What do swing traders do? – Swing points, instruments
A brief on swing trading strategies
Is Swing Trading better than day trading?
What else do you need to know about swing trades?
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Trading approaches can be categorized by several different trading strategies or “trading styles”, such as day trading, investing, and also, swing trading.
What Is Swing Trading?
Swing trading is a trading strategy that focuses on identifying and taking advantage of short- to medium-term price movements, often referred to as price swings. The objective is to capture gains from trends that move either upward or downward.
Swing traders typically rely on technical analysis to study price charts and indicators, especially when trading stocks or other liquid assets. By analyzing these patterns, they aim to find favorable entry points, hold positions for several days or weeks, and then exit the trade just before the trend begins to reverse. The goal is to ride a portion of a market trend and maximize profit from that movement.
In terms of holding periods, swing traders fall between day traders and long-term investors. A day trader usually closes all positions within the same trading day, often holding trades for only minutes or hours. In contrast, a long-term investor may keep investments for many months or even years. Swing traders occupy the middle ground, typically holding positions from a few days up to several weeks.
Apart from the definition above, there are also alternative summaries of swing trading. Generally, all positions that take longer than a day can be described as swing trading. To put it extremely simple – index investors or ETF traders will try to speculate on long-term “swings” of a price movement, whereas swing traders do the same, only for one security, and on a shorter timeframe.
Who is a Swing Trader?
What do swing traders do? – Swing points, instruments
Understanding Swing Highs and Swing Lows in Swing Trading
As the name implies, swing traders focus on identifying price swings or trends in the market. Within any trend, there are typically two important points: the swing high and the swing low.
A swing high refers to the highest price reached within a given period just before the market begins to move downward. Conversely, a swing low is the lowest price reached before the market reverses and starts moving upward again.
Between these turning points, swing traders try to maintain positions that align with the prevailing trend, holding trades for more than a single day—often for several days or even weeks. The specific assets traded vary from one trader to another, with some focusing on stocks while others prefer currency pairs in the forex market.
Many swing traders are drawn to highly volatile assets, as larger price fluctuations create wider trading ranges. This volatility can provide more opportunities for identifying favorable entry and exit points.
Swing trading strategies are also widely used in the foreign exchange market, where traders analyze currency price movements to detect trends and potential trading setups.
But how can you determine which financial instruments are best suited for swing trading strategies? According to Oddmund Grøtte from Quantified Strategies, the key lies in evaluating the characteristics of the market and the behavior of the asset being traded.
“Not all assets classes are suited for trading. We believe that the best asset class for trading is stocks and stock indices. The reason is simple: you can take advantage of the tailwind from long-term upward bias in the stock market. However, this makes it very hard to find any profitable short strategies.
That being said, we are agnostic when it comes to trading. If it passes our quantitative tests, we trade it, no matter the financial instrument, if we believe it makes sense. One dollar earned in the S&P futures is the same as one dollar earned in oil-futures.
However, some assets are more prone to erratic and unpredictable moves. In our opinion, most commodities fall into this category. You can find patterns in commodities, but they are rarely durable for long periods of time. We believe trading strategies in the stock market are more durable.”
-Oddmund Grøtte, Quantified Strategies
Swing trading takes an effort to pinpoint trends, swing traders are actively researching support and resistance levels.
Support levels = a price level which an asset “did not break through” over a period of time
Resistance levels = a price level under which an asset did not drop over a period of time
Some traders say, that volume is an important factor to utilize when it comes to swing trading. Oddmund thinks otherwise:
“We have found volume to be one of the least significant parameters to look for. Our tests indicate volume has not any significant prediction value on future asset prices. Because of this, we rarely use volume in our idea generation for trading strategies.”
-Oddmund Grøtte, Quantified Strategies
Who is a Swing Trader?
A brief on swing trading strategies
To understand the definition above, let’s break down the bolded terms.
Trading strategy = a systematic method of how, when and what to buy or sell on the markets to make profit.
Technical analysis = a method to evaluate and assess probabilities on future price changes based on statistical data, focusing solely on the price graph of given assets. Traders using technical analysis will try to anticipate future changes based on historical marked data, patterns, indicators.
Entry point = a favourable price point where a trader or investor enters a position
Exit point = the price point where a trader or investor exits a position
Swing trading is a simple strategy, and easy to exercise. However, don’t forget that your capital is at risk, as market movements are not 100% predictable.
But, all in all, how do you work on a swing trading strategy? Read Oddmund’s take below:
Support levels = a price level which an asset “did not break through” over a period of time
Resistance levels = a price level under which an asset did not drop over a period of time
Some traders say, that volume is an important factor to utilize when it comes to swing trading. Oddmund thinks otherwise:
“Swing trading is all about generating trading ideas, in our opinion, and backtesting. You need to make an idea 100% testable and go ahead and backtest. We spend probably like 80% of our time backtesting and getting feedback from our live strategies. It’s a constant feedback loop and require constant work.”
-Oddmund Grøtte, Quantified Strategies
When it comes to trading strategies, it is extremely difficult to guess the probability of success. Dale Gillham from Wealth Within shares a few thoughts on this on which traders fail:
“There are many things you can do including increasing your knowledge, setting money management rules to manage your risk, working on your trading psychology, using a trading plan and the list goes on. While these areas may seem like common sense, I must admit that I have met literally hundreds of people who tell me they are traders but have little or no concept of these areas, particularly when it comes to a written trading plan. Yet I cannot fathom how anyone could think they would be a successful trader without a written trading plan although it does explain why most traders fail when it comes to trading the stock market.”
Dale Gillham, Wealth Within
Another question is, whether it is useful to rely 100% on technical tools to find the right swing entry points. Let’s see Andrew Herrig’s take from Wealthy Nickel on this question:
“While technical analysis is not always 100% accurate, it is definitely a prerequisite for a successful trade. I like to keep things simple and first look at simple moving averages and identify potential entry points when a shorter term average crosses a longer term average. The Relative Strength Index (RSI) is also a good indicator for determining when a stock may be overbought or oversold.”
Andrew Herrig, Wealthy Nickel
Who is a Swing Trader?
Is Swing Trading better than day trading?
When it comes to the swing trading vs day trading debate, it is hard to tell. This is dependent on what you look for as a trader.
The difference between day trading and swing trading is solely the timeframe, as holding a position for more than a day can count as swing trading. The shorter the timeframe is, the harder it is. Trends are easier to spot in the longer run. And also, there are instruments, which are extremely expensive for day trading due to their wide spreads (like forex pairs). So all in all, it is dependent on the trading personality – if you feel you are the more patient time, swing trading could work, otherwise feel free to go with day trading, but be sure to know the risk you are facing with all trading.
Another difference is, that a day trader closes a position before markets close to avoid overnight risks.
Also, another angle is that the psychological factor is a great deal. It is solely a personal preference, whether you’d go with swing trading or day trading.
In both cases, whichever strategy you go with, the most important thing is to know how to manage your risks. One approach is the sizing of your portfolio. For swing trading risk management, Andrew shares the following:
“One of the main risk management strategies I use is to appropriately size my positions to my overall portfolio. In order to limit losses, no single position is more than 10% of my portfolio, and I generally try to keep positions to the 1-2% (the amount I’m willing to lose).
I also want to make sure I am diversified across different asset classes in my trades, so that if, for example, I was in an oil swing trade and there was unexpected bad news in the oil industry, it wouldn’t take down my entire portfolio.”
-Andrew Herrig, Wealthy Nickel
Who is a Swing Trader?
What else do you need to know about swing trades??
Want to know more about swing trades before deciding where to head next in your trading journey? We are going to release some more content about swing trading with topic like:
- How to determine entry points?
- Swing trading terms 10