Swing Trading is a style or way of operating in the financial markets, over the short or medium term, whether in Forex, Cryptocurrencies, Indices, or other markets. This method aims to take advantage of the movements or changes that the price has over time to detect opportunities between these movements, over a time period of days or even weeks. Trades are based on two types of swing: swing lows and swing highs.
This way of operating has its advantages and disadvantages. Let’s see what they are:
- Thanks to the time frame in which swing trading works, this style requires less control and analysis. You don’t need to constantly monitor your data. Therefore, the trader also stops “obsessing over trading” and prices. This can be less stressful. Not only that, it allows you to take advantage of the simplest indicators to identify patterns, direction, and trend changes.
- You can take advantage of the longer trends (weekly, monthly, yearly). This allows you to better take a step back analyze and study your data. You can take more time to make calm decisions.
- It allows diversifying assets.
- The costs and commissions are lower, so they have less impact and the profits per operation are higher.
- Financial news doesn’t have as much impact as other types of trading.
- It requires more mental control, calmness, and patience to operate.
- It requires having a higher initial capital (more requirements for guarantees and account margins), therefore, it could imply a greater loss.
- As the market is unpredictable, swing trading is highly susceptible to market whipsaws and could behave in particularly unexpected ways.
- There are openings gaps. If the gap is against a position, it can reverse the trend and disrupt your strategy, losing capital.
- There is a greater probability of hitting the stop loss (and therefore causing loss of funds).
For the swing trader, volatility is the key, since the greater the number of price movements in the short-term market, the greater the opportunities to open a swing trade. Swing Traders can can combine the tools of fundamental analysis with technical analysis to help decision making.
As the market move, going down or up, different strategies can be applied. The choice of these will depend on each trader. It’s about studying them, understanding them, and seeing which one you can work best with. And when the time comes, you can recognize the price action and thus decide which strategy is most appropriate.
The most widely used strategies are Trend Trading, based on the use of technical indicators to identify the direction of market momentum. In an uptrend, you try to buy or “go long” from these lows and close the trade at the swing highs. And, in a downtrend, you try to sell, or “go short,” from the highs to the lows.
Another strategy is called Trading Breakout, which occurs when the price “breaks out” from a certain range of movements in which it has been stable in for a certain period of time. This takes advantage of the volatility that occurs at that time when the price breaks outside of its normal levels.
The breakout also refers to the price breakout of specific price level indicators such as pivot points, supports, and resistances, Fibonacci levels etc etc….
If you are a beginner swing trader, we recommend starting with a demo account(you can read our previous post about simulators and demo accounts here and look for a broker that is regulated, safe and trustworthy. Once you have practiced with virtual money, and you feel safe, you will need a higher initial capital (than in other Trading strategies). However, start trading with small diversified amounts, without risking all your capital in a single operation. And, above all, be very clear about your entry/exit and risk limits, and stick to them (although it can be tempting not to).
A last thing to remember is that the current instability in the markets as a result of the pandemic is causing the trend in prices to not be so predictable. Be calm and patient – especially so af the moment. A quick decision could lead you to over-trade or cloud your decisions; you could see opportunities where there are none.