Swing trading: advantages and risks, complete guide

Swing trading is a very popular way used by traders to invest in the financial markets. Swing trading is an operating technique that is based on the opening of a buy or sell position, to close it after a few days up to a few weeks, generally never more than a month.

The term swing trading might suggest a complex technique, but it is simpler than you can imagine and is suitable for both experienced and non-experienced traders. As a trader friend explained to me, to earn money in trading with swin trading, however, it is important to know the reference markets and know how to use technical analysis. Swing trading can be considered a cross between intraday trading, which involves opening and closing the operation during the same session, and buy & hold, which requires you to keep the position open for a long period of time (more than a month for sure).

Swing trading, the most important features and how to use it

To make money with swing trading, you must select a market in a well-defined trend, be it bullish or bearish. When prices temporarily deviate from the main trend, it is possible to operate to aim for a price return close to the trend itself. Side market phases (called trading ranges) or consolidation phases should be avoided because they can mislead and cause large losses.

The market never moves according to a linear trend, but makes continuous fluctuations. This trend occurs not only during phases of uncertainty, but also during more sustained and solid trends. The swing trading strategy aims to profit from market fluctuations, entering when the corrections of a trend make a pullback and immediately afterwards the trend push starts again.

swing trading example

In other words, when a strong trend makes a temporary deviation from its course the trader observes it carefully and then takes action when a counter-deviation occurs (a “swing”, as in the image above) which puts the price back in trend. The greater the new momentum of the trend, the greater the gain you will get from this strategy.

Time is a key element of swing trading: typically, those who trade a swing trading strategy choose a four hour time frame (often referred to as H4 on various trading platforms). The time frames lower than the hourly ones (H1) and higher than the daily ones are less suitable, since it is necessary to have a complete view of the movement of the last days.

trading time frame

There are various indicators useful in swing trading, especially to understand if the market is trending or not. Among these, the best known is the simple moving average: if the moving average crosses down the price line (goes below) and has a positive bias, the market is in a bullish phase. Conversely, if the moving average crosses the price line upwards (moves above) and has a negative slope, then the market is in a bearish trend.

Advantages of swing trading

Like any type of trading strategy, swing trading includes advantages and disadvantages when using it, and knowing them in advance can be crucial in deciding whether it is a suitable trading technique for your needs.

Swing trading allows you to profit from the natural rises and falls of the markets

Financial markets never go in one direction forever: you can increase profits since, in theory, you will earn both when the market rises and when it retreats, as surely will happen sooner or later.

By entering and exiting the markets, you can take advantage of more opportunities

Look at a market chart: there is almost always a definite long-term trend. But in the meantime, the price movement could oscillate several times between a support and resistance area. By entering and exiting the market you can make more profits than following the primary market trend.

With swing trading, stop losses are lower than with long-term trading

The stop loss on a swing trade could be 100 pips based on a 4 hour chart, while a stop loss on a weekly chart based on the general trend could be 400 pips. This allows you to place larger positions instead of extremely low leverage positions used for long-term trading.

Objectives and limits are clearer

Those who trade long-term normally give ample space to the movements of the markets and are mainly based on fundamentals, while those who trade in the short-medium term using the swing trader are more “technical” and therefore will have a specific area in which they believe that the trend may change direction.

If you are a skilled trader in swing trading, you know exactly when the market will hit you and you can limit the damage by closing the trade by limiting losses.

The risks of swing trading

Obviously, every trading technique has its drawbacks: swing trading does not escape this rule, which due to its main characteristics can cause specific difficulties for the trader.

You can often take losses

Even if the market shows support or resistance in a specific area, this does not mean that prices will respect them. The movement of the markets is sometimes unpredictable and no matter how good you are, it is normal to suffer some losses using a swing trading strategy.

You must be well versed in technical analysis

It’s not necessarily a ‘disadvantage’, but you still need extra work and skills. Almost anyone can tell the market trend on a graph that goes from the bottom left to the top right, but identifying the entry and exit points in a chart is more difficult. Technical analysis can help you, but you must first get to know it and this requires commitment and time.

It takes a different mindset than long-term trading

The time frames are certainly longer than in scalping trading, but even those who use swing trading can be “scared of the market” as the pullbacks in these smaller time frames appear to be more violent than those of longer term trading. This is a psychological problem that most traders will eventually face throughout their careers.

Swing trading is a technique to know to adapt to the markets

In conclusion, I emphasize that most traders use more than one trading technique as the markets are not necessarily always in favor of a particular technique, sometimes they may require more than one. A good trader is able to use various types of trading to increase their profits, but will have to adapt to the markets, not the other way around.

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