Who is a Swing Trader?

Trading approaches can be categorized by several different trading strategies or “trading styles”, such as day trading, investing, and also, swing trading.

Swing trading is a trading strategy aiming at researching and choosing, and “riding” trending price movements (price swings), either upward or downward ones. Swing traders use technical analyses during a trading session, mostly on stocks, to find good entry points to hold a position for days or weeks. The goal for this strategy, is to speculate and choose a right trend to ride, maximizing profits, finding and executing an exit point just before the trend changes.

A swing trader sits between a day trader and an investor when it comes to “holding time”. A day trader would only hold a position for a few hours, but not over a day. An investor is looking for opportunities to hold positions for years. A swing trader is something inbetween, from a few days to a few weeks.

Apart from the definition above, there are also alternative summaries of swing trading. Generally, all positions that take longer than a day can be described as swing trading. To put it extremely simple – index investors or ETF traders will try to speculate on long-term “swings” of a price movement, whereas swing traders do the same, only for one security, and on a shorter timeframe.

Who is a Swing Trader?

What do swing traders do? - Swing points, instruments

As the name suggests, swing traders look for price trends, or “swings”. Every trend has a “swing high” and a “swing low”.

For example, the highest point in a given timeframe just before the trend turns is called the “swing high”. The lowest point until a trend is in a downwards slope before turning back is called a “swing low”.

In between swings, the swing traders aim to have positions matching the trend, retaining and holding this over a day. It depends on the trader whether they’d choose currency pairs or stocks to trade on.

For example, some traders prefer highly volatile stocks, as instruments with more volatility will travel a bigger range, leading to better entry and exit points. Also, such instruments have lots of movements to anticipate on. 

It is also possible for forex traders to identify trends and trading opportunities on a forex market.

In the end, how can you determine which instrument could work for swing trading strategies? Oddmund Grøtte from Quantified Strategies has an answer to this question: 

“Not all assets classes are suited for trading. We believe that the best asset class for trading is stocks and stock indices. The reason is simple: you can take advantage of the tailwind from long-term upward bias in the stock market. However, this makes it very hard to find any profitable short strategies.

That being said, we are agnostic when it comes to trading. If it passes our quantitative tests, we trade it, no matter the financial instrument, if we believe it makes sense. One dollar earned in the S&P futures is the same as one dollar earned in oil-futures.

However, some assets are more prone to erratic and unpredictable moves. In our opinion, most commodities fall into this category. You can find patterns in commodities, but they are rarely durable for long periods of time. We believe trading strategies in the stock market are more durable.”

-Oddmund Grøtte, Quantified Strategies

Swing trading takes an effort to pinpoint trends, swing traders are actively researching support and resistance levels.

Support levels = a price level which an asset “did not break through” over a period of time

Resistance levels = a price level under which an asset did not drop over a period of time

Some traders say, that volume is an important factor to utilize when it comes to swing trading. Oddmund thinks otherwise: 

“We have found volume to be one of the least significant parameters to look for. Our tests indicate volume has not any significant prediction value on future asset prices. Because of this, we rarely use volume in our idea generation for trading strategies.”

-Oddmund Grøtte, Quantified Strategies

Who is a Swing Trader?

A brief on swing trading strategies

To understand the definition above, let’s break down the bolded terms.

Trading strategy = a systematic method of how, when and what to buy or sell on the markets to make profit.

Technical analysis = a method to evaluate and assess probabilities on future price changes based on statistical data, focusing solely on the price graph of given assets. Traders using technical analysis will try to anticipate future changes based on historical marked data, patterns, indicators.

Entry point = a favourable price point where a trader or investor enters a position

Exit point = the price point where a trader or investor exits a position

Swing trading is a simple strategy, and easy to exercise. However, don’t forget that your capital is at risk, as market movements are not 100% predictable.

But, all in all, how do you work on a swing trading strategy? Read Oddmund’s take below: 

Support levels = a price level which an asset “did not break through” over a period of time

Resistance levels = a price level under which an asset did not drop over a period of time

Some traders say, that volume is an important factor to utilize when it comes to swing trading. Oddmund thinks otherwise: 

“Swing trading is all about generating trading ideas, in our opinion, and backtesting. You need to make an idea  100% testable and go ahead and backtest. We spend probably like 80% of our time backtesting and getting feedback from our live strategies. It’s a constant feedback loop and require constant work.”   

-Oddmund Grøtte, Quantified Strategies

When it comes to trading strategies, it is extremely difficult to guess the probability of success. Dale Gillham from Wealth Within shares a few thoughts on this on which traders fail:

“There are many things you can do including increasing your knowledge, setting money management rules to manage your risk, working on your trading psychology, using a trading plan and the list goes on. While these areas may seem like common sense, I must admit that I have met literally hundreds of people who tell me they are traders but have little or no concept of these areas, particularly when it comes to a written trading plan. Yet I cannot fathom how anyone could think they would be a successful trader without a written trading plan although it does explain why most traders fail when it comes to trading the stock market.” 

Dale Gillham, Wealth Within

Another question is, whether it is useful to rely 100% on technical tools to find the right swing entry points. Let’s see Andrew Herrig’s take from Wealthy Nickel on this question:

“While technical analysis is not always 100% accurate, it is definitely a prerequisite for a successful trade. I like to keep things simple and first look at simple moving averages and identify potential entry points when a shorter term average crosses a longer term average. The Relative Strength Index (RSI) is also a good indicator for determining when a stock may be overbought or oversold.”

Andrew Herrig, Wealthy Nickel

Who is a Swing Trader?

Is Swing Trading better than day trading?

When it comes to the swing trading vs day trading debate, it is hard to tell. This is dependent on what you look for as a trader.

The difference between day trading and swing trading is solely the timeframe, as holding a position for more than a day can count as swing trading. The shorter the timeframe is, the harder it is. Trends are easier to spot in the longer run. And also, there are instruments, which are extremely expensive for day trading due to their wide spreads (like forex pairs). So all in all, it is dependent on the trading personality – if you feel you are the more patient time, swing trading could work, otherwise feel free to go with day trading, but be sure to know the risk you are facing with all trading.

Another difference is, that a day trader closes a position before markets close to avoid overnight risks.

Also, another angle is that the psychological factor is a great deal. It is solely a personal preference, whether you’d go with swing trading or day trading. 

In both cases, whichever strategy you go with, the most important thing is to know how to manage your risks. One approach is the sizing of your portfolio. For swing trading risk management, Andrew shares the following: 

“One of the main risk management strategies I use is to appropriately size my positions to my overall portfolio. In order to limit losses, no single position is more than 10% of my portfolio, and I generally try to keep positions to the 1-2% (the amount I’m willing to lose).

I also want to make sure I am diversified across different asset classes in my trades, so that if, for example, I was in an oil swing trade and there was unexpected bad news in the oil industry, it wouldn’t take down my entire portfolio.”

-Andrew Herrig, Wealthy Nickel

Who is a Swing Trader?

What else do you need to know about swing trades??

Want to know more about swing trades before deciding where to head next in your trading journey? We are going to release some more content about swing trading with topic like:

  • How to determine entry points?
  • Swing trading terms 10
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