Swing Trading in the Markets? Here's all You Need to Know

There are several types of traders in the financial market. There are scalpers, who open trades and close them within seconds.

On the other hand, there are day traders who specialise in opening and closing trades within a day. There are long-term traders who open trades and leave them for weeks or months.

In this report, we will look at swing trading, what it is and how to trade it in the market.

What type of trader are you?

What is Swing Trading?

Swing trading is a method of trading in which traders initiate trades and leave them open for a day or two.

Unlike day traders and scalpers, these traders aim to identify themes in the market and follow them for a few days. They also use different methods of analysis than short term traders.

For example, while most day traders focus mostly on technical analysis, these traders focus on indicators, fundamental analysis, and chart patterns among others.

Swing Trading vs Day Trading

In an old article, we compared the pros and cons of swing trading and day trading.

Basically, there are advantages and disadvantages of both strategies.

Overnight Risks

First, day traders avoid overnight risks. These are risks that happen when you leave a trade open overnight.

A good example is what happened a few years ago when Switzerland decided to unpeg its currency from the euro.

In response, currencies in the market saw huge movements, leading to significant losses in the market. Swing traders who were not in the market lost a significant amount of money.

The amount of profits

Second, swing trading allows the traders to make more money if their trades go right.

For example, assume that the EUR/USD pair is trading at 1.1200 and you believe that it will drop to 1.1100. If you are right and you short it, you will make more money than a day trader who shorted it and exited the trade at 1.1180.

Better still, if you use a trailing stop loss, it means that you will protect your profits as the price moves up.

Still, there are traders in both sides of the argument. There are those who believe in swing trading and those who strongly believe in day trading.

How Swing Trading Works

Traders use different strategies to swing trade. Broadly, there are two key strategies.

Tip: You can also use swing with ETFs

Trend Following

First, there is trend following. This is a strategy in which a trader identifies an existing trend and then decides to follow it.

They apply the Newton’s law of motion, which states that an item in motion will remain in the same direction unless it meets an equal force in the opposite direction.

After they identify the trend, they put in place a stop loss in order to limit their losses.

Reversal Strategy

Second, there is a trend reversal strategy. This is a strategy where they identify a trend and use several strategies to identify when the price is about to reversal.

After this, they initiate the trade and set a take profit and a stop loss.

A good way to identify reversals is to use the double exponential moving average strategy that we looked before.

Other tools or strategies that can help you identify these reversals are the Elliot Wave, pivot points, harmonic patterns, candlestick patterns, and pennant patterns among others.

Advantages of swing trading

There are several benefits of using this strategy. These are:

  • More profits – As mentioned above, the potential profit when using swing trading is relatively higher than when day trading.
  • Less trades - Swing traders open fewer trades than day traders and scalpers. This helps them limit their losses.
  • Cheaper – By implementing fewer trades, swing trading is cheaper than day trading.
  • Saves time – Swing trading works for traders who don’t have a lot of time to trade. For example, if you have a day job, you can open a trade and leave it running for a while.

Risks of swing trading

The main risks are:

  • Overnight and weekend risks – There is always a risk when you leave a trade open at night and during the weekend.
  • Stock splits – There is a risk that a company will decide to split its stock during your holding period.
  • It takes more nerves – That is because financial assets rarely move in a straight line. So, you have to withstand huge swings.

Final thoughts

Swing is the most common type of trading in the market today. It is what most people use to trade the financial market.

If you are just starting, we recommend that you take time to come up with a good strategy to use to use the strategy.

External Useful Resources

  • Strategies for becoming a successful swing trader - Investors
  • Forex Swing Trading - Babypips

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