SWING TRADING FOR DUMMIES COURSE 2
In here, I am going to explain the difference between Swing Trading and Swing Trading Strategies Vs Other Trading Techniques like Day Trading And Trend Trading.
If you’ve just arrived at this page and don’t know what swing trading is, here is a simple definition of swing trading: Swing trading is usually defined as speculative trading activity in financial markets whereby instruments such as currencies, or commodities are
bought or sold at or near the end of up or down price swings caused by price volatility.
Trades are held for anywhere from one day to several weeks.
Swing Trading is is similar to the day trading style, simply because many of the same trading systems can be used, but guess what the difference is?
The chart timeframes used would be much longer (e.g. daily charts instead of 5 minute charts).
In here I will go through the different trading techniques and how they all compare with each other. These are:
- day trading
- swing trading
- trend trading (position trading)
Day Trading:
Also known as ‘Intraday’, positions are usually entered & exited within the same trading day.
Obviously forex scalping fits into this category. Forex Traders in general are interested in quicker, smaller amounts of profits/loss and making multiple trades per day.
If you are a day trader, you will be trading a lot frequently than the swing trading or trend trading.
Swing Trading:
Swing trading is typically a short to intermediate term trend following system lasting anywhere from 1 to 30 days.
Traders who swing trade typically look for trend reversals & retracements for their entry/exit points. In other words, forex traders are looking to buy low and sell high.
Swing trading strategies and systems are designed in such as way as to capture these buy low and sell high situations.
Trend Trading(Position Trading):
Trend trading, also known as ‘position trading’, can best be described as a ‘buy and hold’ method.
Positions can be open for a few days, a few weeks, a few months or longer.
They are also held during periods of minor retracement with the expectation that they will eventually continue trending in the desired direction.
Counter Trend Trading – Is still part of trend trading but it is basically trading against the current market direction or trend. Medium term trades that are entered with the expectation that the current trend is soon going to reverse.
Counter trend trades can last anywhere from one day to several weeks, or longer if a new trend develops, with profit targets of several tens or hundreds of ticks.
Counter Trend trading is performed using a graphical chart, with or without indicators, trading against the current market direction, but with the expectation that the direction will soon reverse.
With that out of the way, let’s look at some of the pros & cons of each of these types of trading.
I know I won’t get them all, so please feel free to add your own ideas of pros/cons, or your own opinions if you disagree. We can update this list as we go…
Intraday Trading
Pros:
– Smaller take profit target = Smaller risk per trade.
– Because of the amount of trades being placed, compounding has a greater effect on your overall profits.
– You can make money faster.
– Makes you ‘Feel Good’. Can be a rush! (Is this really a pro?)
– Allows you to always be actively participating in the market (Is this a pro?)
– Because of the last two, traders can exhibit addictive behaviour (gambling).
– Because most positions are closed out at the end of the day, able to take advantage of interest earned in their account.
– Risk control – positions are closed out overnight so unexpected market changes will not affect your bottom line.
Cons:
– Spread has a larger effect on your overall profits.
– You can lose money faster.
– Very difficult to learn – by some estimates less than 1% of traders become successful.
– Time consuming – very difficult to trade properly if you have a full-time job.
– Fast pace & necessary concentration can make day trading very stressful.
– Extremely Risky! Traders can lose a substantial amount of money in a very short period of time.
– Discipline, proper money management, risk/reward and a profitable system are a lot more important when day trading. Even a small mistake can result in a huge loss.
– Can be harder to predict the market.
Swing Trading
Pros:
– Manageable take profit and stop losses.
– Easier to learn than day trading – higher success rate than day trading.
– Spread has less of an impact into overall profits than day trading.
– Less time involved in actively trading – it is not necessary to ‘babysit’ your trades.
– Can be worked around a regular job – a couple of hours per day should suffice.
– Less stressful than intraday trading.
Cons:
– Can be difficult to learn and become profitable.
– While it requires less time than day-trading, preparation and analyzing the markets is still necessary and can be time consuming. Tending your positions daily is a must!
– Some traders have a tendency to develop emotional attachments to a trade.
– Discipline and keeping emotions in check are very important. It is not uncommon to exit on a retrace or trend change only to have the market immediately change back and head in the original direction.
Trend Trading/Position Trading
Pros:
– The most forgiving type of trading – small mistakes are more easily absorbed in market movement and the size of your eventual profit.
– The easiest to learn. It is estimated that up to 25% of position traders learn to become profitable.
– Less stressful than intraday or swing trading.
– Easier to become successful with smaller startup capital.
– Much easier to predict the market as in general you will be following the overall trend.
– In general position trading is the most profitable.
– Less time consuming than day trading.
Cons:
– Compounding has a lot less effect on profit than both intraday and swing trading.
– Because positions can be highly leveraged and trades remain open for extended periods of time, traders are unable to reap the benefits of medium term market movements.
– There is inherent risk in keeping positions open over night. It is quite possible for drastic changes to occur in the market while you sleep.
– Money can be tied up for an extended period of time. This can prevent entry into new positions as they arise.
– Because of the length of time involved in position trading, traders can experience significant drawdown with the expectation that it will turn around and start trending back in the desired direction. Psychologically this can have a very negative effect.
SUMMARY
While position trading is more profitable, day trading is less risky. The emotional element (discipline and self control) is also of more significance while day trading. The higher the time-frame, the better the chance to succeed and become profitable overall.
Which trading style appeals to you?
WHAT KINDS OF TRADERS USE SWING TRADING?
Swing trading is a popular trading style with professional traders, and is used by individuals and commercial traders alike.
Pure day traders often view swing trading as having greater risk, because trades are held overnight, but when traded correctly, swing trading has no greater risk, and can be very profitable.
More in-depth information about swing trading can be found here: introduction to swing trading.
A swing trading position generally can be held longer than a day which makes it different from trend following and buy and hold investment strategies.
Swing Traders are different from day traders in that they let their trades run for days to weeks. Swing Traders do not look to trade and make money daily like the day traders do.
Swing Trading involves letting trades run for days which gives it the potential to gain much more profits. In essence, this is best described as “letting the market do its job”.
Swing trading is different from the following trading techniques:
- In a buy and hold investment strategy, a trading position can be held for months or years.
- In a day trading strategy, trades are opened and closed within that day of trading.
In Swing Trading, profits can be made by engaging in either Long or Short trading.
SWING TRADING STRATEGIES THAT SWING TRADERS USE
Swing traders use different types of swing trading strategies. But there’s one major similarity with whatever systems they use:
all of these swing trading strategies are designed to capture the up swings and down swings at the earliest possible opportunity.
Let me say that again differently: swing trading strategies aim to buy at the lowest possible point and sell at the highest possible point: buy low and sell high. This is what summaries swing trading.
Why is this?
Well, its pretty simple…swing traders want to get into a buy (or long trade )at the lowest possible point so that when the market moves up:
- that upswing makes it easy for them to be profitable as the price moves up.
Similarly, for a sell trade, swing traders want to get in at the highest point just before the market starts to go down so that:
- that downswing makes it easy to be profitable quickly as the price moves down.
Swing Trading Strategies, like any other trading strategies, are a set of objective trading rules for buying and selling which swing traders use because the trading rules eliminate the subjectivity and emotional aspects of trading.
The trading rules are simply a set of instructions defining the rules of entry and exit of a trade. The trading rules can be either based on technical analysis or fundamental analysis.
A SWING TRADER SHOULD BE VERY GOOD IN TECHNICAL ANALYSIS
If you want to be a swing trader, you should spend time studying technical analysis. Learn about:
- Price Action which involves candlesticks and different types of patterns. This includes bullish and bearish reversal candlestick pattern. Its a must to know these!
- You should be familiar with the use of moving averages like exponential moving averages and simple moving averages, moving average convergence and divergence (MACD), stochasticks, RSI, and SAR forex indicators.
- You should also study how trends form and change. Learn about the “Dow Theory”. This knowledge will allow you to be miles ahead of the rest.
- As a swing trader you should also know how to use trendlines in your technical analysis.
- In addition, you should know what support and resistance levels are.
- As a swing trader, you should be familar with the use of fibonacci tool also.
AS A SWING TRADER YOU NEED TO HAVE SOME APPRECIATION OF FUNDAMENTAL ANALYSIS
It is in my opinion that if you are swing trading, you should also have some knowledge of fundamental analysis. It does not mean you have to be a fundamental trader…but what I mean is use that fundamental analysis and knowledge to your advantage to buy or sell at the right time based on your swing trading strategies you may have.
What is fundamental analysis? Well, simply put, its things like:
- unemployment rate (high unemployment, bad for a countries currency so it goes down)
- interest rate (high interest rate means a country’s currency value increases, low interest is the opposite)
- CPI (consumer price index)
And there are some fundamentals that move the forex market but it is not the scope of this post to discuss them all.
IF YOU ARE NEW TO SWING TRADING
Then start off by learning simpler trading rules like the cross-over of 2 moving averages signalling a downtrend and entry is made on a temporary retracement after that cross-over or more advanced trading rules like the Moving-Average-Convergence-Divergence(MACD) where in this case, the price is moving up(or down) but the MACD indicator is doing the opposite.
When do you know when to enter or exit a trade? Honestly, this is one of the greatest challenges in swing trading as well as any trading techniques of systems you may be using.
However, having said that, as a swing trader, you do not need perfect timing-buying at the very bottom or selling at the very top of price swings-to make a profit. Why?
Because if you practice strick money management rules with even small consistent trading profits, you can compound returns significantly.
ADVANTAGES OF SWING TRADING
- swing trading position can be opened and held for days, therefore it allows you to avoid the “noise” that is so predominant in the lower timeframes like the 1minute up to even 1hour timeframes.
- Profits are large when a trade is held for days and is going in the right direction.
- Swing Trading Allows a Trader to trade less and this eliminates of of the greatest of all trading blunders-overtrading.
- Good Risk:Reward Ratios-You risks for each trade a generally very small with a huge profit potential.
- Less Stressful Trading because you are not sitting behind a computer screen monitoring every single uptick and downtick of price charts. you can come 6hrs or even 1 day later to check the progress of you trade and manage it as it goes in your favour.
- You actually trade with the main trend when you swing trade
- Part time traders and people who have day jobs can get involved.
RISKS OF SWING TRADING
Swing trading in any financial market like forex involves risk. The main risk with using swing trading is that when a market is in a sideways price movement or a trading range, risk of loss in swing trading typically increases compared to compared to market that that is clearly moving in a steady up (bull market) or down (bear market) direction.
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