What is swing trading and how does it work?
Usually a position, for example in a stock, is only held open for a few days before it is closed. It is the “swing” in the price of the action, from one moment to another, which gives the trading method its name.
The key is to keep a close eye on the price swings of various types of stocks, so that you can enter at a level that’s right for you and exit shortly thereafter—one to four days is typical—with a profit. However, some traders may choose to keep their position open for weeks depending on their strategy. Choosing to keep the position open will mean that the trader will have to pay a maintenance cost, either positive or negative, depending on the direction of his operation and the type of maintenance applicable.
This is vastly different from other strategies such as directional trading, often employed by institutional investors, among others, who hold their assets for many years. In general, these investors will look for rises and falls in the prices of the asset, only closing when the value of the asset has reached an advanced or mature stage, with significant movements.
How does a swing trader work?
Swing traders must carefully analyze price charts and other data to identify movements in an asset’s value. Therefore, traders will try to determine when a price is likely to move, before entering a position, in order to capture any potential profit from the respective move.
This means that swing traders should familiarize themselves with technical analysis, using these techniques as a set of guiding principles for their decisions. They should also have a good understanding of fundamental analysis, examining the asset’s fundamentals to support their technical assessment.
Swing trading is a method by which a trader can seek to make efficient profits in the short term, taking into account the time frames in which these types of operations are usually left open and the relative ease with which they can be set up and managed.
Swing trading in forex
Due to the fluctuations inherent in many world currencies, some traders develop forex swing trading strategies to profit from sharp movements. These may occur as a result of economic or political instability in one or several countries. For example, traders can buy at low prices and then sell when currencies rise in value as they rally, perhaps with support from national central banks or international funders.
Swing trading vs day trading
A properly executed swing trading strategy can allow traders to get the most out of it in a short amount of time. Swing trading differs from day trading in a variety of ways, as we have discussed below.
This requires keeping up with market sentiment and economic news to get an idea of where the market is headed. Having this information, and an understanding of the technical indicators on price charts, is what informs a trader about when to enter and exit a position.
The freedom of swing trading is the reason why it is one of the most popular strategies, but that is not to say that it is useful for everyone: there is an art to it. Swing traders must be able to quickly scan charts and data, and use historical information to know exactly when to buy or sell. Less experienced traders may find it difficult to master this skill, while more experienced or professional traders may have the experience to benefit from it. However, it is not always possible to quickly get in and out of large volumes of certain assets.
Being properly prepared before the markets open and keeping a close eye on the assets you care about – as well as keeping an eye on the financial media – should give you an idea of how the markets are performing on any given day, to help you take advantage of the market maximum swing trading.
Benefits of swing trading
This style of trading is compatible with those who have full-time jobs and cannot dedicate hours each day to trading. This, however, does not mean that you should not constantly monitor your trading.
Since swing traders often have a day job, it means they have another form of income in case they make losses, something many day traders don’t.
Wide stop losses can be set, so this should help reduce the number of positions being closed out prematurely.
Day traders often need to be able to stay calm and focus on their screens for hours each day; this is less important for swing trading, which takes place at a slower pace.
More efficient use of capital can be made by holding positions for higher profits, rather than opening new positions every day. However, traders will have to take maintenance costs into account.
Disadvantages of swing trading
You have to feel confident with technical analysis to identify entry and exit points. While this may come naturally to professional traders, those looking to start swing trading may need more practice analyzing price charts.
If a position is held overnight, or for multiple nights depending on the trader’s time horizon, they risk opening gaps. Some economic news over the weekend could result in a very different price when the market reopens.
Holding the position for a longer period of time can lead to higher profits, but it can also lead to higher losses.
Swing trading requires patience and could create a stressful environment if a trade starts to move unfavorably.
For day traders, trading is often their full-time job so they can focus solely on their trading and spend more time improving their strategy, while swing traders need to balance trading with their day job.
Summary
Swing trading is an alternative strategy for those who like short-term trading, but cannot put in hours of trading every day. While it requires a proper understanding of technical analysis, it can lead to more efficient returns compared to day trading.
As with any form of trading, there will be risks involved. Swing traders, particularly those just starting out, need to make sure they have a solid understanding of technical indicators, as well as market fundamentals, in order to make their trading decisions. A swing trader should also seriously consider having a stop loss in case there is any breaking news that affects the direction of the market they are positioned on.
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