When you hear the term swing trading, what comes to mind? Is it something like can I be a swing trader? What is a swing trader? Is swing trading profitable? How to swing trade? What are the best strategies for swing trading?
These are just among the many questions that I receive with regards to this trading concept.
In swing trading, traders seek to capture gains by holding a trade anywhere from overnight, a couple of days to weeks.
The objective of swing trading is to capitalize on a bigger shift in price than is possible in an intraday time frame.
Owing to the reason that you follow a bigger price range and shift, you’ll need a calculated position so as to reduce the downside risk.
In order to do this, individuals rely on technical analysis to identify trades with short-term price momentum.
This calls for one thing: following the principles and fundamentals of price action and trends.
Swing trading is a style of trade that calls for patience, as you may be required to hold your trades for up to several days at a time. This style is ideal for those who are not in a position to monitor their charts throughout the day but can dedicate a few hours to analyze the market every night.
Most of the traders who use this strategy are those with full-time jobs or school but can create enough time to stay up to date with what’s going on in the currency market.
Just as the name suggests, swing trading attempts to identify the ‘swings’ within a trend (midterm) and only enter when the probability of winning seems to be high.
Given that trades last longer than a day, bigger stop losses are needed to weather volatility, and a trader must adopt that to their money management plan.
You will often find trades going against your direction during the holding time. This is because there may be a number of fluctuations in prices on the shorter trading time frames.
This is the time you should remain calm and trust in your analysis. Because swing traders always have larger targets, spreads won’t have a big impact on your overall profits.
This, therefore, makes trading with larger spreads and lower liquidity acceptable.
Swing Trading Tactics
A swing trader will look for multiple day chart patterns.
Some of the more common patterns involve shifting average crossovers, cup-and-handle patterns, head and shoulder patterns, triangles and flags.
Important reversal candlesticks may be used together with other indicators to come up with a concrete trading plan.
Ultimately, every swing trader comes up with a plan and strategy that gives them an advantage over other traders.
This involves looking for a trade setup that tends to lead to predictable movements in the prices of the assets/currency pairs. This is not always that easy as there’s no single strategy or setup that will work every time.
With good risks and rewards, winning every time isn’t necessary. The better the risks and rewards, the fewer number of times winning is required in order to produce an overall profit over the trades taken.
Swing Trading Vs Day Trading
The main thing that differentiates these two is the hold time.
At the basic minimum, swing trading involves an overnight hold, while day trading aims to close out positions before the daily closure of the market.
Therefore, day trading is purely focused on trends within the day, and it calls for fast decision making that does not account for the potential changes beyond the closure of the market.
Day traders should also consider that a stock can open much stronger than it closed the day before and need to adjust their strategies.
On the other hand, swing trading involves a hold for up to several weeks. This carries a risk of unpredictability such as gaps from the announcement of news after hours, which can be a reason for the rise or fall of currency pairs.
Swing trades also have to use a smaller position size as well, because of the large position taken by day trading to leverage through the margin.
Day trading is subject to pattern day trader regulations as well.
If a trader makes, say four or more round-trip day trades during any period of around five consecutive business days, and the trades make up more than 6% of the total trades during the period, they will be designated a pattern day trader and be required to abide by the requirements and regulations.
Short sells count towards the trade limit as well, for as long as they occur during the same period of time.
Swing trading on a margin can be risky in the event of a margin call.
A margin call is a situation where a broker demands that the investor deposits an extra amount of money or securities so as to meet the demands of the maintenance margin.
This often occurs when one or more of the securities/currency pair held in the margin account drop below a certain level.
Day traders are therefore required to stay focused on their positions, looking for potential new opportunities and replacing the left positions.
This will create a considerable commitment of time and pressure, which may lead to stress and emotions that in the end, hinder the decision-making process.
You should venture into swing trading if:
- You have the ability to remain calm if the trades go against you
- You are patient
- You do not mind having large stop losses
- You can take fewer trades but be careful to make sure your trades have good setups
- You can hold on to your trades for several days
You should consider other options if you:
- Like fast paced, action packed trading
- You can’t create time every day to analyze the market situation
- Lose patience or become anxious if your trades don’t go as you expected.
- You expect instant results and explanations
You may have a full-time job, but if you understand and enjoy trading on the side, then swing trading may be just for you. However, you need to equip yourself with more than mere swing trading basics in order to make it as a profitable forex trader.