In the world of trading, there are multiple trading types that help traders make the most profit under certain conditions. Swing trading is one of these types.
Swing trading refers to entering into positions and holding them open for several days or even weeks. Swing traders aim to profit from price swings at the market over a medium term period. This trading type requires the use of technical analysis as it is extremely important to be able to predict in what direction the market is going to move next and whether it will be profitable to open the position now and close it sometime later.
Typically, a swing trader analyzes current price charts looking for the signs of price reversals. Before entering a trade, the trader built the lines in accordance with the classic Fibonacci ratios and opened a buy trade at 38.2% line. Based on this same pattern, the trader expects the uptrend to extend to the previous high and plans to exit the trade at that level, putting a Stop Loss just below the opening line to minimize the risks of losses. This is a prime example of a typical swing trade.
Swing trading vs day trading
Although in swing trading the positions are held open for several days or weeks, itâs not really a long term trading type. Because of this, this type of trading is often compared to day trading and other short term trading types.
Day trading means holding positions open for less than one day. Some trades last no longer than several minutes. Day traders usually make many trades within one day, analyzing the price movements within a very short period. They donât try to make a lot of money from each trade. Rather, their aim is to make many small profitable trades to meet their profit target for each day.
Day traders are generally full time traders who can dedicate several hours each day to trading and analyzing the market.
Swing trading, on the other hand, isnât at all like that. Itâs true that swing traders, too, analyze the market, but they rely on price chart patterns to profit from new price movement trends. They combine fundamental and technical analyses in trading and generally look for trades with the maximum profit potential over as short a period as possible. Swing traders do bear higher risks than day traders, but the profit they do get from it is also quite high. It is also perfect for those traders who have full time jobs and can only dedicate a limited amount of time to trading.
Swing trading allows traders to use various moves and techniques to maximize the end profit.
- There are also several strategies that swing traders can employ when looking for potential positions to open.Â
1. Fibonacci retracement
This trading strategy uses a pattern called the Fibonacci retracement tool. This instrument can help swing traders to identify possible reversal levels on a price chart. As is well known, a trend doesnât consist of a straight rise or fall; the price tends to retrace back before continuing on with the main trend.
According to the Fibonacci retracement pattern, the lines built at the ratios of 23.6%, 38.2%, 50% and 61.8% can show potential reversal areas. Traders can use these lines as support and resistance levels and plan their trading strategy around them.
2. Support and resistance triggers
There are many things to look for when analyzing the price charts. One of them are support and resistance lines. These lines show when exactly the prices tend to change the direction of their movements. A support line indicates a price range on the chart below the current market price when buyers take over the market and the price starts to climb up after a downtrend. A resistance line, on the other hand, shows a price range above the current market price when the uptrend is usually halted and sellers prevail.
These lines can help swing traders build a solid trading strategy. The first strategy for them is to buy on the bounce off the support line and put a Stop Loss just below it. The second strategy is to enter a sell position on the bounce off the resistance line with a Stop placed just above it. But in both cases itâs important to remember that once the price breaches these lines, they switch roles, and the support line becomes the resistance line.
3. 10 and 20 day SMA
This trading strategy is also very popular among swing traders and uses simple moving averages (SMAs). SMAs show an average price over a certain period. Since prices change every day, so do SMAs, so each average connects to the previous ones in a line, which can be applied to price charts.
Swing traders usually take 10 and 20 day SMAs and apply them to the same chart in order to calculate their next move. To do this right, they look for the point where two SMAs cross each other. The 10 day SMA crossing above the 20 day SMA indicates an uptrend and gives a buy signal. However, when it crosses below the 20 day SMA, it signals a downtrend and gives a sell signal to traders.
4. MACD crossover
This trading strategy is considered one of the easiest and most reliable indicators of price movement direction and reversals. The MACD, or Moving Average Convergence Divergence indicator calculates and shows how two moving averages (MA) of prices relate to each other. One of them is faster than the other, meaning that it reacts to price changes more quickly.
The MACD crossover trading strategy involves studying the MACD line and signal line. The thing is that when MACD crosses signal line, it signals the start of a new trend. If MACD above the signal line, it gives a buy signal. However, if itâs below, then it gives a sell signal.
These strategies are a great way to find out when a new trend is starting and whether itâs better to stick to a bullish or bearish strategy.
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