If you’re wondering how to swing trade, but you are still deciding on your primary market strategy, ask yourself this:
Do you prefer to:
- chase quick gains with higher risks?
- opt for the long game with lower risk?
- find a balance somewhere in between?
If you resonate with the last answer, you’re likely a swing trader at heart. Let’s discover how to swing trade by exploring the strengths, weaknesses, analysis methods, and other crucial insights for this strategy.
What’s Swing Trading?
Swing trading involves seizing short- to medium-term gains from price movements within a trend. Traders who follow the swing strategy work in the corridor between a few days to a few weeks, which allows them to work with a bigger picture yet get profits relatively fast with less time commitment. They buy an asset at a low level and sell it at the next high level to take full advantage of price fluctuations. They may also use short selling in a falling market when they anticipate a possible fall in the price of a particular asset.
Swing Trading, Day Trading, or Long-Term Investing?
To understand swing trading, let’s compare it to other major strategies: day trading and long-term investing.
Day traders are like sprinters — they make dozens of quick trades in a single day. To be able to reap their profits before the markets go to sleep, they often use scalping to be as speedy as possible. They also tend to use an array of technical indicators and sophisticated charting systems.
Investors, on the other hand, are marathon runners. They focus on the big picture, use a lot of fundamental analysis and keep their trades open for months. They risk less, but their profits come slow.
Swing traders are like surfers catching the perfect wave — they’re in, they’re out, and they’ve got time to chill.
What Indicators and Tools Do Swing Traders Use?
Swing trading strategies employ technical indicators, chart patterns, or a combination of both. The advantage lies in swing trading timeframes (most commonly 1 hour, 4 hours, 1 day, and 2 days), which allow these indicators and patterns to unfold at a leisurely pace — unlike scalping, where things happen too quickly, often resulting in false signals.
Some widely used indicators for swing trading include:
- Moving averages help identify the trend direction.
- Oscillators like the Relative Strength Index (RSI) or Stochastic Oscillator signal overbought or oversold conditions, providing insight into potential trend reversals.
For further insights on how to swing trade with technical indicators, check out our other article on what are the best swing trading indicators.
Chart patterns such as flags, triangles, and head and shoulders patterns are also common tools in swing trading. They can be used in swing trading to:
- Identify trends: for example, patterns such as flags, pennants, and ascending/descending triangles suggest that the current trend will continue once the pattern completes.
- Spot reversals: patterns like head and shoulders, double tops and bottoms, and inverted head and shoulders signal a potential change in the direction of the price movement.
- Time trades: for instance, a swing trader might enter a long position after a price breaks above the resistance level of a bullish chart pattern (like a cup and handle or a descending triangle) and might consider selling when the price breaks below a support in a bearish pattern.
- Aid in risk management: by identifying stop-loss levels at key pattern boundaries (such as below the neckline of a head and shoulders pattern), traders can manage potential losses if the market moves against their position.
- Combine with technical indicators like moving averages, Relative Strength Index (RSI), MACD, etc., to confirm the pattern’s strength and validity. For example, a breakout from a pattern with high volume and a rising RSI can confirm a strong upward move.
Pros and Cons of Swing Trading
Before you start implementing swing trading strategies, consider all factors and make sure it’s right for you.
Pros:
- You can make some serious profits without being glued to your screen all day. Some swing traders only trade for a few hours a week, so if you’re looking for a side gig on top of your main one, this is the option for you.
- Swing trading allows traders to capitalize on both upward and downward price movements, providing opportunities in both bull and bear markets.
Cons:
- Swap fees. When you hold your positions to the next trading day, you may incur extra fees on the broker’s side. Make sure to factor in these expenses when planning your strategy.
- Weekend market risks. Anything can happen over the weekend, and you’ll have no control over it.
Best Instruments for Swing Trading
Swing trading is well-suited to a wide range of trading instruments. You can trade stocks, currencies, commodities, crypto — you name it. As long as it’s got price movements, you can swing trade it. Perhaps Forex may exhibit slightly less efficiency, as currencies are typically less volatile. Just stick to what you know and what’s trending.
Swing Trading Example
To illustrate the idea, we need to consider swing trading examples. Examining the Bitcoin chart from March to April 2024 reveals a notable shift from a bullish trend, which initially surged in anticipation of the BTC halving event, to a bearish trend reversal.
Zooming out to observe longer time frames unveils two distinct head and shoulders patterns, signaling a loss of momentum and hinting a bearish shift.
- These patterns have two smaller peaks on each side of a bigger one, making them look like heads between two shoulders.
- We draw a line connecting the lowest points of the two shoulders, called the neckline.
- When the price dropped below this neckline, it confirmed the pattern and suggested it’s a good time to sell.
Thanks to the swing trading strategy, we identified a temporary trend reversal within the longer bullish trend in Bitcoin, which allowed us to execute at least two successful trades. Such signals might not be visible on shorter timeframes, and on longer ones, these brief reversals would be just missed out.
Conclusion
Swing trading will be a go-to strategy for those with limited trading hours and a medium risk tolerance. Plus, you get to ride both the ups and downs of the market, making it a versatile strategy for navigating various market conditions. It’s like catching waves in the trading world — thrilling, dynamic, and with the right skills and tools, you can make handsome profits on medium-term timeframes.
