What is Swing Trading, And How Does It Work

Swing Trading

There is Scalping, where traders open & close trades as quickly as possible. Then there is Day Trading, where traders open and close trades within a day. But what exactly is swing trading?

Swing trading involves holding a position for more than one day, spanning weeks and sometimes months. In other words, I’m a swing trader if I enter a trade today and do not exit until after a few days or weeks, or months. 

Although closely similar to day trading, it has somewhat differences. This trading type thrives on small profits that compound over time. And, trust me, it takes a lot of expertise to swing trade – more than you’d need for day trading. 

Swing traders mostly focus on fundamental analysis, chart patterns, and indicators.

How Does Swing Trading Work? 

As we discussed in my last posts, swing trading involves entering a position for a few days, sometimes up to weeks or months. 

If you enter a trade today & close it before the close of the Day, that’s Day Trading. But if you leave that same trade to run until the next Day, or even longer, then that’s Swing Trading. 

You can use several strategies to swing trade. But, generally, most traders use two main strategies Trend Following & Reversal Strategy.

  1. Trend Following: As the name suggests, this strategy involves “riding the trend.” Identify a trend and follow it to the end. Don’t forget to set an SL to limit your potential losses. 
  2. Reversal Strategy: This one is for the “pros.” And as the name suggests, it involves identifying price reversals and acting accordingly. 

What Are The Risks Youll Face As A Swing Trader?

Trading is not a risk-free enterprise. What matters is identifying potential risks and managing them appropriately. Here are a few risks you’re exposed to as a swing trader:

1.      Market Volatility

As a swing trader, you’re more vulnerable to market volatility than others. Therefore, just as you can compound your profits, you can also suffer massive losses, especially when the market goes extremely unfavourable.

2.      Overnight and Weekend Risks

Anything can happen over the night or on the weekend. There might be major news or market overturn. Since your trades are still open, you can experience a major hit too. 

3.     Higher Fees

Typically, the longer you stay in the market, the more fees and commissions you’ll pay. And since you’re trading for more than one Day as a swing trader, you should be prepared to suffer higher fees. 

4.      Requires More Nerves

Financial securities rarely move in a straight line. If a position how’s against you, can you withstand the huge swing? 

Difference Between Day Trading & Swing Trading

Earlier in this article, I mentioned that swing trading & day trading are closely similar. While this is true, however, of course, they have their unique differences.

Here are the major differences between these two types of Trading:

  1. Because of the trading duration, swing traders are more vulnerable to overnight risks. These are anything that happens at night, whether good or bad. 
  2. Swing traders typically make more profits than day traders. Swing trading helps traders to compound smaller profits over a long period. 
  3. Apart from the overnight risks, swing trading is less risky than day trading. There’s no need to over-leverage as a swing trader. You have all the time to compound.
  4. The major difference between the two is their timeframe. Day trading involves trading within one Day, while swing trading involves many days, sometimes up to weeks and months. 

Top 3 Reasons You Should Choose Swing Trading

Of course, several benefits are associated with using this trading strategy. I have discussed the top 3 below:

  1. More Profits: Compared to day trading & Scalping, a swing trader tends to enjoy more profits with lesser risks. You don’t need to over-leverage – this trading type takes you slow and steady. 
  2. Saves Time: Being a swing trader gives you the freedom you deserve. You don’t need to sit in front of your system all Day as a swing trader. If you have a day job & don’t have a lot of time to spend on the charts, you can just open a trader and leave it running for a while. 
  3. Fewer trades: Since it generated more profits, then you don’t need to have plenty of positions open at the same time, compared to scalpers and day traders. 

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