Key Questions Answered
- What is Swing trading: Swing trading is an approach that employs multiple indicators to set up trades lasting days or weeks. Swing trading is usually best suited for traders lacking the time and focus required for day trading.
- Fundamental analysis and technical analysis are the two types of methods that swing traders employ to identify such opportunities.
- The moving averages, RSI, and volume profiles are some of the technical indicators used for swing trading.
What is Swing Trading?
Swing trading is an approach that employs multiple indicators to set up trades lasting days or weeks. A swing trader will either use fundamental or technical analysis to identify clues and signals indicating the direction and length of a potential price ‘swing’. The trader then opens a position accordingly and patiently waits for the move to happen.
Swing Trading vs. Day Trading: Which is better?
Swing trading is usually best suited for traders lacking the time and focus required for day trading, which involves the full-time analysis of charts searching for profitable short-term market moves. A day trader will open and close trades within a single day to avoid overnight exposure.
On the other hand, a market move identified by a swing trader might take days or a couple of weeks to materialize. This is one of the distinguishing characteristics of swing trading. While a swing trader attempts to capture profits in the short to medium-term (days or weeks), a day trader will enter and exit a position in a matter of hours or less. Overall, swing trading is a less active approach that can still be just as lucrative as any other.
Swing Trading vs. Buy and Hodl: Which is better?
Buying and holding a cryptocurrency is a long term investment strategy that requires patience and trust in the intrinsic value of a project. Although it can take days for a swing trader’s prediction to materialize, they will maintain their position until proven right or wrong without considering the long-term inherent value of a cryptocurrency.
Both types of traders must master the discipline of staying calm and trusting their analysis, even as prices fluctuate in the short term. Compared to day trading, these two strategies have larger targets but are also exposed to overnight risks. Nevertheless, they tend to be much less stressful for new traders as these do not require as much active monitoring and constant execution of trades.
How To Swing Trade Bitcoin?
The first step to becoming a swing trader is learning market analysis. As with all other trading strategies, this will require some time and dedication. A trader has to become proficient at analyzing charts and patterns to identify cryptos with flashing signals suggesting large impending moves.
Fundamental and technical analysis are the two types of methods that traders employ to identify such opportunities.
Swing trading with fundamental analysis
Fundamental analysis is an approach that focuses on studying news, events, and other microeconomic factors surrounding an asset. For instance, a swing trader interested in Ethereum would constantly monitor any and all news related to the project. Ethereum’s recent progress in terms of its adoption of a new proof of work consensus protocol is a perfect example of an actionable signal. Many would argue that with such an upgrade, the price of ETH is likely to increase. Overall, fundamental analysis requires a trader to be much more intimately familiar with a project’s structure, innovations, and news. The more knowledge one has about an asset, the more likely they are to correctly predict future moves.
Swing trading with technical analysis
On the other hand, technical analysts are only concerned with actionable signals related to an asset’s price. In other words, they do not care about a project’s structure, management, or any other micro and macroeconomic factors. Technical analysis involves strictly only monitoring charts and indicators that provide clues as to the direction of price. Although a swing trader can use either approach to evaluate an asset, most swing traders rely primarily on technical analysis.
3 Best Technical Indicators for Swing Trading
The following are several excellent technical indicators used to determine potential future price movements.
This technical indicator examines the price action of an asset over a specified period to reveal its average price activity over time. On a chart, a moving average (MA) is represented by a single flat line depicting smoothed out movements rather than small variations caused by random price fluctuations. The most popular moving averages are the 200-day, 100-day, and 50-day moving averages. The combination of multiple MAs can often reveal impending swings or large changes in price. For instance, if Bitcoin’s 50 and 200-day MAs rose steadily and closely for an extended time but then suddenly the 50-day MA dropped and crossed the 200-day MA, the point where the two lines meet can be considered a signal. In this case, a bearish move is produced when the short-term MA crosses below the long-term average. Likewise, a signal indicating a bullish push would be produced when the short-term average cuts above the long-term line.
Relative Strength Indicator (RSI)
Market movements are characterized by buying and selling cycles, the Relative Strength Indicator (RSI) depicts when the market is overbought and oversold. Generally, when a market is overbought, many would expect it to cool off and move in the opposite direction or vice versa. In technical analysis, the momentum of price is the rate at which it rises or falls. Since the RSI measures the velocity and magnitude of price movements, it is also classified as a momentum oscillator.
Volume indicators such as the ‘On Balance Volume’ (OBV) use volume flow to predict a change in price movement. The OBV indicator is designed based on the fundamental concept that the price of an asset is determined by the buy and sell volumes of both retail and institutional traders. As retail traders sell in a panic, institutional traders buy in high volumes. The price might level out for a while; however, it will eventually go increase in response to the high volume. When the price is at its peak, retail traders rush in hoping to catch the uptrend while institutional traders sell in greater volume leading to a drop in price. This indicator can be used with a volume histogram to examine the current level of interest for an asset. If a line connecting two peaks on the volume histogram creates a slope (either upwards or downwards), the market is likely to swing in a new direction.
4 Popular Swing Trading Strategies
To be effective at swing trading, not only does one need the right tools and indicators, but also the right strategy.
This strategy requires the use of indicators such as volume data and moving averages to determine a sudden uptrend market signal. A trader would enter a position as soon as the price breaks a key level of resistance and ride it to its peak. Since the uptrend can last for days, a swing trader must stay vigilant to decide the best place to exit.
The breakdown strategy involves exiting or opening a short position right before prices fall. Also known as a downside breakout, it is essentially the opposite of a breakout strategy described above.
The retracement strategy looks for moments when the price is about to temporarily reverse. Think of this strategy as a trend within a trend. The RSI is a good indicator for this strategy as it can show the point at which prices begin to reverse. Since these are considered temporary reversal, swing traders must identify when to flip or exit their positions.
The reversal trading strategy is used when a series of higher highs and higher lows reverse into a downward trend of lower lows and lower highs (or vice versa). A price moving below a moving average can indicate that a reversal is about to happen.
Who Can Become A Swing Trader?
Because swing trading requires more patience and a less active approach, it is often best for those that cannot dedicate all their time to trading. Given that predicted movements and trades can take weeks to complete, a swing trader can easily have a full-time job at the same time. However, for someone that prefers a more fast-paced approach, day trading or scalping may be a better strategy. The volatile nature of cryptocurrencies makes it imperative for swing traders to carefully analyze the market before entering any position. It will likely take a significant amount of time dedicated to researching, practicing, and improving before one can be truly successful.