Swing trading is a style of trading that aims to capture prices changes over the short to medium term.
In contrast to day trading which will see multiple trades during the day, swing traders will trade less frequently and keep positions “overnight” meaning they are managing risk for longer periods when compared to day traders.
Before trading with real money, swing traders should spend time developing a swing trading strategy that dictates which instruments will be swing traded, eg. cryptos, stocks or commodities, or a combination of instruments when trades should be opened and closed, and the size of the position.
Trading strategies can take months to develop and can be tweaked over hundreds of trades over the years. Profitable swing trading is largely down to consistently following the same strategy.
It’s largely irrelevant whether Donchian Channels, chart patterns, candlesticks, or other indicators are used – what matters is that the rules have been backtested and are followed in live trading, every single trade.
Of course, traders rely on momentum for profits but above all else, they must have the self-discipline to follow risk-management no matter how great the urge to seek quick profits may be.
Discipline and gaining experience is required to be a professional swing trader.
However, there are compelling reasons to assume that swing trading may be the ideal alternative for retail traders – that is, people like you and me – and especially for rookies to the markets. That is why we are providing the Swing Trading 101 program, it takes traders from scratch providing a complete foundation for swing trading in 2022.
What Exactly is Swing Trading?
Swing trading is a trading strategy that targets strong price swings that can range from two or three days to several weeks. Substantial sums of capital from financial institutions can sometimes fuel massive price patterns that endure for several weeks.
Swing trading efficiency is dependent on accurately identifying the entry point at which a price move is about to initiate. Both fundamental and technical analysis is essential for swing traders.
However, while the concept of a swing may imply a single linear move in price, swing trading does not always mean looking for trend reversals.
It’s just as vital, if not more so, to seek for swing points within established trends, which usually arise when price temporarily retraces.
Swing traders typically make trading choices based on the daily charts, while the four-hour and one-hour charts can help provide more precise inputs. Weekly charts can also assist a swing trader in discovering critical support and resistance levels.
Let’s understand the advantages and disadvantages of swing trading.
The Advantages of Swing Trading
- Swing trading involves less control and analysis due to the time in which it operates. You don’t have to keep an eye on your data all of the time. As a result, the trader no longer “obsesses overtrading” prices. This may be less stressful. Not only that, but it also allows you to use the simplest indicators to spot patterns, trends, and changes in movement.
- You can profit from longer-term trends like weekly, monthly, or yearly. Swing Trading enables you to take a step back and analyze and research your data more thoroughly. You have more time to think things through before making a decision.
- It enables asset diversification.
- Costs and commissions are lower, resulting in a minor impact and more considerable earnings per operation.
- The financial news has a lower impact than other forms of trading.
The Disadvantages of Swing Trading
- Using a swing trading strategy takes more mental control, composure, and patience.
- It demands a more extensive initial capital additional needs for guarantees and account margins, suggesting a significant loss.
- Swing trading is very prone to market whipsaws and may act in astonishing ways due to the market’s unpredictability.
- There are gaps. If the gap is against a position, it has the potential to reverse the trend and upset your strategy, resulting in financial loss.
- There is a higher chance of hitting the stop-loss, causing financial loss.
Who Benefits from Swing Trading?
Swing trading is excellent for traders who are short on time in many ways. The traders don’t have the time to sit in front of their monitors for extended periods each day.
Taking time each evening analyzing the daily charts is a terrific way to proceed for part-time traders who also have regular work; or rookies who have yet to decide whether trading is for them.
This trading approach enables traders to pay close attention to market-moving global economic and political news.
Swing trading strategies can be used for any currency pair and many other financial assets such as stocks and futures.
However, it’s a strategy that works best with higher volatility and significant movements. As a result, the major forex pairs listed below have proven to be particularly good for swing trading:
- EUR/USD, USD/CAD, NZD/USD, and AUD/USD are US Dollar pairs.
- EUR/GBP, EUR/CAD, AUD/EUR, and EUR/JPY are Euro pairs.
- GBP/CAD, GBP/AUD, and GBP/CHF are GB Pound pairs.
- JPY/CAD, JPY/GBP, and USD/JPY are examples of Japanese Yen pairs.
Understanding Bull Markets and Bear Markets
It would help if you comprehended that being a trader entails understanding the market concept. The financial market is always in a cycle, either in a bull market or in a bear market.
Bull and bear markets are both parts of the economic cycle; hence they shouldn’t be considered separately. The bull market is in full swing during the economy’s expansion, and then it shifts into a bear market once it hits its peak.
Bull and bear markets can relate to any investment, asset, or commodity; therefore, there could be a bull market for cryptocurrencies but a bear market for equities at any same time.
It’s also plausible for there to be neither a bear nor a bull market – the market might be in flux at any time.
Let me give you a few real-life examples to help you grasp the idea.
You wouldn’t have to dig too far back in history to get good bull and bear market examples.
We were in the midst of the longest bull market in history, which ran from March 2009 to March 2020, before the COVID-19 outbreak. The S&P 500 increased by more than 400% during this time, and anyone who had the foresight to invest in 2009 could currently be very wealthy.
Admittedly depending on who you ask, this suggests a bear market is on the way at some time, albeit no one knows when it will happen.
Between October 1990 and March 2000, the prior record for the longest bull market was set.
The Great Depression is the most precise illustration of declines. The Dow Jones Index dropped by roughly 80% between 1928 and 1932. It also dropped for four years in a row, making it the longest-running bear market in history.
These are both instances of extended bull and bear markets, but the same trends may also be seen in micro. Due to the COVID-19 outbreak, the prolonged bull market we’d been enjoying abruptly ended in March 2020 – I mean abruptly.
The plunge from a high to an all-time low on March 23, 2020, happened in just 33 days, resulting in an 80% drop. On record, this is the fastest peak to trough change.
It recovered quickly, reaching its prior high in just under five months.
This swift recovery was likely due to investor confidence that governments were taking the appropriate precautions to safeguard their economies from the pandemic’s effects and that the market would recover quickly as a result.
So you want to analyze the market, but first, you need to figure out how much risk you’re willing to take. You don’t want to put your family and yourself in a financial bind.
Trying to foresee and benefit from price swings is probably not for you if you can’t stand watching your investments lose its value for a while. You should also evaluate your investment time horizon – are you looking for rapid returns in the short term, or are you more interested in optimizing your profits a few decades down the road?
Being a swing trader, you can learn to pick assets that are anticipated to rise in value early in a bull market and sell them just as they do. Yes, it’s easier said than done, but it may be highly lucrative.
However, you may decide to play it safe by investing in stocks you believe have high long-term potential while their prices are low during a bear market, expecting significant gains later.
Yes, suffering through a bear market can be difficult, but it often results in the best gains, perhaps even the profit of a lifetime.
Careful of Dead Cat Bounces.
Is it true that the financial market has only two cycles? NO! Certainly not! The Financial Market has just more than two cycles. So what are the other cycles involved in the market?
Let me clarify that the bull and bear markets are the most well-known and financially and economically life-changing trends, but a few contribute to them.
You might have come across the phrase, “dead cat bounce”. It is a particular stock market phenomenon.
The expression is derived from the belief that even dead cats would bounce if they fell from a high enough position. When asset values reach high levels and then fall, they may momentarily recover — even if the asset is ultimately “dead” and will plunge right back down.
So, What is Dead Cat Bounce?
A dead cat bounce is a momentary, short-term recovery of asset prices from a prolonged downturn or bear market, followed by the downtrend continuing. Downtrends are frequently broken by brief episodes of recovery—or minor rallies—during which prices temporarily surge.
How can you Hedge Yourself?
Going short may appear to be an appealing option when stock prices fall substantially and then begin to rise again.
At this stage, it is critical to ensure that you do not misinterpret the rebound as a reversal, placing more cash at risk than is intended.
Waiting for the price to recover to its previous low is a “test” you can try. If a few days have gone by and the price has maintained well above the previous low, it is a sign that a genuine recovery has begun.
Expect an imperfect “W-shaped” recovery in which the price continuously lowers and then recovers again.
When this occurs, Experts recommend placing a stop-loss slightly below the first V to allow for an exit if the price drops.
Swing trading strategy can be applied to any asset class, like stocks, and within a few asset classes, it’s possible to specialize, such as with growth stocks.
After learning this information, your question would be: What’s the difference between Swing Trading and Day Trading?
Let’s understand the difference between Swing Trading and Day Trading.
Swing Trading vs Day Trading
Swing traders trade for several days, weeks, or even months at a time. On the other contrary, day traders open and close multiple positions in a single day.
Swing trading is a fast-paced trading strategy, but it entails trading over days, weeks, or months. Swing trading, as a result, accumulates gains and losses more slowly than day trading. On the other extreme, specific swing trades might result in significant wins or losses very quickly.
Traders who wish to compound their gains quickly may be drawn to day trading. The activity of traders buying and selling assets on the same day, frequently many times per day, is called “day trading.”
Let’s now shift our focus to a few swing trading strategies.
Swing Trading Strategies
To book profits, swing traders frequently employ a variety of indicators and trends. Here are a couple of examples to help you understand.
EMA Crossover Trading Strategies
The Exponential Moving Averages (EMA) crossover strategy is a popular swing trading strategy. This strategy outpaces a simple moving average to provide clear trend signals and entry and exit points. Swing traders can utilize the EMA crossover to time entry and exit points.
The EMA crossover is the most simplistic strategy, as it only takes two EMA lines.
Swing traders frequently use the 20 and 50 periods EMAs on their charts. That is, the chart will display two lines, one reflecting the average closing prices of the 20 candlesticks and the other indicating the average closing prices of the 20 candlesticks. The 50 EMA line is the same.
The EMA is more price-sensitive when the period is shorter. Backtesting by the swing trader should provide the best moments to trade. However, swing traders should be cautious not to “over-optimize” their backtesting.
However, as an example, consider placing the 25 and 50 EMAs on the daily chart of the Australian Dollar futures contract.
Remember that while calculating an average price, EMAs prioritize more recent periods. The larger the proportional weighting, the fewer periods employed.
We can obtain a decent picture of how fast the price is changing and when it is likely to change direction by utilizing two lines with distinct periods.
Furthermore, because swing traders widely utilize the 25 and 50 EMAs, they are likely to be adequate support and resistance indicators.
In this example, the crossover of the longer-term EMA, the 50, by the shorter-term EMA, in this case, the 25, will provide a clear visual indicator of a potential swing point. An upward cross indicates a bullish indicator, whereas a descending cross indicates a negative signal.
Nonetheless, as with all of these trading techniques, we will not be relying on a single indicator.
Swing traders can utilize the Fibonacci retracements pattern to spot reversals on a stock chart. The Fibonacci retracement approach is based on the Fibonacci number sequence, in which each successive number is the sum of the two preceding ones.
As a result, the series begins with 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, and so on.
The Fibonacci sequence is be found in nature very often. It’s also found in a lot of computer algorithms. Fortunately, we as traders do not need to comprehend the mathematics that makes it valuable.
We need to know that specific Fibonacci-based percentage retracements are helpful indicators of future support and resistance levels.
0% marks the swing high or low before any retreat or retracement occurred. The 100% level denotes a complete retracement to the preceding swing, high or low.
We are mainly interested in the intermediate values, which are 23.6%, 38.2%, 61.8%, and 78.6%. Although not precisely derived from Fibonacci, a 50% level is often employed in swing trading.
It’s vital to realize that these levels aren’t magical in and of themselves. It’s just that their previous experiences have led them to pervasive reversal levels.
In practice, we will look for swing highs or lows on the daily chart and then use our Fibonacci drawing tool to insert the lines that will automatically generate at the retracement percentages stated above.
We will then wait for the price to reach these levels, but as with other methods, we will use candlestick formations to corroborate what our indicators are telling us about the price activity.
Single candles, such as hammers, inverted hammers, or dojis, may all indicate a reversal is imminent. However, these patterns might be a trap for the unwary. As a result, we’ll be looking for confirmation from a subsequent purchase or sell candle—the first to close above or below the appropriate Fibonacci line. One advantage of these trading techniques is that they allow for higher stop-losses than intraday trades.
Momentum is the rate at which a financial instrument’s price changes. We’re not interested in price direction; we’re concerned with the rate of change.
High numbers imply that the price is rapidly increasing or declining.
- Momentum can act as a price follower: The swing trader should observe momentum validation with a new high or low when the price rises or lowers in value.
- Momentum can function as a Confirmation Indicator: The swing trader expects to see price changes mirrored by momentum as prices rise or fall. In this sense, momentum confirms what you see in price on the price chart.
Rising or falling momentum can be a checkbox before deciding to trade. Momentum can confirm a buy or sell signal generated by your trading system.
Momentum trading is based on the notion that what has happened in the past will continue to occur in the future. Whether the price is rising or falling, the presumption is that it will continue to do so.
Traders can use a Heiken-Ashi trading strategy to spot the start of solid trends and alter their portfolios accordingly, adding or increasing long positions when bullish trends emerge and closing positions when bearish trends emerge.
When candlesticks on the lower end of the chart have no wicks or shadows, it is a strong indicator of the start of a bullish trend, which traders may employ to maximize profits rather than selling stocks too soon and losing money.
A negative trend has begun when higher-end candlesticks have no wicks, pushing traders to sell assets to avoid losses. The presence of multiple candles without wicks in a row indicates a stronger tendency in the direction shown.
Candles with shorter bodies and longer wicks indicate that the trend has halted. The trend may then reverse direction or continue in the same direction. It takes a lot of expertise and experience to figure out which is more likely to happen.
When employing the Donchian Channel, a swing trader might use various strategies.
- Always in: The ‘always in’ strategy implies that the trader is constantly holding a position, whether long or short.
- Protective Stop: The swing trader’s second strategy is to deploy a protective stop loss. A protective stop-loss order will be entered simultaneously as the initial buy or sell trade. The broker will only implement the stop-loss order if the instrument’s price hits the trader’s trigger level. The stop-loss will be applied only if the price hits the trigger level. If this occurs, the stop-loss order is converted into a market order to purchase or sell.
How to Manage Risk When Swing Trading?
As a swing trader, you must grasp the need for risk management to avoid financial loss.
Let me share a few risk management ideas to help you avoid financial ruin.
As they say, continuously diversify your trading positions and put your eggs in different baskets. If there is an adverse movement in the market, diversification can help you recover from the financial loss.
Learn to set up a stop loss. A stop-loss, also known as a stop order, is a trade entry command given to a broker. The order will be for a specific price to buy or sell a stake.
Let’s pretend you’re bullish and want to buy stock or whichever instrument you’re swing trading. You could use a sell stop order to protect it. You’ll place a purchase stop order if you’re going short.
In both circumstances, the critical thing to remember is that a market order will automatically execute when the price reaches the goal. However, it’s worth noting that stop-loss orders are rarely performed at the exact target provided in the actual world.
In practice, orders will be filled at the best available price, which may be higher or lower than our target price, depending on market conditions.
Or you can also set up a stop-limit order. On the other hand, a stop-limit order signifies that a limit order is triggered when the price reaches the target. After that, your order will be fulfilled only at our chosen pricing or greater.
Here are a two book choices if you want to learn more about swing trading.
Currency Trading for Dummies, 3rd Edition
Kathleen Brooks and Brian Dolan authored this particular book. It was published in January 2015. This book is ideal for beginners because it covers practically all of the fundamentals you’ll need to get started.
It clarifies technical jargon in an easy-to-understand format and presents vital topics clearly, straightforwardly.
Currency Trading For Dummies (3rd Edition) provides an overview of the forex markets and the significant economic variables that influence them.
It also includes technical analysis, fundamental analysis, trading strategy development, and trade management. The book concludes with successful traders’ routines, risk management principles, and extra resources.
Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude
This book was penned by Mark Douglas and was published in April 2000. Trading In The Zone is a wonderful book to read if you’re new to trading and find yourself making the same mistakes again and over.
The need of developing consistency and tenacity is stressed in the text. The book might also assist the trader in changing his thoughts and psychological makeup. Both are essential aspects of emotional control.
Master Your Emotions: Swing Trading Psychology
For traders, learning how to swing trade can be a lifetime pursuit. Learning chart patterns and technical analysis can take time as does mastering effective entry and exit techniques.
However, these areas are simply modules that can be taught and mastered by any twelfth grader. the most simple aspect of is If I asked you to think of ways to be more successful as an investor, you’d probably suggest studying the markets in greater depth or gaining more experience. Maybe looking for a mentor or trying out a new strategy. But what about increasing your emotional intelligence?
As anyone who’s ever made a rash move in the heat of the moment and looked back in horror will know, our psychology can have a huge impact on how we make decisions under pressure.
This is especially true of trading. Let’s take a deep dive into emotional intelligence and how mastery can increase our profitability when trading.
What is Emotional Intelligence?
Emotional intelligence (EQ) is a term thrown around a lot, but I’m going to use a tighter definition. In everyday life, we say “emotional intelligence” to describe our ability to read other people and respond appropriately.
We think of it as a soft skill for job interviews and a tool to keep everyone happy in group situations. Actually, it’s a lot more complex than that.
There are differing theories about EQ, especially regarding how we can measure and develop it. But most researchers agree EQ is about more than just handling social situations — it also encompasses our ability to understand and control our own emotions. What could be more vital to investing?
Emotional Intelligence for Swing Traders (and Investors)
One of the most prominent psychologists to study emotional intelligence, Peter Salovey, explored the link between emotional intelligence and investor behavior. His research for the CFA Institute with a behavioral economist and Vanguard principal gave a different interpretation to what most people think of as EQ.
The paper defines an emotional intelligence as someone’s effectiveness at recognizing and regulating emotions while solving problems. It’s something we can easily apply to trading.
An investor must solve a problem every time they make a decision about buying, selling, or holding their assets.
Those with low emotional intelligence follow their impulses without even realizing it, whereas high-EQ individuals are able to take a step back.
Investors with high emotional intelligence are hyper-aware of their instincts and don’t trust them immediately. They might still panic if a stock they bought plummets in value — but instead of giving in to their inclination to sell, they calm themselves down and assess the situation rationally.
Don’t believe me? The CFA Institute research also found a strong relationship between emotional intelligence and financial decisions among Vanguard investors. It affected both the frequency of transactions and the type of investments chosen.
Why Swing Trader and Investors Alike Need to Focus on Emotional Intelligence
To understand why emotional intelligence is important, we only have to look at why so many who are drawn to trading or investing end up losing money. In fact, it’s fair to say that majority of those who come to the markets lose money.
Trust me — between 69% and 79% of retail clients aren’t profitable, according to data from spread betting companies in the UK. Many of these people are smart and may be quite successful in their careers.
They come to the market thinking they can replicate this success with their trading and investing. Perhaps this could be the behavior that can foster business success often doesn’t fly in the markets. We need to adopt a different approach. Investing is easy When it comes down to it, investing isn’t particularly difficult.
That might sound strange coming from someone who has spent thousands of hours learning how to invest and reading books on the topic, but bear with me here.
Sure, there’s no end of concepts to get your head around and new strategies to learn. But ultimately, all the information you need is already out there. Learning enough about investment to get started only requires some basic research.
There are many books out there, including those written by Warren Buffet, the most successful investor of all time. Why can’t all investors adopt Buffet’s strategies and be just as successful? I think you know my answer.
Let’s take something as simple as investing in a diversified index fund as an example. All you need to do is figure out which fund to use, find a broker, and make monthly contributions. No fancy trading strategies — you can just leave your money in and let it grow.
Yet some people still panic when they see their investments’ value decline during a market crash. In fact, research shows people who check their investments and trade the most earn less money from investing than passive investors. Clearly, making profits from investing is about more than grasping the basic principles.
What’s the difference between the average trader who understands the theory but struggles to implement it and a successful investor like Warren Buffet?
There may be a few factors, but emotional intelligence is sure to play a role. Money is tied closely to our psychology We all have a different money psychology, meaning we view financial decisions through a lens unique to our personality and experiences.
Researchers from Dongbei University studied how the Big Five personality traits (openness, neuroticism, extraversion, conscientiousness, agreeableness) affect how people trade after receiving financial advice.
They found that those with open-minded or neurotic personalities are the most vulnerable to trading excessively. The best thing we can do for ourselves is to develop awareness.
Investors like Buffet have formed a specific style and process for investing that matches their temperament. This is no easy task — it takes years of observing your behavior and figuring out how to play to your strengths — but well worth the effort. No two investors are the same. You won’t get the results you want by copying somebody else’s strategy — you could both have very different money pscyhologies.
Instead, your strategy should depend on your personality, and your personality should fit your strategy. So, don’t feel bad if Warren Buffet’s lessons didn’t quite sink in for you.
It’s tricky to figure out what your money psychology is. However, I’ll outline my suggestions for developing your strategy later.
Watch your beliefs It’s not just your personality that you need to be careful of; it’s also your beliefs and self-perceived status. Do you have a strong identity as a master trader or pro-investor?
This is probably bad news for your profitability, as you might want to make risky trades to prove your prowess. Be sure to keep your ego in check.
This can also link to the concept of fixed versus growth mindsets. If you have a fixed mindset, you believe you’re either inherently good or bad at investing.
In contrast, growth mindset investors realize anybody can learn how to invest effectively. Those with fixed mindsets may struggle to take a loss, because they think it reflects on their ability as an investor — or even their overall intelligence.
They’ll do anything to prevent that loss, even if it’s incredibly risky. How can we fix this?
By working on our emotional intelligence. How to improve your emotional intelligence Improving your emotional intelligence is all about observing your reactions and feelings when you trade.
How does it make you feel when you lose money? What about when you make money? Do you have a strong bias toward action or struggle to step away?
Taking note of these tendencies is key to developing emotional intelligence. It’s difficult to do when trading alone, but using simulated trades or joining a group can help.
Make use of simulated trades We should all embrace our mistakes when investing — it’s part of improving. But it’s better to make mistakes when trading $10 and not $10,000. Or, even better, when trading nothing at all.
Most popular brokers and trading apps have free simulations you can try so you can get to grips with trading without risking losing your money. For instance, Trading 212 lets anyone open a free practice account to simulate trading forex, gold, CFDs, and more.
This is the perfect way to unpack your emotional intelligence and investor psychology without taking any risks.
Join a group If you’re struggling to hold yourself accountable, you might find it useful to join a group. Ed Seykota advocates joining a Trading Tribe. His book by the same name suggests that it’s best to work with your peers to master our emotions and improve at trading.
Seykora points out that, left alone, it’s hard for us accept our shortcomings and be honest with ourselves — we need someone to call us out!
Although the focus on the ego and subconscious might seem too new age for the classic trading crowd, don’t discredit it. Joining a “tribe” is the perfect way to find alignment between intention, emotions, behavior, and discipline. Instead of focusing on the result of a trade (winning or losing money), let it go and hone in on the process.
Bottom line There’s far more to emotional intelligence than just teamwork and listening skills; it can also make or break your investment strategy. Instead of finding an investor you admire and trying to copy their strategies move by move, focus your attention inwards. Who are you and what does trading bring out of you?
We’ve seen some compelling reasons to choose swing trading versus intraday trading.
However, there is no one-size-fits-all approach to trading. It’s just essential that you choose a style that suits you.
And to do so, you must carefully analyze your particular circumstances, financial goals, and desired lifestyle. Perhaps most importantly, you must comprehend your temperament and psychological makeup, as well as how you prefer to live and operate.
To succeed as a swing trader, you need to understand your own emotional and financial patterns. If you are constantly anxious about the trades you have placed and can’t control your emotions well, then my friend trading is not for you.
It’s entirely up to you. Always remember the fundamentals of price movement, candlestick patterns, support, resistance, and risk management, regardless of which market you choose to trade.
Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
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This post was produced and syndicated by Fistful of Dollars / Timothy Thomas Limited.
Featured image credit: Unsplash.