Swing trading is a trading approach whose goal is to take a mid-term movement within a period of a few days to several weeks. Swing traders as well as in day trading primarily use technical analysis. But it is a regular practice not to hesitate to apply fundamental analysis also in addition to analyzing price patterns and trends.
Many swing traders place trades on a so-called risk/reward basis. By analyzing the chart of an instrument the entry is determined, as well as the stop loss and afterward, it is anticipated where the take-profit could be located. Usually, traders tend to follow 1:3 R:R rule which means that if the risk is $1 then the trade should produce at least a $3 gain. Everything lower than that like risking $1 to make $1 isn’t quite favorable.
Benefits of Swing Trading
Before someone wants to start swing trading, it is important to know all the advantages that it may give. There are a number of features in swing trading, that have to be pointed out.
Swing trading allows taking advantage of longer trending periods while scalping or day trading styles gain income on short-term volatility. It is considered that it is easier to predict longer-term movements rather than short oned, whereas shorter periods of trading may be affected by noise and false signals.
When scalping or day trading, it is required to sit in front of the monitor all day long. On the contrary, swing trading requires to make some analysis once a day or even more rarely. It may be more useful for beginners also because a more user-friendly time frame is applied. In comparison to more high-frequency trading, swing trading gives more time for the collection of all the pros and cons of a trade instead of spending more time making trades during a day.
Everyone knows that trading commissions and spreads on assets affect the profitability of every trading system. Those who trade during the day, especially scalpers, may give away up to 30% or even 40% of their profits in a form of commissions. Big commissions amount being a reason for a large number of trades may be a factor that turns a profitable strategy into a losing one. For swing traders, the spread and commission matter less because they make fewer trades. Formally, a lower number of trades and less frequency give a swing trader an additional feature in comparison to other trading styles.
Higher probability of Indicators
The swing trading time frames start from 4 Hour charts and may be also daily and weekly. Every trader knows that a higher timeframe gives a higher chance of being correct in prediction. It refers both to candlestick patterns and indicators that may be used for trading. For example, if a zone is created in the Supply and Demand indicator on the Daily timeframe, then it is valued more than the zone on 5-minute chart. Finally, analysis of higher time frames is more accurate, so swing trading strategies can benefit from this.
Each trading approach has its pros and cons so there are some aspects of swing trading that can not be eliminated and every swing trader has to accept them.
- Swap fees: Swap is a daily interest rate that is charged on positions that are held overnight. It is not an issue for scalpers or day traders, that open and close positions within a day, though may add up fees for longer-term trades, especially on some exotic pairs with high interest rates.
- Overnight risk: The main gain of swing trading may turn into a negative part because if held overnight or over the weekend, there is no way to influence some events (political elections, disasters, etc).
Every trader should carefully accept these risks and try to lessen their influence on a trading strategy.