Swing trading is a trading strategy which tries to make money from medium-term price movements. Markets that are trending either to the upside or to the downside offer the best environment for swing trading. For example, there are a lot of swinging opportunities on a strong uptrend, as the trend will experience a number of pullbacks on the way up.
On the contrary, it becomes difficult to swing trade when markets go sideways without having a definitive trend since there are no large price movements to capture.
What is Swing Trading?
Swing trading is a flexible trading strategy, which acts as a balance between short-term trading strategies, such as day trading and scalp trading, and long-term strategies like trend trading. Due to that, swing trading is regarded as the activity of trading medium-term price movements that usually last more than a day.
Since major changes in any price direction likely take at least several days to generate enough movement, trade positions are held significantly longer compared to day trading and scalp trading. In that sense, swing trading does not involve a definitive time horizon to hold positions; swing traders need to wait in their positions until the price movement they expect happens, like fishing in a lake.
A day trader holds a cryptocurrency anywhere from a few minutes to hours but never more than a day, while a trend trader holds the cryptocurrency for the longer-term, which lasts for at least a few months.
How Do Swing Traders Make Money?
Swing traders are best positioned when a cryptocurrency is in a strong impulsive move, either to the upside or to the downside. In that circumstance, a swing trader can, for example, sell his cryptocurrency after a very large and fast price hike and try to buy it back after the price pulls back for a correction.
Downtrends can also serve as opportunities for swing traders. A swing trader can short-sell a cryptocurrency at a major, high time-frame resistance level on a downtrend, and generate profits as the price falls down. Or, they can buy a cryptocurrency when the price crashes to a support level and sell it back when the price hits a major resistance above.
To build a swing trading methodology, you can make use of daily support and resistance levels, Fibonacci extensions and retracements, and momentum indicators. For example, you can benefit from daily moving average support and resistance lines, or you can buy and sell at the oversold and overbought levels of momentum indicators on daily timeframes. Some of these useful momentum indicators are RSI, Stochastic RSI, MACD.
Pros and Cons of Swing Trading
Pros
- Catch more profits by holding longer – By holding positions longer in swing trading, you will not miss out on the profit opportunities that day and scalp traders have to miss. This is important because a large number of trades require more than a single hour or a day to turn a profit and because of the larger time frames involved (from days to weeks as opposed to minutes to hours), swing traders do not need to be glued to their computer screens all day long.
- Locate major support and resistance levels – Day trading often falls short of time to catch any major, higher time-frame price support and resistance levels. If you adopt swing trading instead, you will be able to buy at those major support levels and sell at the major resistance levels (or the exact opposite if you short-sell).
- The most efficient use of momentum indicators – Momentum indicators are known to work the best in swing trading. Day trading again falls short of time to catch any oversold or overbought indicator levels throughout a trading day. On the other hand, in trend trading, sustained uptrends or downtrends can last for so long that momentum indicators may just get over exhausted at their overbought or oversold levels. Due to that, these indicators are generally able to give the most accurate signals during when prices go back and forth, the best setting for swing traders.
Cons
- Miss the largest profits from trend trading – Trend trading has historically generated the greatest profits for people who were patient enough to hold their positions throughout a major, sustained market trend that lasted for months at least. When you focus on medium-term (read: daily) price movements, support and resistance levels, and momentum indicators for swing trading, you will likely miss the largest impulse moves that end up giving the heftiest profits.
- Higher exposure compared to day and scalp trading – Since swing traders hold their positions longer than day and scalp traders, they also run the risk of larger losses. So you make fewer trades in swing trading, but you may incur higher losses when things go wrong because you have to hold onto your trade positions longer.
Some Additional Thoughts
In swing trading, you could allocate a comparably larger portion of your account per trade, compared to the 1-2% per trade suggested in day trading, as you would be generating a lower number of trades by holding your positions longer. However, you should at the same time get the habit of using stop-losses and staying away from illiquid tokens while swing trading.
You should also be realistic about your profitability rate and note that the most successful swing traders win up to 70% of their trades and they usually profit more in their winning trades than they lose in their losing trades, which grows their capital as time goes on.
As is the case with any trading strategy, you should refrain from opening and closing positions that are triggered by your emotions and impulses. To be able to do that, you need to limit your position size on each trade to a suitable percentage of your account, so that it does not take a toll on your emotions when some unexpected, large price movement happens.
Finally, you should always stick to the principles of your trading strategy. You may start trading by practicing a number of different strategies – day, scalp, or swing trading to see which one matches your individual personality, but once you make your decision, you need to adhere to its principles patiently and diligently.
In trading, the worst losses are known to be made by a lack of patience and self-discipline, and by consequently trying out different alternatives that derail you from your original trading strategy.
For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.
