Swing trading: holding periods, costs and overnight risk

What you will learn

• How swing trading differs from day trading and from investing by holding period and decision frequency
• How to list every cost of a swing trade and convert it into R (units of planned risk)
• How overnight financing works on leveraged products held for days or weeks
• Why overnight and weekend gaps are the central risk of swing trading

Explanation

Swing trading means holding a position for several days to a few weeks to capture one "swing": one leg of a move between two turning points on the daily chart. In this course a swing trade is defined as a holding period of about 2 to 20 trading days. Trades closed within the session are day trades (covered in the course "Day Trading & Intraday Execution"); positions held for years are investing.

Practical consequences:

• Decision timeframe: you analyse the daily chart (one candle per trading day) and make most decisions once a day, usually after the close.
• Wider stops: daily price ranges are larger than intraday noise, so stops are wider in euros and positions are smaller in shares for the same euro risk.
• Overnight exposure: you hold the position while the market is closed. News arriving at night or at the weekend is priced in at the next open.

The cost list of a swing trade

R-multiples (result divided by planned risk) are covered in the Risk Management course. Here you apply them to costs. Add up:

1. Commission: the broker fee for opening and for closing (two fees per round trip).
2. Spread: the difference between bid and ask. Buying at the ask and later selling at the bid costs roughly one full spread per round trip.
3. Slippage: the difference between the price you expected and the fill you received.
4. Financing: only for leveraged products such as CFDs (contracts for difference). Brokers typically charge interest on the full position value for every night held, often a reference rate plus a markup; weekends usually count. Check your broker's current terms.
5. Currency conversion for foreign shares.

A simple formula for financing:

Financing cost = position value × annual financing rate × nights held ÷ 365

Express total costs in R: Cost in R = total costs in € ÷ planned risk in €. As a rule of thumb, costs above about 0.1R to 0.2R make an instrument expensive for the setup.

Overnight and weekend gaps

A gap is a jump between the previous close and the next open with no trading in between on the main venue. A stop-loss order is only an order to sell once price trades at or through the stop. If the next open is below your stop, the stop is filled near the open, not at the stop price. Your planned risk of 1R can then become 1.5R, 2R or more. Weekends add two days of news.

Swing traders cannot avoid gaps, only plan for them; lessons 6 and 7 show how.

Worked example

Hypothetical example: account €20,000, planned risk 0.5% per trade = €100 (1R). A share is bought at €50.00 with a stop at €47.50 and a target at €55.00.

1. Risk per share: €50.00 − €47.50 = €2.50.
2. Position size: €100 ÷ €2.50 = 40 shares. Position value: 40 × €50.00 = €2,000.
3. Commission: €5 per order × 2 = €10. Spread: assume 0.10% of €2,000 = €2. Total costs: €12 = €12 ÷ €100 = 0.12R.
4. If the target is reached: gross profit 40 × €5.00 = €200 = 2.0R. Net: €200 − €12 = €188 = 1.88R.
5. Same trade as a CFD held 14 nights at an assumed 6% per year: €2,000 × 0.06 × 14 ÷ 365 = €4.60, or 0.05R. Net result: €188 − €4.60 = €183.40 = 1.83R.
6. Gap scenario: the share closes at €49.00, then bad news arrives and it opens at €46.00. The stop is filled at about €46.00. Loss: 40 × (€50.00 − €46.00) = €160 = 1.6R, plus €12 costs = €172 = 1.72R.

Excluded: further slippage, currency effects and taxes. Planned risk €100; actual loss €172.

Common mistake

Practice activity

Hypothetical data: account €15,000, risk 0.6% per trade. Buy at €30.00, stop €28.50. Commission €4 per order, spread 0.20% of position value round trip. A CFD version is held 21 nights at an assumed 7% per year.

1. Calculate the planned risk in €, the number of shares and the position value.
2. Calculate the round-trip costs in € and in R (without financing).
3. Calculate the financing cost for the CFD version in € and in R.
4. The share gaps down and opens at €27.00. What is the loss before costs in € and in R?

Key takeaways

• Swing trading holds positions for about 2 to 20 trading days and is planned on the daily chart.
• Add commission, spread, slippage, financing and currency costs, then express the total in R.
• Financing on leveraged products grows with every night held, including weekends.
• Gaps can make a loss larger than the planned risk; plan for them before entering.

Next step

In the next lesson you learn how to scan the market for swing candidates using relative strength and liquidity filters.