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What Is Swing Trading?

Of the many cryptocurrency trading methods at one’s disposal, swing trading can prove to be somewhat lucrative. Its concept is relatively simple, which is why novice traders often rely on this method. Although swing trading works across all financial markets, it seems well-suited for cryptocurrencies.

The Idea Behind Swing Trading

As the name indicates, swing trading revolves around capitalizing on short-term price momentum. Whether a market recovers slightly or dips unexpectedly, timing these price differences often yields good results. As these trades can play out over days or even weeks, this trading strategy is well-suited for novice users and advanced traders alike.  

The end goal is to profit from a price swing but take profit early to prevent the swing from being invalidated. Focusing on a smaller gain is often a better approach, as you can sometimes complete these trades nearly risk-free. Properly analyzing the risk/reward ratio is crucial before committing to any market, though. Additionally, it is often advisable to use all the different order types at your disposal to err on the side of caution. 

On paper, the method of swing traders is always useful. In reality, however, it requires a trending market. Whenever a market is outspokenly bullish or bearish, swing traders can make money. More specifically, the price swings can be greater than usual, earning swing traders more money in the process. 

Once a market goes into sideways momentum, swing trading loses all of its appeal almost immediately.

Please Don’t Confuse It With Day Trading

On the surface, one may think that swing trading and day trading are the same. Both strategies capitalize on short-time price changes, but the approach is very different. A day trader will focus on price moves that may represent seconds or minutes. Swing trading often involves maintaining market positions for hours, if not days. 

It is safe to say that swing trading is more laid-back than day trading. Having to watch price charts like a hawk for most of the day is required for most traders. On the other hand, swing traders can often ‘set and forget” positions for a few hours. The latter approach also requires far fewer trades to execute, as the potential profit per trade is much higher. 

Another difference is how swing traders will often perform fundamental analysis to make decisions. Fundamental analysis requires much more research to analyze a market or asset. It can include determining a company’s yearly performance, earnings, balance sheets, and cash flow. None of this applies to cryptocurrencies specifically, although it never hurts to look beyond the price levels either. 

That doesn’t mean technical analysis isn’t essential. It is still one of the crucial steps to take before determining whether a fundamental analysis is warranted. 

The Pros And Cons Of Swing Trading

As is the case with any trading method, there are always certain advantages and potential drawbacks to consider. It is not a solution that everyone will explore, but it can prove worthwhile for those who don’t mind taking a few risks. 

The benefits of this trading method include:

  • Less time-consuming compared to day trading
  • Maximizing short-term profit potential without overexposure to the next market swing.
  • A simple method, assuming one has sufficient technical analysis knowledge and expertise.

However, if there were only advantages, everyone would explore this option. Swing trading also has three main drawbacks:

  • Open positions remain subject to overnight and weekend market risk (only applies to traditional markets, not cryptocurrencies).
  • Market reversal can occur and invalidate the swing trade entirely, causing potential financial loss.
  • The short-term vision of this trading method can make you miss out on long-term trends and profits. 

Risks are inherent to any trading method, and this one is no exception to that unwritten rule. Always analyze a market properly to avoid fake signals and losing money.

A Swing Trade Example

Keeping all of the above knowledge in mind, the time has come to look at a real-world example of a swing trade. This form of market momentum occurs a lot more than one may think. It can be either a bearish or bullish move, allowing speculators to make money in either circumstance. 

Source: Swing Trade Stocks

As mentioned earlier, pivoting points for swing traders will occur after a strong bullish or bearish trend. In the example above, the stock of Electronic Arts saw a big bull run. The momentum started to sour relatively quickly. 

As the bullish (white) candles were dwarfed by the bearish (black_ ones, it was a matter of time until the price collapsed again. 

By opening a short position as a swing trader where the arrow is drawn, this trader made a lot of good money by holding their position open for a while. 

It is crucial to keep in mind you can find a “perfect setup” like this one in every market. The outcome may be more or less profitable. Still, once engulfing candles – either bullish or bearish – begin to appear, the time has come to pay close attention. 

The Engulfing Candle Explained

The idea behind an engulfing candle – either bullish or bearish – is simple to explain. It will occur when a trading volume candle is larger than the one that came before it on the time frame. More specifically, the new candle must be more prominent in body than the previous one’s size of body and wicks combined. The image below illustrates this concept a bit better. 

This particular event is crucial for traders, as engulfing candles will often signal a trend reversal or a trend continuation. 

  • If the candle is larger than the previous one – and of the opposite kinda reversal is likely. 
  • If the candle is larger than the previous one and of the same nature, a trend is expected to continue. 
  • When the candle is smaller than the previous one but still of the same kind, it can serve as an exit strategy signal. 

It is advisable to always look out for potential engulfing candles, as they can tell a lot about where a particular market may head next. 

Patience Is A Virtue

For those who want to explore a career ins wing trading, patience is a virtue. Financial markets tend to go nowhere for long periods. More specifically, there may not be any price changes for days, weeks, or even months. This is visible across all financial markets, except cryptocurrencies, which are far more volatile by default. 

It is for this reason that traders will look for small price changes and opportunities. Furthermore, it is common to explore actively-traded markets, ETFs, assets, and cryptocurrencies. Doing some research in advance to gauge overall liquidity of markets is always beneficial.

Making Money With Swing Trading

Now that the concept is clear, the time has come to put it into motion. That is much easier said than done, however. One should never go in blind while swing trading. Before exploring this way to make money, traders must ensure they possess the necessary technical analysis. Without this knowledge, traders will have no idea what to expect or how to execute their trading strategy.

Additionally, it is paramount to use traditional indicators and patterns. Analyzing a financial market requires thorough homework before making financial commitments. Commonly used tools include The RSI, moving averages, and Bollinger Bands. Even the Fibonacci retracement lines can play a role of importance when timing swing trades. 

Furthermore, it is advisable to determine the time frame for swing trading in advance. As these positions only last for a few days, the time frame needs to be adjusted accordingly in most cases. Spotting a breakout or temporary trend reversal may require shifting between hourly and daily charts, for example. 

More often than not, the daily chart is a good starting point. Zooming in further may provide additional details but is not always worthwhile. It all comes down to the trading strategy you are most comfortable with.

In the end, there is no option to make money without traders putting in the necessary research and effort. Take the time to customize your trading strategy and market approach. Rushing into a market without ample preparation will almost always result in a loss.

Which Tactics To Use

Traders can adopt many different strategies and tactics to maximize the potential of trading strategy. Swing trading is no exception, as traders often look for a handful of possible patterns to enter and exit markets.

  • Fibonacci Retracement: often used to identify support and resistance levels and swing trade points for reversals. Crucial ratios are 23.6%, 38.2%, 50%, and 61.8% levels. These are often points during which a reversal can take place.
  • Channel trading: If a market is going through a strong trend, drawing a channel around it may prove worthwhile. In this instance, trading with the trend is advisable, regardless of whether it’s bearish or bullish.
  • MACD Crossover: The MACD is a crucial indicator when performing technical analysis. When the two lines of the MACD cross, a trading signal occurs. This is a good opportunity for swing traders to go long or short on the market, as a new crossover can take weeks, if not months, to occur.
  • Simple Moving Averages: Any trader performing technical analysis will put Simple Moving Averages on a chart. Using a 10-day and 20-day SMA is a common approach. If the 10-day SMA cross above the SMA20, a bullish signal occurs. If the SMA10 drops below the SMA20, going short is a worthwhile option. It is a similar setup to the MACD, but with a different indicator. 

Should You Do It?

As appealing as swing trading may seem on paper, it may not be a viable method for everyone. When determining your personal trading strategy, it will quickly become apparent if swing trading is a viable option. 

This method lends itself well to novice traders due to its relaxed market approach and ease of position monitoring. Even then, attempting swing trading on paper first remains an advisable course of action. Markets will often behave differently from what new traders expect, and avoiding financial losses needs to be the top priority.

Conclusion

Swing trading is a more than viable cryptocurrency trading strategy. More importantly, it is feasible for other financial markets, making this method all the more versatile. Getting acquainted with swing trading is not too complicated, but it requires putting in some effort before diving in properly.  

For those willing to take the plunge, there are various exchanges and trading platforms to choose from. Most companies provide the necessary indicators and trading tools to analyze markets before looking for price swings. Use these to your full advantage, as they can save your portfolio from certain doom. 

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