Just as the name suggests, a 'swing trade' involves riding the "swings'' or fluctuations in the market to make gains. Unlike long-term investors or day traders, swing traders hold positions for a few days to weeks, or even months. This trading strategy is however not for everyone - it requires a keen eye for spotting trends and a willingness to act swiftly to capitalise on market movements. Before you learn how it works, it's important to note that swing trading comes with risks, including market volatility and the potential for losses if trends change abruptly.
What is a swing trade?
A swing trade is when you buy something, like a stock or cryptocurrency, when its price is low, then wait for it to go up, and sell it when it's higher. But here's the catch: you're not holding onto it for a really long time like some investors do, and you're not buying and selling super fast like day traders.
Capitalise on volatility in cryptocurrency markets
Take a position on moving cryptocurrency prices. Never miss an opportunity.
So, let's say you're looking at Bitcoin, which is currently at $64,000. You've been watching it, and you notice it tends to go up and down quite a bit. Today, it's at a low point, maybe around $60,000 because of some bearish news.
You think, "Hmm, this could be a good time to buy some Bitcoin while it's cheaper." So, you buy some at $60,000.
Over the next few weeks, Bitcoin's price starts to swing up. Maybe it hits $70,000 because of some positive news about adoption. You're keeping an eye on it, and when you feel like it's swung up enough and you're happy with the gains you made, you sell those Bitcoins at $70,000.
That's how you make a swing trade - you're basically trying to catch the swing of an asset's price and make gains from it.
Instrument for swing trade and why
Here's a breakdown of why certain instruments are commonly chosen for swing trading:
Stocks: Stocks are popular among swing traders because they often exhibit clear trends and patterns that could be exploited for short- to medium-term gains. Additionally, there is a wide range of stocks available across different sectors, providing ample opportunities for swing traders to find potential candidates.
Cryptocurrencies: Cryptocurrencies, like Bitcoin and Ethereum have gained popularity among swing traders due to their high volatility and round-the-clock trading. The crypto market's volatility could present significant opportunities for traders who can accurately predict price swings over short to medium timeframes.
Forex pairs: The Forex market is the largest financial market globally, known for its high liquidity and accessibility. Swing traders in the Forex market aim to capitalise on short-term price fluctuations between currency pairs such as GBP/USD, taking advantage of geopolitical events, economic data releases, and other factors influencing exchange rates.
Commodities: Commodities such as gold, oil, and agricultural products can also be suitable for swing trading. These markets could experience significant price movements driven by factors like supply and demand dynamics, geopolitical tensions, and global economic conditions, providing opportunities for swing traders to gain from short-term price fluctuations.
Ultimately, the choice of instrument for swing trading depends on the trader's preferences, risk tolerance, and familiarity with the market. It's essential to conduct thorough technical and fundamental analysis before selecting an instrument, and to continuously monitor market conditions to identify potential swing trading opportunities.
| S/N | Advantages of swing trade | Risks of swing trade |
|---|---|---|
| 1. | Less pressure, more time: Unlike day trading where decisions must be made quickly, swing trading allows for more relaxed decision-making. Traders have time to analyse short and medium-term trends, reducing the pressure to make split-second choices. For example, instead of stressing about every tick in the market, a swing trader might analyse the stock's performance over several days to identify a trend before making a move. | Overstaying positions: One risk of swing trading is the temptation to hold onto positions for too long, either in pursuit of greater profits or in hopes of recovering losses. For instance, if a swing trader sees their stock reach their profit target but decides to hold on for more gains, they risk the stock reversing its trend and erasing their profits. |
| 2. | Flexibility: Swing trading doesn't require constant monitoring of the market. Traders can hold positions for several days, allowing them to pursue other activities or commitments without being glued to their screens. This flexibility appeals to individuals with busy schedules or those who prefer a less intense trading approach. | Emotional trading: Emotions can cloud judgement and lead to poor decision-making. Swing traders may become emotionally attached to their positions, causing them to ignore exit signals or hold onto losing trades in the hope of a turnaround. For example, a swing trader who experiences a string of losses may become overconfident and refuse to cut their losses, leading to further declines. |
| 3. | Lower costs: Since swing traders execute fewer trades compared to day traders, they incur lower transaction costs. Buying and selling stocks frequently can rack up brokerage fees and commissions, eating into gains. Swing traders, by holding positions for longer periods, minimise these costs, making it more cost-effective in the long run. | Market volatility: Swing trading relies on identifying and capitalising on short to medium-term trends. However, market volatility can disrupt these trends, leading to unexpected price movements and potential losses. For instance, sudden news events or geopolitical developments could cause a swing trader's position to quickly turn against them. |
How to make a swing trade
Let's break down how to make a swing trade using gold price - XAUUSD as an example:
- Open an account: First, open an account with Skilling quickly and easily. Then search for Gold (XAUUSD) from the instrument list.
- Identify a trend: Look at the historical price movements of gold (XAUUSD) on a chart to identify whether it's in an uptrend downtrend, or ranging. For example, if the price of gold has been steadily increasing over the past few weeks, it might indicate an uptrend.
- Spot a potential entry point: Within the trend you've identified, look for a pullback or consolidation phase where the price temporarily moves against the trend. This could present a chance to enter the trade at a favorable price. For instance, if gold recently pulled back from its recent high of $2400 to $2300, it might signal a potential entry point as it consolidates before resuming its upward trend.
- Confirm entry with indicators: Use technical indicators, such as moving averages or relative strength index (RSI), to confirm the entry point. For example, if the 50-day moving average is sloping upwards and the RSI indicates that gold is not overbought, it strengthens the case for entering the trade.
- Set stop-loss and take-profit levels: Determine your risk management levels by setting a stop-loss order below the entry point to limit potential losses if the trade goes against you. Similarly, set a take-profit order above the entry point to secure profits when the price reaches a certain target. For instance, you might set a stop-loss at $2250 and a take-profit at $2400 based on your risk-reward ratio and analysis of support and resistance levels.
- Place your trade: Execute the trade by placing a buy order for gold (XAUUSD) at the desired entry price. Make sure to set up your stop-loss and take-profit orders simultaneously to manage your risk effectively.
- Monitor the trade: Keep an eye on the price movement of gold and any relevant market news or events that could impact your trade. Adjust your stop-loss and take-profit levels if necessary based on new information or changes in market conditions.
- Close the trade: Once the price of gold reaches your take-profit or stop-loss levels, close the trade accordingly. Stick to your trading plan and avoid letting emotions influence your decision-making.
- Review and learn: After closing the trade, analyse your performance and identify any areas for improvement. Reflect on what worked well and what didn't, and use this feedback to refine your swing trading strategy for future trades.
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Difference between a swing trade and a day trade
As you've already learnt, a swing trade involves holding positions for days to weeks, capitalising on short to medium-term price fluctuations in the market. Traders aim to profit from the 'swings' or trends within this timeframe, allowing for more relaxed decision-making. In contrast, day trading involves buying and selling financial instruments within the same trading day, aiming to profit from intraday price movements. Day traders face intense pressure to make quick decisions and must closely monitor the market throughout the day. While swing trading offers more flexibility and less stress, day trading requires rapid execution and constant attention to market fluctuations.
Remember to always conduct thorough technical and fundamental analysis and manage your risk responsibly.
