Foreword

Traders employ different trading strategies based on their preferences. One popular approach is to use specific periods as the foundation for developing trading strategies. In the trading market, conservative investments involve holding assets for an extended period and gradually accumulating wealth. On the other hand, some traders opt for short-term speculations through intraday trading to generate quick profits. Another common trading approach is swing trading, which aims to secure profits in a steady but gradual manner.

Swing trading is one of the most prevalent trading methods in various financial markets, including forex, stocks, and cryptocurrencies. It primarily involves trading in the short and medium term, taking advantage of price fluctuations through technical analysis to capture profit from price differences.

What is Swing Trading?

Swing trading is a short- to medium-term speculative strategy in which investors hold positions in cryptocurrencies or other assets for a period typically ranging from a few days to several months. They aim to profit from price differences resulting from price fluctuations. In response to market trends, the time period of swing trading is usually more flexible.

Swing traders closely monitor market trends and price movements. By analyzing and studying the price of the investment target, swing traders assess the overall market trend to determine the optimal timing for buying or selling assets to maximize profits. If you correctly predict the movement and timing of entry, you can profit from the investment, which is why technical analysis plays a crucial role in swing trading. Investors can combine various indicators and models to make informed trading decisions that yield the highest potential profits.

Three Common Trading Strategies and Four Types of Market Trends

Different trading strategies are designed based on the demands and preferences of investors. Below, we will discuss the three most common trading strategies, categorized according to the investment duration. The approach to asset management also varies across forex, stock markets, and spot cryptocurrencies. Investors typically choose to hold an asset when they are optimistic about the market. If the price does not recover as expected, they may exit the market and accept the losses within the predetermined time period. Perpetual futures are usually not included in this type as their funding rates are charged thrice daily, making it highly unlikely to hold them for over a year before selling. On the other hand, day trading and swing trading focus on exploiting price fluctuations for profit. Regardless of whether the market is rising or falling, traders aim to capitalize on the created price changes.

Swing Trading, Day Trading & Buy and Hold

Swing Trading

The period for swing trading ranges from a few days to several months. In simple terms, it involves profiting from price trend fluctuations. Therefore, the application of technical analysis and risk management is crucial. Trades can be executed in small amounts on a regular basis, thereby accumulating funds gradually.

Day Trading

Characterized by a fast-paced trading rhythm, day trading aims to generate short-term profits by completing buy and sell orders within a few hours, typically concentrated within a single day, and sometimes as short as a few minutes. It is a speculative, short-term trading strategy that involves rapid profit-taking and stop-loss actions, requiring continuous market monitoring during the trading operation. Multiple trades may be executed in a single day and the transaction costs are high.

Buy and Hold

This strategy involves gradually accumulating wealth over time by holding assets for an extended period, typically spanning several years, without selling. This is a long-term investment approach that is often observed during bullish market conditions and periods of economic prosperity.

Breakouts, Consolidation, Reversal & Retracement

Breakouts

During a breakout, when the market price breaks through the consolidation stage, either by breaking above a resistance line or below a support line, it transitions from a sideways consolidation to a trending phase, presenting profit opportunities. In a trend, entering long positions above the breakout level or short positions below the breakdown level and then exiting at the stop-loss level can be advantageous.

Consolidation

When the price undergoes small fluctuations over a certain period without a clear upward or downward trend, it is often difficult to predict future price movements. During a consolidation period, the price oscillates between support and resistance lines. In such cases, swing trading can be employed by going long at the support level and short at the resistance level, aiming to profit within the price fluctuation range.

Reversal

A reversal occurs when the price trend changes from a downtrend to an uptrend or from an uptrend to a downtrend. It is recommended to confirm the trend reversal before initiating trades. In candlestick charts, when the upper shadow and lower shadow are of equal length, it indicates that the previous uptrend or downtrend weakens, signaling a potential reversal. Users may place orders at this point.

Retracement

If the price does not show a clear trend but a sideways movement after a reversal, you can place a short position at the retracement level before the previous uptrend. If the price reaches the previous retracement level, climbs, reverses, and falls below the support line, it may present a profit opportunity for those who had placed short positions at the price of the retracement level. However, it is important to note that there is also a possibility that the price may not break below the support line after reaching the retracement level. As this trading approach relies on predicting price movements, it carries higher risks and should be carefully considered before using it.

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How Swing Trading Works

Swing traders employ technical analysis to analyze price movements and momentum to develop their trading strategies. Typically, they focus on trading in major markets with substantial trading volume, as higher volume generates momentum and significant price fluctuations. Conversely, if there is inadequate liquidity and insufficient trading volume, the market will experience minimal price volatility, making it difficult to profit effectively.

There is a belief that the best way to invest is to allocate 2-5% of the total funds in the trading account to each investment asset. When managing a portfolio of multiple swing trades, the percentage of total funds allocated should align with an individual’s risk tolerance. One key aspect of executing swing trades is to minimize losses while capturing market trends. This can be achieved by utilizing a risk-reward ratio of 1:3, where one unit of risk is balanced against three units of potential return. This approach helps determine profit-taking and stop-loss levels.

Swing Trading Risks

Effective risk management is very important in swing trading. It involves not only selecting investment targets with good liquidity, typically focusing on large markets, but allocating funds to different investment targets to diversify risks. For example, while investing in Bitcoin, you can also allocate funds to alternative coins with high liquidity and unique price movements that are not solely reliant on the overall market trend.

In traditional financial instruments like forex and stocks, swing traders face the common gap risk. During market closures, factors (such as significant news or events) that can impact market prices may occur. These can cause the price of securities to rise or fall, which will be reflected in the opening prices when the market reopens, whether overnight or over the weekend. The longer the market is closed, the greater the associated risk. Swing traders may miss profit opportunities as the market trend may shift when the market is closed. This differs from the cryptocurrency market, which operates 24/7. Therefore, traders do not need to worry about gap risks.

Swing Trading and Technical Analysis

Swing trading is considered a speculative strategy where investors aim to profit from the price differences of assets based on anticipated price movements. To make a more accurate assessment of market conditions and identify optimal entry and exit points, proficiency in analyzing charts and data is essential. By applying statistical analysis and models to identify market patterns, investors can profit from swing trading.

Using EMA to Identify Bullish and Bearish Intersections

Support and resistance lines in candlestick charts can assist investors in identifying favorable entry and exit points. Investors can utilize exponential moving averages (EMAs) to track price trends, determine lower and upper ranges, and establish support and resistance lines.

By assessing the price intersections of EMA10, EMA20, and EMA60, you can determine whether the price is trending upwards or downwards. When the price exceeds or crosses these moving averages, it can be seen as a bullish signal, indicating a potential upward trend. Conversely, if the stock price falls below these moving averages, it indicates a downward trend, and in such cases, if you had previously held long positions, you’d better close your positions and consider taking short positions.

Fibonacci retracement is another auxiliary tool that can identify potential support and resistance levels, as well as potential price rebound points, according to the golden ratio between the lowest support line and the highest resistance line.

Examples of Swing Trading

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When the market price enters a downward trend for 1~3 periods, it indicates a bearish signal. At this point, the Elliott Wave Theory can be applied. The Theory is a technical analysis approach that suggests that security price movement mostly follows intermittent ups and downs, resembling wave patterns with alternating rises and falls, rather than abrupt and significant fluctuations. This theory is useful for predicting market trends as the overall trend tends to develop in the same direction. Additionally, Fibonacci’s theory can be used as an auxiliary tool to identify key points in the price movement.

To implement a swing trading strategy based on these principles, you can place short position orders at the lowest point of the 3rd period (at $22,314) until reaching the lowest point of the 5th period (at $19,611), and place long position orders at the end of the 5th period and wait for an upward rebound wave according to the Elliott Wave theory. You can make a profit of $2,703 ($22,314 - $19,611) from the short positions placed in the 3rd period, and a profit of $8,108 ($27,719 - $19,611) from the long position placed in the 5th period when the price reaches $27,719 before entering the consolidation. This trade took place over approximately two weeks, from March 3rd to March 17th, 2023, based on the price movement of the securities, thus exemplifying a swing trading strategy.

Day Trading vs Swing Trading

Compared to the nature of buy-and-hold trading, both day trading and swing trading carry a higher risk of losses, and the trading costs are also higher compared to long-term holding. Furthermore, although day trading and swing trading share similar trading natures, the prerequisites for each trading strategy differ. Day trading requires dedicated market monitoring throughout the day, while swing trading requires sufficient capital to accumulate profits. The trade-off between time and money depends on the trading preferences of investors.

Swing traders have more flexibility in time management, without the need to constantly monitor the market

While swing trading and day trading share some similarities in terms of profiting from market fluctuations, their major difference lies in the frequency of trades. Swing trading focuses on short- to medium-term positions lasting from several days to several months, whereas day trading involves opening and closing positions within the same day and thus has the highest trading frequency. Therefore, day trading can be considered a full-time job that requires dedicating the entire day to monitoring market trends and adjusting trading strategies accordingly.

Swing trading requires more funds

Due to different time durations, swing trading and day trading face varying degrees of price fluctuations in securities, thus requiring different investment strategies. Swing trading takes a longer time frame, allowing for multiple trades within a trend that may last several days without closing positions. On the other hand, day trading involves opening and closing positions within the same day. To avoid forced liquidation due to insufficient margin, swing trading typically requires more funds than day trading.

Conclusion

The goal of swing traders is to identify potential price movements in the market and capitalize on swings or trends. While the returns from short- to medium-term trends may not yield significant profits, accumulating these profits over time can generate substantial annual returns.

If you do not want to spend a significant amount of time sitting in front of a computer monitoring market trends, you may choose the swing trading strategy that is more flexible regarding operation time, and rather friendly to those with limited time availability. The duration of your investment can be adjusted flexibly based on various market trends. As long as there is sufficient maintenance margin in your positions, you may earn profits as the market swings over time. Therefore, many people consider swing trading more suitable for beginner investors to get started. However, as market conditions constantly change, even experienced fund managers cannot correctly predict the future movement of security prices, let alone beginners with limited trading expertise. Incorrect predictions of the market can result in significant losses.

The essence of swing trading lies in capturing market trends by entering the market whenever there is a significant price fluctuation. The larger the fluctuation, the greater the potential returns. At this point, technical analysis can be applied to predict future price movement, determine when to enter and exit the market, and identify crucial points for trading. Various technical analysis tools can be used to determine which of the four basic market trends the trading instrument is likely to exhibit, forming the basis for making trading strategies. While swing trading doesn’t need to monitor the market continuously like day trading, it still necessitates the ability to read charts and analyze data to apply technical analysis effectively. Studying past trading activities and price patterns provides insights into future price movements, enabling traders to capture precise trading opportunities.

Lastly, while swing trading in cryptocurrency markets eliminates the gap risk associated with traditional financial instruments, market risks arising from rapid and volatile price fluctuations are even higher than in stock markets, where a certain percentage of drop triggers a limit down. Therefore, investors need to exercise caution and may consider implementing risk management strategies such as using a risk-reward ratio of 1:3 or setting predetermined stop-loss levels based on their initial capital. This way, investors can more accurately observe the market and enjoy the slow but steady yields over time.