Trading Toolkits: Swing Trading Explained

Swing trading is a common type of speculation aiming to capture price fluctuations in a short to medium time frame, typically between a couple of days and several months. Swing trades can both use fundamental or technical analysis to capitalize on these opportunities. This strategy is common among beginners to financial markets as the time frame suits most average traders. Swing trades come in all types and are present in all financial markets, forex, stocks, and cryptocurrencies.

This article covers the basic concepts of swing trading, the good, the bad, and everything in-between.

What Is Swing Trading?

Swing trade is classified as a type of trading in financial markets where participants long or short in order to speculate on price movements. These trades pan out over a time frame of a couple of weeks to several months, depending on the market conditions. It is rarer to have swing trades that only last a couple of days, but it happens with crypto market volatility.

Swing trading comes in all sorts of forms; some traders aim to capture moves in volatile markets, such as low-cap stock and cryptocurrencies; While others trade less volatile markets such as commodities and blue-chip stocks. The common theme here is that speculators identify where an asset's price is likely to move, then they exercise a position in the market to capture the profit put on the table. Typically, swing traders utilize higher time frames, including but not limited to: 4HR, 8HR, Daily, Weekly, Monthly. These strategies usually work best in trending markets. It allows traders to capture overall trends, but this is not the end all be all. Many traders have a plethora of different strategies that work in select market conditions.

How To Capture Price Fluctuation

This is the holy grail question that, unfortunately, no trader has a definite answer to. The beautiful thing about financial markets is that participants develop an edge using a plethora of techniques. Typical swing traders utilize technical analysis heavily as well as some fundamental analysis. Swing Traders adopt Risk:Reward (R:R) ratios and other analysis techniques to define their risk and anticipate the profits that will be made.

This idea of R:R is coupled with things such as candlestick chart patterns, support and resistance levels, technical indicators, and even price action. This series of trading toolkits will build out a catalog of all of these concepts, helping mold beginner traders – hopefully, you are reading this when this article is built out with a plethora of hyperlinks; for now, please make due!

A key concept here is that there are hundreds if not thousands of edges to be captured in financial markets, but there is definitely not free lunch. A very basic strategy to outline is that of a trend following strategy. In this scenario, users will utilize trend lines, follow technical market structure, buy on pullbacks, and sell on rips. This is just one core way of swing trading among breakout trading, range trading, and other standard practices. Within these strategies, there lies limitless possibilities for capturing an edge in markets.

Pros and Cons of Swing Trading

Pros:                                                        

--Time Efficient

--Captures the bulk of market swings

--Rely on concrete factors such as TA

Cons:

--Overnight risk is assumed

--Large exposure to markets results in substantial risjk in market reversals

--Miss out on the macro trends

Day Trading Vs. Swing Trading

Most people have heard of the glamour of an overinflated life style of day traders, or at least that's how it's portrayed. Day traders aim to capture short-term price fluctuations, typically intra-day, while swing traders look for larger multi-day moves. Day trading requires much more management, demanding real-time concentration and collectiveness. To keep it simple, day traders hold positions for no more than a day, while swing traders hold their positions from days to months.

When swing trading, participants must account for the unpredictability that comes with overnight risk, in equities and traditional markets, this can be seen in gap ups and gap downs, for crypto, this is just general overnight volatility. This results in different position sizing for each trader, as day traders must use larger position sizes to profit off smaller fluctuations, and vice versa for swing traders, smaller positions to catch larger moves.

These trading types also call for different styles; day traders typically exclusively rely on technical analysis. Swing traders, on the other hand, can incorporate both fundamental and technical analysis. Part of a swing trader's edge may be that the high probability of the underlying asset being higher in the next six months due to fundamental reasons, which gives them an edge in going long a majority of the time.

Swing Trading Tactics

Swing traders rely on multiple days worth of market structure to trade common patterns or trends. The most common strategies revolve on moving average crossovers, cup-and-handle patterns, flags, pennants, and a plethora of other technical aspects.

These patterns individually do not mean much, but they can provide traders with an edge when coupled with a concrete strategy and plan. A key thing to understand in trading is that it is a probabilities game, and patterns fail all the time; this is why its key to adopt a risk management system, typically seen in R:R. The underlying goal all traders strive for is a positive expectancy.

A Swing Trade in Action

This is a swing trade that was taken on GRT at the week of writing. The key thing to notice here is the confluence of multiple aspects of technical analysis that support the R:R tool's (traders) thesis. This trade leverages trend following, traditional chart patterns, R:R, and support and resistance levels.

As displayed in this example, this swing trade was completed in less than a couple of days. This trade was swift as crypto markets experience tremendous volatility. As previously stated, this is not always the case that trades can be anywhere from a day to multiple months.

Concluding Thoughts

Swing trading is an excellent place for beginner traders to start. This is due to multiple reasons such as smaller position requirements, time efficiency, and it's arguably less stressful. There is no one way to trade in financial markets but this article covers the swing trading basket. It is now up to the individual trader to hammer in their edge through studying markets. Finding an edge is not re-inventing the wheel but more of connecting the puzzle pieces to find a strategy that suits you and the current market conditions. Trading is not easy, but studying these materials will show improvement.

For those looking to get started trading, here are my referral links to exchanges I prefer (You will also get a 5% discount on trading fees)  😊

FTX

Binance