and exit decisions, aiming to buy near support and sell near resistance to capitalize on price reversals or breakouts, key strategies in swing trading.
Swing Trading (complete definition): Swing trading is a trading strategy that aims to capture shorter-term price swings or “swings” within a larger trend. Unlike day trading, swing traders hold positions for several days or weeks, taking advantage of price oscillations that occur as markets move up and down. Swing trading involves identifying potential entry and exit points based on technical analysis, chart patterns, and indicators. This strategy is suitable for traders who seek to benefit from medium-term price movements while avoiding the rapid pace of day trading.
Swing Trading Strategy (complete definition): A trading strategy is a predefined plan or approach that traders use to make decisions about buying and selling financial assets. It encompasses various techniques, such as technical and fundamental analysis, risk management, and timing of trades. Swing trading, a specific strategy, focuses on capturing short to medium-term price swings in the market. Traders using this strategy aim to profit from both upward and downward movements by holding positions for a few days to weeks, rather than seconds or years. (trading strategy glossary)
Swing High: A swing high refers to a recent peak in an asset’s price that is higher than the surrounding price points. Swing highs are often used to identify potential resistance levels within a trend and to assess the strength of upward price
Technical Analysis (complete definition): Technical Analysis is a key concept in swing trading. It involves studying historical price and volume data to forecast future price movements. Traders analyze charts, patterns, and indicators like moving averages and RSI to improve decisions. This method focuses on market psychology and assumes that historical price patterns will repeat. Swing traders often use technical analysis to identify entry and exit points for short to medium-term trades.
Unfilled Gap (complete definition): An “Unfilled Gap” in swing trading refers to a price gap on a stock or asset’s chart that hasn’t been filled by subsequent trading activity. It occurs when there’s a notable price jump between two consecutive trading sessions, leaving a gap on the chart. Swing traders often monitor unfilled gaps as potential areas of future price movement, as there’s a tendency for prices to return and fill these gaps, serving as a technical trading signal.
Volatility (complete definition): Volatility in swing trading refers to the degree of price fluctuation or variation in a financial asset’s value over a specific period. High volatility signifies rapid and significant price swings, making it appealing to swing traders seeking short-term profit opportunities. Low volatility, on the other hand, suggests stable and gradual price changes, which may be less attractive for swing trading. Traders often use volatility indicators and historical data to gauge potential market movements and optimize their trading strategies accordingly.
Whipsaw: Whipsaw is a term used to describe a challenging and frustrating market condition characterized by sudden and unpredictable price reversals. In a whipsaw market, an asset’s price rapidly fluctuates, creating a series of false signals that can lead traders to make incorrect trading decisions. This phenomenon is common during periods of market indecision or choppiness when there is no clear trend direction. Traders often employ risk management techniques, such as setting tight stop-loss orders, to minimize losses during whipsaw conditions and wait for more stable market trends to emerge before making significant trading decisions.
Wyckoff Method: (complete definition) The Wyckoff Method is a trading strategy and approach to technical analysis developed by Richard D. Wyckoff in the early 20th century. This method emphasizes the analysis of price and volume data to understand market trends and potential trading opportunities. Traders using the Wyckoff Method focus on identifying accumulation (buying) and distribution (selling) phases in the market, enabling them to enter or exit positions. It places importance on the interactions between supply and demand to gauge the strength of price movements, making it a valuable tool for traders seeking to understand market sentiment and trends.
X-axis: The horizontal axis on a price chart, representing time or the number of trading periods (e.g., days, hours). It is the axis along which the price data is plotted, allowing traders to track price movements over time. The X-axis helps traders analyze historical price patterns based on past data.
Yield Curve: (complete definition) The Yield Curve is a graphical representation of interest rates on bonds with varying maturities. It provides a snapshot of the relationship between short-term and long-term interest rates in the financial markets. A normal yield curve typically slopes upward, indicating that long-term interest rates are higher than short-term rates. An inverted yield curve, where short-term rates are higher than long-term rates, can signal an impending economic recession. The shape and movement of the yield curve are closely watched by economists, investors, and policymakers as it can offer insights into future economic conditions and monetary policy decisions.
Zone of Resistance: The Zone of Resistance is a concept used in technical analysis to identify a specific price range or level at which an asset faces significant selling pressure. It represents an area on a price chart where historical price movements suggest that an asset has encountered challenges in moving beyond that particular price point. Traders and investors use the Zone of Resistance as a critical reference point about entering or exiting positions. When an asset approaches this zone, it often prompts traders to be cautious and consider potential price reversals or consolidations, making it an essential tool for risk management and trade planning.