There are plenty of trading styles for professionals, even those starting to dip their toes in the trading world. Above all, swing trading is fundamental. Sitting between day trading and trend trading, swing traders tend to examine and evaluate a trade’s prospect in a natural oscillation momentum to draw an impartial resolution towards an exchange.
Of course, swing trading has some benefits over other trading approaches. Still, it’s worth mentioning that a trader’s success has much to do with his skills, the assimilation of the ideology of swing trading, and needless to say — discipline. So, don’t expect miracles from a trade, only by switching to this form of trading.
In fact, to fully comprehend the basics, let’s start by understanding what swing trading is all about.
Swing trading is a trading style used to benefit from the short-term and medium-term price swings of an asset. Unlike day traders, who open and close their positions during the same day, swing traders keep their positions open from one day to several days or even several weeks, depending on the market opportunity.
How Does Swing Trading Work?
Some refer swing trading as a trading strategy, but it’s more accurate to say that it is a trading style since many lucrative strategies are developed based on this approach. You may think the definition of swing trading is all about using different timeframes compared to day-traders and position traders. But, it’s really about a different trading philosophy, so to speak.
Still, swing trading generally operates with daily timeframes and aims for broader trends. Most swing trading strategies would try to catch a trend and benefit from it until it fades out. There are very few strategies for those looking for lateral moves inside horizontal channels.
But generally, this trading style is suitable for all types of assets, including forex pairs, stocks, and cryptocurrencies trading, among others.
The Rule of Thumb
As a rule, swing traders leave their positions overnight and close them after several days or weeks when the trend shows signs of reversal.
Well, a picture is worth a thousand words, so let’s see what swing traders’ positions look like on the chart:
As you can see, a swing trader’s ideal position lasts several days or weeks and involves a clear trend with several price swings. You can observe the swing highs circled in green and the swing lows circled in red. Thus, swing traders are not scared of short-term price volatility as soon as the general trend continues. The price doesn’t break below the support line or above the resistance line, depending on whether the chosen trend is bullish or bearish.
Elsewhere, during this period highlighted on the chart, day traders would have opened multiple positions to benefit from the smaller trends formed between the emphasized swing highs and lows. However, day traders are generally more stressed, given that they have to take way more crucial decisions during the same period, and success is not guaranteed.
On the contrary, statistics say that most day traders don’t make it in the long run. That doesn’t mean swing trading will make you rich. But as a beginner, you can often find yourself trading against the trend more often when day-trading.
Swing trading is generally more challenging to consolidate markets when the price is figuring out a reasonable valuation and staying there for a while.
Understanding Swing Trading Strategies and Tactics
Swing traders will usually check daily charts for monitoring trends and trade on open positions. However, they can also rely on smaller timeframes in search of accurate entry and exit points by looking for breakouts or pullbacks. Larger timeframes are also very common among these traders. A well-established uptrend or downtrend is usually confirmed on larger timeframes. Still, the daily chart remains the most critical timeframe.
As mentioned above, swing trading has to do with price swings that can last from a few days to several weeks. Thus, they hold their positions open for more time than day traders but less than position traders or buy and hold investors.
Given the circumstances, traders who use this style prefer to use technical analysis when searching for new entry points, but they don’t tend to rely on it to the same extent as day traders. Swing traders can combine their technical analysis with Fundamental analysis is an approach used by cryptocurrency investors to establish the intrinsic value of a crypto asset.... to see whether certain events may interfere with the current trend.
As for technical analysis indicators, they prefer to use moving averages, the Relative Strength Index (RSI), the Fibonacci retracement tool, and Bollinger Bands. The latter is relevant, given that it exposes trends more clearly and helps traders anticipate trend reversals on time. In general, the price action, candlestick patterns, swing trading indicators, and support and resistance levels are vital for swing traders.
Swing Trading Examples
Multiple swing trading strategies involve various technical analysis tools and entry and exit conditions. Here are the three most popular trading types that you should know:
This type of trading relies on changes in price momentum. Reversal strategies aim to profit from the change in trends. For example, if Bitcoin has rallied for a while, and the uptrend shows signs of weakness, traders can enter a short position when the price breaks below key support levels.
A reversal can be bullish or bearish, depending on the current trend. As a rule, traders would combine several technical analysis indicators, but they will rely on oscillators like Stochastic or the RSI to assess a trend’s momentum.
Retracements, also called pullbacks, are short-term price moves against an overarching trend. They can be regarded as mini-reversal, but they tend to keep inside the general trend’s support and resistance levels. Retracement traders would look for the price to temporarily reverse within the general trend and capitalize on this short-term move. Trend reversals always begin as potential pullbacks, so traders must distinguish the two and realize whether the retracement turns into a relapse.
Breakout and Breakdown
Unlike reversal and retracement trading, the most popular swing trading types are trend-following strategies. In breakout trading, traders open long positions ideally at the start of an uptrend. They’re looking for the price to breakout, i.e., to break above a key resistance line.
On the other hand, when the price breaks below a support level, swing traders would open a short position, which we call a breakdown strategy. Usually, traders can check moving averages and oscillators.
Besides support and resistance lines, traders can rely on moving averages, especially exponential moving averages (EMA). For example, if the price crosses an EMA from bottom to top, that may point to an uptrend. For a more accurate signal, you can combine a short EMA with a long one, such as nine-period and 13- or 50-period. If the short EMA crosses the long EMA from bottom to top, the chances are that a robust uptrend is forming.
Here is an example of a bullish and bearish signal based on EMAs:
The Pros and Cons of Swing Trading
|Less stressful||Every loss can damage the balance|
|Generous profits and gains||Absorb overnight risks|
|Have more free time||Not aware of overnight fees|
Here the breakdown of the advantages and drawbacks of swing trading:
Advantages of Swing Trading
- Less stressful – swing traders don’t have to be always glued to the screen, as in the case of day traders that trade within a span of minutes or hours.
- Generous profits – the potential gains with swing trading are impressive if proper risk management is applied. Successful traders make between 10% and 50% per year by using this trading style.
- Have more spare time for self-enrichment – swing traders don’t have to regularly search for new entry points, as they can hold their positions for several days or weeks once they find the right trades. They can use the free time to read educational materials, make a better watchlist, or enjoy their hobbies.
Disadvantages of Swing Trading
- Every loss can damage the balance – for swing traders, every position matters, and a sudden reversal can lead to significant losses that would impact the overall balance.
- Overnight risk – unlike day traders, who close their position at the end of the day, swing traders would leave positions overnight and often on the weekends, leading to price gaps affecting the trader’s profitability.
- Overnight fees – many brokers charge fees for leaving positions open overnight, though it depends on the traded asset.
Swing Trading Vs. Day Trading: Differences
Swing trading and day trading indeed share some common aspects of technical analysis tools used during the trading process. However, the two differ when it comes to the approach when implementing these tools. In fact, the differences are quite obvious:
- Day traders focus on short-term price movement
- Swing trader spend lesser time to monitor their positions
- Day traders prefer smaller yet more frequent profits
Taking a closer look at day traders, they tend to benefit from the short-term price moves and are generally not interested in fundamentals driving the market. They can open multiple positions during a day and hope for aggregate progress. For day traders, any losing position is a routine since he expects the winning ones to offset losses.
On the other side, swing traders are interested in broader price moves and treat every position very seriously. It would be reasonable for any swing trader to consider fundamentals as well. In fact, some traders choose to rely exclusively on fundamentals and use technical tools only for monitoring positions.
Unlike day traders, swing traders can be more passive and monitor their positions at a less frequent rate. This is a key benefit that leaves much room to explore new opportunities.
A few winning trades are enough to secure generous returns for swing traders. However, the deposit size has to be larger to notice the difference. That’s exactly why traders who want to start with smaller deposits and seeking quick profits would prefer day trading.
It’s important to mention that this article does not intent to put day trading in a bad light. On the contrary, this style has its benefits and maybe even more lucrative when used correctly. Still, the risks are much higher when trading on short-term trends.
If you are new to trading and would like to figure out which one is best in your situation, you can trade on demo accounts that use virtual funds for testing purposes. Here are some of the crypto day trading strategies that are worth looking at. Ultimately, both day and swing trading styles can generate impressive returns, but it depends on your skills, focus, psychology, initial deposit, and personal preferences.
What Are the Risks of Swing Trading?
To succeed with swing trading, you should have a clear plan and a strategy to stick with no matter what. Obviously, it would be best to consider risk management techniques and never invest more than you can afford. Using stop losses would protect your trades overnight. Here are the main risks that swing traders face regularly:
High volatility – while swing traders have more time to assess the market situation than day traders, the volatility is still very high. This is also an advantage since you would be interested in trending markets, but high volatility comes with a risk. The level of volatility also depends on the asset you trade. For instance, cryptocurrencies are typically more volatile compared to traditional investments.
Overnight gaps and abrupt reversals – since swing traders leave their positions overnight, they may be taken by surprise by gaps or abrupt reversals that can affect your balance.
Is Swing Trading Legal?
It depends on the jurisdiction you reside in and the asset types you trade. However, there are no specific legal limitations aimed at swing trading.
In the U.S., day trading stocks require a minimum account balance of $25,000, but there is no such requirement for swing traders. Still, a swing trader would need $10,000 or more to generate a sizable profit. When it comes to forex pairs and cryptocurrencies, anything higher than $500 should work for beginners. Again, these are not legal requirements.
In the case of cryptocurrencies, you should make sure that trading them is legal in your country. Some jurisdictions, including Bolivia, Algeria, or Macedonia, have banned Bitcoin and altcoins.
Where to Start Swing Trading?
You can start swing trading with reputable brokers that provide online trading platforms with technical analysis tools, customer support, and preferably educational materials.
When choosing a broker, check whether it is registered with local regulators and has a clean history.
For U.S. stocks, TD Ameritrade, Fidelity, and E*Trade are some of the most reputable brokers. Forex traders have way more options, including— CMC Markets, IC Markets, Oanda, Saxo Bank, Plus500, and IG. When it comes to cryptocurrency and crypto derivatives, swing traders prefers Bybit as it provides 100x leverage.
Some platforms also provide several types of assets. For example, Robinhood allows traders to get exposure to stocks as well as to cryptocurrencies.
Before making your first trades, it would be better to try your demo account strategies with virtual money. Most brokers offer such accounts.
Who Is Suitable for Swing Trading?
As mentioned above, swing trading might be ideal for beginners, as it is one of the most common trading styles.
You might be interested in becoming a swing trader if you meet some or most of the following conditions:
- Willing and agree to withhold your positions for several days and don’t bother about that.
- If you are patient as a person. Legendary stock trader Warren Buffett once said that “the stock market is a device for transferring money from the impatient to the patient.” The same logic may apply to cryptocurrency trading, and you can rest sure about the truth of this quote even if Buffett is not a Bitcoin believer.
- Remain calm even when the price goes against you as soon as they don’t break key resistance or support levels.
- You agree with using large stop losses.
- Don’t mind handling fewer traders but being more responsible about each of them.
- Agrees to keep an eye on fundamentals to make sure no major event can impact the market.
On the flip side, you might not be a swing trader and instead choose day trading or buy and hold trading if you are:
- Not patient and always want to know whether the price moves in line with your positions.
- Like fast-paced trading.
- Gets nervous and worried whenever the price goes against you.
- Don’t have enough time to read and learn new crypto strategies regularly and check your trading positions.
The Final Note
To recap, swing trading is one of the most popular and lucrative trading styles, and it has been widely used in stock, forex, and cryptocurrency trading. Swing traders would keep their positions open for a few days or weeks, depending on the market conditions and their profile.
Is swing trading the ideal style for you? It’s possible. To find this out, you can try it on a demo account. Alternatively, you can invest small amounts in experimenting with various approaches.
Is Swing Trading Better Than Day Trading?
It depends on your trader profile and preferences. Still, swing trading might be the best approach for beginners, given that day-trading requires too much effort and involvement. At the same time, buy and hold strategies require much patience, dedication, and larger deposits.
Can Anyone Live off With Swing Trading?
Sure, many traders live off with this trading style. However, they have years of experience and are dedicated to their trading activity. Don’t expect to perfect a trade overnight. Leaving your current job to pursue your swing trading plans is a bad idea. In the beginning, this should be a part-time activity. Many professional traders would combine several trading styles to boost profitability.
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