Swing trading basics: How to make money on short-term market fluctuations?

​Swing trading is a short-term trading strategy that focuses on capitalising on price fluctuations. Positions are usually opened and closed within a few days, allowing traders to react quickly to changes in the value of assets, most commonly stocks. The name of this strategy comes from the price fluctuations that traders use to profit from.

Basic principles and features of swing trading

The main goal of swing trading is to follow the changes in the stock price and enter a position at the optimal level, and then exit it in a few days with a profit. Typically, holding a position for one to four days, but some traders may keep positions open for several weeks, depending on their strategy.

If a trader chooses to hold a position for a longer period of time, they need to consider the cost of holding the position, which can be either positive or negative. This cost depends on the direction of the trade and the applicable funding rate. Swing trading requires careful monitoring of the market and quick decision making to make the most of price fluctuations.

Swing trading differs significantly from strategies such as position trading, often used by institutional investors who hold their assets for many years. Typically, these investors seek to profit from asset price fluctuations, withdrawing funds only when the value of the asset has reached an advanced or mature stage, rising significantly.

The subtleties of swing trading

Swing traders must carefully analyse price charts and other data to identify changes in the value of an asset. Traders seek to determine when the price will move further before entering a position in order to capture any potential profits from that movement. This means swing traders need to familiarise themselves with technical analysis and use its methods to guide their decisions. They also need to understand fundamental analysis and study product fundamentals to back up their technical judgement.

Swing trading is a method where a trader can seek to make efficient profits in the short term, given the generally tight timeframes on which such trades open and the relative ease of setting up and managing them.

Fluctuations in world currency exchange rates offer a wide range of opportunities for traders applying swing trading strategies in Forex traders. These fluctuations often occur due to economic or political instability in one or more countries. Traders can buy a currency at a low level and sell it when the exchange rate rises, which happens as economies recover, supported by national central banks or international lenders.

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Swing trading and day trading

A well-executed swing trading strategy allows traders to make the most of a short period of time. Unlike day traders and scalpers, it is not as important to be in front of the screen all the time here as you don't need to constantly monitor price movements. Swing traders need to be aware of trends over several days or weeks, as opposed to small price movements over a few minutes or seconds. This means keeping an eye on market sentiment and economic news to see where the market is heading.

Swing traders must have the ability to quickly study charts and data, and use historical information to know exactly when to buy or sell. Less experienced traders may struggle to master this skill, while more experienced or professional traders have enough experience to use it to their advantage. However, it is not always possible to get in and out of large positions quickly. Good preparation before the markets open and careful monitoring of the products you are interested in or own, as well as following the financial media, should give you an idea of how the markets are behaving on any given day and help you make the most of swing trading.

Benefits of swing trading

This style of trading is ideal for those who have a full-time job and can't devote several hours a day to trading. Swing traders tend to have day jobs, which provides them with an additional source of income in the event of losses that day traders often do not have. The ability to set wider stop losses allows swing traders to reduce the number of prematurely closed positions.

Unlike day traders, who must remain calm and focused on their screens for hours each day, swing trading requires less time and is conducted at a slower pace. This leads to a more efficient use of capital, as positions are held for higher profits rather than opening new trades every day. However, when deciding to hold positions, traders must consider the costs involved.

Disadvantages of swing trading

Swing trading requires a confident mastery of technical analysis to determine optimal entry and exit points. This may be natural for professional traders, but those beginning swing trading will need more practice in analysing price charts. As positions are held overnight or over several days, there is a risk of being left out of cash. Economic news released after hours or over the weekend can cause the market to open with a completely different price.

Holding a position for a longer period of time can result in both large gains and significant losses. Swing trading requires patience and can become very stressful if a trade begins to develop unfavourably. Unlike day traders, for whom trading is often their main job and who can focus entirely on their positions and perfecting their strategies, swing traders have to combine trading with their day job.

Conclusion

Swing trading is an alternative strategy for those who prefer short-term trading but cannot devote several hours a day to it. Although it requires an understanding of technical analysis, the strategy can yield higher profits than day trading. As with any type of trading, there are risks involved. Swing traders, especially those who are just beginning, need to have a good understanding of technical indicators as well as the market fundamentals on which they base their trading decisions. A swing trader should also have a stop loss in case of breaking news that will affect the direction of the market.