Swing highs: what they are and how they work

What is a swing high in trading?

A swing high in trading is seen when an asset's price reaches a peak that surpasses the high points around it. Think of it as a mountain peak on your price chart – it's higher than the ‘hills’ around it. You might want to keep an eye on these peaks because they often act like invisible ceilings, or resistance levels.

Swing highs could be helpful in determining whether a price is about to start heading down or if it’s gearing up to push even higher. They may therefore come in handy when deciding on trade entry or exit points or where to set those all-important stop-loss orders. They’re often used in conjunction with other technical indicators to confirm trading signals and improve overall market analysis.

What is a swing low in trading?

A swing low in trading is a trough that’s lower than those on either side of it on a price chart. If swing highs are mountain peaks, swing lows are valleys. You might pay attention to these low points because they often behave like safety nets, or support levels.

Swing lows are also often used in conjunction with other technical indicators (including swing highs). They could be useful when you're thinking about entering or exiting a trade or placing stop-loss orders on short positions.

How does swing trading work?

Swing trading aims to capitalise on short- to medium-term price movements in financial markets. Swing traders seek to profit from the natural 'swing' of price movements that occur within larger market trends. By leveraging both technical analysis and fundamental analysis, swing traders attempt to identify optimal entry and exit points for positions, balancing the potential for gains with the need for careful risk management.

Here's a more detailed look at how swing trading works:

• Identifying swings: traders look for significant price movements – both upward and downward. They might seek one of the following:

• A notable price increase (ie swing high) that could signal a subsequent reversal and, in turn, a short-selling opportunity

• A substantial price decrease (ie swing low) that might indicate a possible rebound and, in turn, a buying opportunity

Keep in mind, though, that swings won’t necessarily follow the direction of the overall trend, eg a swing high could occur within a downward trend

• Time frame: this approach involves holding positions for a period ranging from a few days to several weeks, placing it between the rapid-fire world of day trading and the long-term perspective of position trading

• Overnight exposure: unlike day traders, swing traders often hold positions overnight, which can expose them to slippage due to after-hours news or market events, as well as overnight funding fees

• Analysis techniques:

• Technical analysis: swing traders primarily use chart patterns, trend lines and technical indicators to identify potential entry and exit points for positions

• Fundamental analysis: some swing traders also incorporate fundamental factors like macroeconomics or company announcements (in the case of stocks) to support their trading decisions

• Diverse markets: this strategy can be applied to various markets, including stocks, forex, commodities and more

• Backtesting: seasoned swing traders often backtest their strategies using historical data to help refine their approach

• Emotional discipline: swing trading requires the patience to hold positions through market fluctuations

Swing high examples

Swing highs can happen in any market you trade. Here, we cover a stock and forex example.

Stock market swing high

Imagine a technology stock that’s been in an uptrend for several weeks. The stock’s share price rises from $100 to $120 over three weeks, then experiences a short pullback to $115. It then resumes its upward movement, reaching $130 before pulling back again to $125. This $130-point represents a swing high.

You’d identify this swing high by observing that it's higher than the previous peak ($120) and the subsequent pullback ($125). This swing high at $130 could indicate a potential resistance level. If the price approached $130 again, you might expect the stock to face selling pressure (ie where there are more sellers than buyers). If, however, the price broke above the $130 level, this could signal that the uptrend was going to continue.

Forex market swing high

Consider the EUR/USD currency pair. Over a month, the pair rises from 1.1000 to 1.1200, then pulls back to 1.1150. It then climbs to 1.1300 before declining to 1.1250. The 1.1300 level represents a swing high.

You’d note this swing high as it's higher than both the previous peak (1.1200) and the following trough (1.1250). This 1.1300 level could become a key resistance point. You might use this information in several ways:

• As a potential ‘sell’ point if you believe the uptrend is weakening

• As a level to watch for a breakout, which could indicate a stronger uptrend

• To set stop-loss orders just above this level when taking short positions

How do you trade swing highs and swing lows?

When trading a swing high, you’d:

• Identify the highest point that the market’s price reaches before it starts to reverse

• Enter a short position as the price begins to fall, aiming to sell at the highest possible point

• Place a stop-loss above the level of the swing high to manage your risk

• Set a take-profit at a support level or just above a previous swing low

When trading a swing low, you’d:

• Identify the lowest point that the market’s price reaches before it starts to reverse

• Enter a long position as the price starts to rise, aiming to buy at the lowest possible point

• Place a stop-loss below the level of the swing low to manage risk

• Set a take-profit at a resistance level or just below a previous swing high

How to start swing trading

There are two ways to start swing trading with us, depending on your level of confidence and experience. You can:

1. Open an account and start trading in a live environment. You can trade using spread bets and contracts for difference (CFDs)

2. Test your swing trading strategies using virtual funds with our demo account

Alternatively, you can check out IG Academy to learn more about swing trading and other trading styles.