By Hassan Mehmood (Saudi Arabia)
Introduction
On account of a lack of financial education, most people assume that investing is all about waiting for years in the end to make a profit. However, several techniques of trading allow investors to start taking profits within one day or less.
This article is going to discuss in detail one such trading technique called Swing Trading. By learning about the dynamics of such a trading strategy, investors can place their bets on investing products using a defined and qualified trading strategy.
What is Swing Trading?
Swing Trading is a type of speculative trading technique. Usually, investors create a new position that is sold before the day of the market close. On other occasions, investors take up long-term positions that they opt to hold for a massive period to make profits.
However, Swing Trading is like a middle option between the two types of trading. With Swing, Trading investors are not opting to sell their positions within a day. At the same time, they are also not willing to hold their investment positions for long durations, such as years or months. At the same time, swing traders are focused on taking advantage of price changes or swings in their investment products.
How does Swing Trading Work?
Swing Trading is based on the idea that investors are not following the short-term or long-term tenets of trading. There are many instances where Swing Trading is considered a trading style rather than a trading strategy.
When a swing trader takes a new position, they are aiming to hold it longer than intraday and lesser than a week. Usually Swing trading period can last longer than 24 hours but shorter than four days. At the same time, the main focus of Swing traders is to pinpoint a price-changing trend for an asset so that they can make profits.
Swing traders rely on technical analysis to find possible swings or price changes. The most used tools of Swing traders contain price action analysis, fundamental research data, support and resistance statistics, technical indicators, and candlestick chart study.
Just like Swing traders are lenient with the trading period, they are also reserved about the price action of an asset. Swing traders usually aim for medium to high patterns. They place cover orders meaning that they define exit and entry points in advance. Some Swing trading sessions can also last for a few hours, while others may continue for weeks on account of fundamental analysis.
Origin of Swing Trading
William Delbert Gann, or W.D. Gann, is often attributed as the founder of Swing Trading. He is also responsible for correcting the 1909 wheat price prediction correctly, projecting that it could reach $1.20, the Black Friday incident of 1929, and the Great Depression of the 1930s.
He studied mathematics at different universities in Egypt, India, and England. At the same time, he is also celebrated for price and time squaring.
Among all of his contributions to the field of mathematics, Gann Swing Charts have gained the most popularity. He based his charts using four distinct price chart patterns, namely:
- Up Day: Higher High, Higher Low
- Down Day: Lower High, Lower Low
- Inside Day: Lower High, Higher Low
- Outside Day: Higher High, Lower Low
The Necessary Conditions for Creating a Gann Swing Chart
- Finding out the turning point on a price chart for trading assets such as stocks.
- Don’t do anything on Inside Days, as they are regarded as neural by Gann.
- Treat ‘Outside Days’ as wait and watch.
- Up Days that are followed by Down Days indicate the end of an uptrend and trend reversal.
- Down Days followed by Up Days denominate the end of the downtrend and the start of the uptrend.
- On a Gann Swing chart, Up Day is highlighted as Green, Down Day as Red, Inside Day as Black, and Outside Days as Blue.
- Remove all candlesticks that are not turning points to get a clear picture of the Swing Trading period.
- Specify the entry point and stop-loss beforehand to control the price movement.
- Swing traders have the option to avoid stop loss in case there is a possibility of further profits.
- Gann also directs the investors to refrain from emotional trading and use technical indicators for making all their trading decisions.
Types of Swing Trading
In principle, Swing Trading is not divided into different classifications. However, Swing Traders strictly follow technical indicators and follow a new trend until it ends. Therefore, Swing Trading can be divided into different arrays based on the technical indicators in use to form a Swing Trading period.
By learning about these different types of trading indicators and how they work, investors can learn how to utilize them successfully. Here are the top technical indicators that Swing Traders should employ:
Fibonacci Retracement
Fibonacci Retracement is fashioned after the mathematical sequence created by a French academic of the same name. The main objective of the FR pattern is to identify support and resistance levels to spot trend reversals.
Fibonacci Retracement is gauged in percentages. Fibonacci ratios measured as 23.6%, 38.2%, and 61.8% are seen as the most frequent trend reversal points. However, swing traders often keep their eyes on the 50% FR ratio because investment products tend to change their direction after retracing half of their recurring move.
Support and Resistance Levels
Support and Resistance levels are the building blocks of technical analysis. By reading and identifying support and resistance areas, swing traders can understand where to place their orders.
When a trading asset is present at the support area and forms a Double-bottom pattern, the investors can assume that the chances of an uptrend reversal are high. In the same manner, if the asset is forming a Double-top pattern touching resistance, it is a good indication of a downtrend.
Based on the current dynamics of the market, Swing traders can opt for short or long positions and take profits using the trend reversal points.
Channel Trading
Swing traders can also focus their attention on isolating the investment products that are currently present within a channel. At the same time, the pattern formation for the said asset should be well-defined and strong.
Therefore, the swing trader should be able to identify if the asset is following a bullish or bearish trend. The main objective of the investors is to find out the polarity of their investment or the breakdown or breakout points. In this manner, Swing traders can generate profits using call or put options.
EMA, or Exponential Moving Average, is an ideal technical indicator for measuring the polarity of investment products because it emphasizes short-term changes.
Simple Moving Average (SMA)
A simple Moving Average or SMA is constantly updating the moving average price. For example, a 10-day SMA will generate the latest states for the last ten days every day. At the same time, every SMA reading is connected to the last one to create a line pattern that chops down any unwanted clutter.
Traditionally, Swing traders implement the ten and 20-day SMAs on the charts. If the 10-day SMA goes above the 20-day SMA, it indicates a buy signal. In case 10-day SMA starts to fall below 20-day SMA, it indicates a sell signal.
MACD
The Moving Average Convergent Divergent, or MACD, uses two MAs at once, namely the MACD line and the signal line. MACD is developed by traders to measure trend direction and find reversals. If the MACD line surpasses the signal line, it is an indicator of an uptrend or purchase point.
Likewise, if the MACD line is below the signal line, it is a green signal for sale or a downtrend. After ling crossing in either direction, the swing traders wait for MACD trends to cross once again to identify the next trend reversal and close their positions. If MACD is above the zero line, an asset is bullish, and if it is below, it is bearish.
Differences Between Swing Trading and Day Trading
At first glance, it can seem like there is no fundamental difference between Swing Trading and Day Trading. However, taking a deeper look at both trading styles would magnify the main differences that set them apart from each other. Here are some of the most important distinctions between both:
Short-Term Prices
Day Traders only worry about short-term price movements of assets, and they are not worried concerned with fundamentals drivers. Day Traders can also open several new positions in one day and opt for maximizing their profits based on their aggregate results.
On the contrary, Swing investors take a deep dive into the price movement of an asset. They are not likely to place many new orders every day in hopes of overall loss off-sets. Not only Swing traders gave fundamentals great importance, but they sometimes depended entirely on them.
Monitoring Duration
Swing Traders do not hover over their trading positions as frequently as day traders. Day traders have short-term positions spreading across several different options. Therefore, these investors are unable to leave their investment portfolio at the mercy of their brokers or algorithms.
On the other hand, under most circumstances, Swing traders use cover orders, and they have already defined their entering and exit price points. Furthermore, their technical analysis is more detailed; therefore, they do not use the same frequency of monitoring as day traders.
Frequent Profits
Day traders look for frequent, consistent, and regular profits, even if they are smaller profit margins. They act on the principles of the Pareto rule or the 80/20 rule. Day trading is considered an ideal trading strategy for investors with limited capital. Meanwhile, Swing traders can close their positions less frequently and yet earn a considerable amount of profits.
Advantages of Swing Trading
Swing trading has its upsides and downside. For the benefit of the readers, the investors should take a detailed view of both possibilities. Some advantages of Swing Trading are mentioned as under:
Stress Management
Stress management is one of the biggest wins for professional and amateur investors. At the outset, investors can seem to be rolling in money. However, the stress of trading can prove to be fatal in some cases as well.
Therefore, Swing trading is one of the best techniques that prevent investors from staying glued to the stock market charts and latest development constantly. At the same time, it has the potential to generate better returns in comparison to Day Trading, depending on the capital size.
Rather than having to constantly monitor the portfolio statistics, Swing investors can sit back and rest easily because they have predetermined entry and exit positions. At the same time, investors can take the extra time and spend it on collecting data about new potential investment options that can further increase their productivity, confidence, and profits.
Profit Percentage
Unlike day traders, Swing traders do not rely on taking small profits. Typically, every profit from swing trading is quite sizeable, considering that all factors are considered. However, swing traders need to take a lot of time to perfect their risk management skills.
The most successful traders who have adopted the Swing trading technique can get 10 to 50 percent of return per year, which is nothing short of impressive.
Time Flexibility
Swing traders are not in a race against time. They are always at ease because they are not going into the investment market in search of new positions every other day. They can hold their positions for longer durations and only have to keep a close watch on their technical analysis. Until a trend is forming and devolving, swing traders do not have to pay heed to any other factors.
They have definitive answers and price points to look out for, and they can get notified automatically. In the meantime, they can do as they please with their work seeking new profitable entry points. At the same time, they also have more room for self-improvement and spending time with their relatives.
Limitations of Swing Trading
As with all manmade things, Swing Trading strategies are also not perfect and foolproof. Investors who are thinking about trying it out should be wary of its following limitations:
Low Loss Appetite
Day traders are prepared for the fact that some of their positions are going to end up in losses. However, Swing traders do not have safety net positions. Therefore, every single position that they have created can make or break their portfolio. In the case of one losing position, the winning streak of a swing trader can come to an end.
At the same time, if there is an unexpected turn or reversal of the trend, Swing traders do not have any contingency to ease the loss. At the same time, it can also trigger a margin call in case of a leveraged position and break the overall Swing trading portfolio.
Overnight Risks
Day traders are religious about closing their trading positions before the day’s end. In doing so, they take a page out of the Melvin Capital. However, Swing traders opt to keep their trading positions open overnight.
Therefore, Swing traders are open to the threat of overnight changes. When the exchange markets close after-hours and on weekends and a big change such as a surprise lawsuit, an exploit, or a change in regulatory framework happens, the profits of Swing traders can go down the gutter in an instant.
It is important to note that outside of business hours, investors cannot do anything about their cutting their losses other than cryptocurrencies.
Trading Fees and Hidden Costs
Another disadvantage of keeping overnight positions open is that brokers charge an extra fee for working off hours. Depending on the asset in question, it seems like Swing traders also have to adjust their profit percentages with a bigger cost account in comparison to Day Traders. Not accounting for the fees in the real world can become a hidden obstacle for inexperienced traders.
Swing trading requires a considerable amount of expertise and a grasp of the fundamental concepts of technical analysis as well. Therefore, it is ideal for investors who already have training before trying out this option.
Conclusion
Swing Trading is a spectacular way for traders to operate in the middle lane of the investing markets. Swing trading by design discourages making emotional decisions and not paying attention to the technical indicators.
One great way for investors to become more confident with Swing trading is to back-test their portfolios before going into the main market. At the same time, the investors who are only getting started should work under the supervision of a trained broker. Swing Trading is a rewarding way to make profits.
At the same time, it can also pose equally big risk factors. Therefore, ideally, investors should do their homework and proceed with caution.
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