What is swing trading? This trading style has gained popularity as Forex traders look for ways to earn extra income while working their full-time job.
July 2, 2021, | AtoZ Markets – The period of time over which a trader chooses to trade can have a significant impact on a trading strategy and profitability. Day trading and swing trading can suit different traders depending on the amount of capital available, time availability, psychology, and the market being traded.
One trading style is no better than the other, and it really comes down to which style suits the trader's personal circumstances. Some traders choose to do one or the other, while others may be day traders, swing traders, and buy-and-hold investors at the same time.
Swing trading vs day trading
Are there any differences between swing trading and day trading? Is this trading strategy a good idea at all? These Forex terminologies are often mistakenly introduced in a way that misleads new traders looking to learn. In this article, we will prove that they are two different trading styles and talk about the pros and cons of each.
What is swing trading?
As the name suggests, swing trading is an attempt to profit from fluctuations in the market. These fluctuations consist of two parts: the so-called Swing High and Swing Low.
Swings are the most profitable part of any market move.
Rather than focusing on the exact time, these traders try to determine the beginning of a directional price movement, enter the trade and hold it until the movement disappears, when they make a profit. Swing traders are willing to keep trades open for days or even weeks if required.
Swing trading is usually less labor intensive and is usually practiced on higher time frames than day trading. 4 hours is the most frequent time frame, although some guide traders will make decisions based on 1-hour charts or even use a lower time frame to customize their entries and exits. One of the main attractions of swing trading is that it can be practiced by checking prices only once every four hours. Thus, many novice traders can combine forex trading with their main place of work. Based on the above, you can determine that swing trading will take much less time from you than day trading.
Swing traders typically look for higher profits on price movements between 1.5% and 5%, using commensurately wider stops to account for the inherent volatility of 4-hour or hourly price movements. Swing traders typically use trend, support, and resistance strategies, often supported by fundamental analysis, as they try to catch large price movements.
Watch the youtube video below to learn the basics of Swing trading from a beginner level.
What is day trading?
“Session trading” may be a better term to use than “day trading” as the key definition of day trading is that trades usually open and close within a single trading session. In fact, day traders can leave a small portion of a very profitable position to start "night" trading, but this is very rare.
Day trading is very intense. It requires tough, active trading on small timeframes such as 15 minutes, 5 minutes, or even 1 minute, as well as close attention at least periodically throughout the trading session.
Day traders can use any of the trading strategies, but typically all traders, over the course of a single day, look for a series of relatively small winning trades, with winnings ranging from a few pips to perhaps a 1.5% move in price.
Day trading vs swing trading - Difference
Day trading attracts traders looking to quickly increase profits. Let's say a trader risks 0.5% of their capital on each trade. If they lose, they will lose 0.5%, but if they win, they will gain 1% (2: 1 reward to risk ratio).
Let's also assume they win 50% of their trades. If they make six trades a day, on average they will add about 1.5% to their account every day, minus trading fees. Creating even 1% per day would increase the trading account by over 200% over the course of a year without any repercussions.
On the other hand, while the numbers seem to be easy to repeat to generate huge returns, nothing is ever so easy. Earning twice as much from the winners as you lost and also winning 50% of all the trades you make is not easy. You can make money quickly, but you can also quickly drain your trading account during day trading.
Swing trading accumulates gains and losses slower than day trading, but you can still have certain swing trades that quickly lead to large gains or losses. Suppose a hesitant trader uses the same risk management rule and risks 0.5% of his capital on each trade in order to try to earn between 1% and 2% on his winning trades.
Let's say they get an average of 1.5% on winning trades, while losing 0.5% on losing trades. They make six trades a month and win 50% of those trades. In a typical month, a swing trader can earn 3% on their account balance minus commissions. Over the course of the year, this is around 36%, which sounds good, but offers less potential than the possible earnings of a day trader.
These sample scenarios serve to illustrate the difference between the two trading styles. Changes in the percentage of trades won, the average win versus the average loss, or the number of trades will significantly affect the potential return of the strategy.
Generally, day trading has more profit potential, at least on smaller accounts. As the account size grows, it becomes more difficult to effectively use all the capital on very short-term day trades.
Day traders may find that their interest rate decreases as capital increases. Their dollar yields can still increase as getting 5% on $1 million equals more than 20% on $100,000. Swing traders are less likely to do this.
Swing trading - pros and cons
Swing Trading strategies are based on the use of short-term price movements. When choosing the right market (Forex for example), they generate many signals that make it possible to trade. Swing trading does not take as long as day trading or other short term strategies. At the same time, it represents a kind of balance between short-term and long-term investments. This is why swing trading is one of the most popular trading styles.
Advantages of swing trading
- does not require as much attention and time as day trading
- Generates a large number of signals
- There are several possible use cases
- Low transaction costs
Disadvantages of swing trading
- Increased risk associated with large price fluctuations
- The need to place protective orders - stop loss
- Great knowledge and experience required
Day Trading - Pros and cons
- the positions are usually closed at the end of each day, and are therefore not affected by the risk deriving from the night news or from the broker's movements after hours;
- small stop-loss orders can protect positions from extreme movements;
- regular traders have access to higher leverage and lower fees;
- numerous operations enhance the hands-on learning experience.
Conversely, these are some of the main drawbacks of day trading:
- frequent trades mean multiple commission costs;
- some assets are off-limits to day trading, such as mutual funds;
- there may not be enough time for a position to make a profit before having to close it;
- losses can increase rapidly, especially if the margin is used to finance purchases. Margin calls are a real risk.
How to make money in Forex with swing trading
This strategy is used by both experienced and novice traders and is the easiest to use because it is the right compromise between time spent in trading and the duration of the operation.
With swing trading, the profit is greater than in scalping and intraday trading because you have more time to evaluate your strategy.
In order to earn with swing trading, you need to open trend following positions.
By opening trend following positions (i.e. that follow the underlying trend of the chart), you are much more likely that the operation will end in profit even if you do not enter the best point and therefore have very low risks.
In this article I will explain how to implement a trend following strategy, a necessary requirement to correctly use swing trading.
One factor to be absolutely considered if you want to use a swing trading strategy is the timeframe.
The timeframe used should not drop below 1H.
In fact, in this strategy, it is important to have a slightly broader view of what the underlying trend is because we have to capture the fluctuations that follow the trend.
Increasing the timeframe a little helps to distinguish if the current trend is well defined or if we are in a lateral phase of the market, where it is not advisable to use this strategy.
In addition to the timeframe, you can rely on indicators to evaluate the strength of an ongoing trend.
My advice is therefore to choose one and follow the signals it gives you to understand if it is the right time to open a long or short position.
Is swing trading right for you?
There is no right or wrong answer here. However, many experienced traders believe that this is the most profitable trading style.
Below are definitions to help you determine if swing trading fits your personality:
- You don't mind keeping the trade open for several days
Most swing trading trades last from a few days to several weeks. This means holding positions overnight and sometimes on weekends.
- You want to be free to use your time
Swing trading allows the trader to get a lot of free time. On average, it will take you about 30-40 minutes to analyze charts.
- You are okay with the fact that you will have fewer trades, but each trade will bring more profit
Because swing trading in Forex works best at higher time frames, the options are limited. You can receive five to ten trades every month. However, the profit from such trades will be greater than from intraday ones. Usually, in such a trade, the minimum reward ratio is 3R.
- Are you looking for a slower trading style
When it comes to Forex trading, slow is not a bad thing. In fact, a slower style, such as swing trading, gives you more time to make decisions, which leads to less stress and anxiety.
So, if you're looking for a more relaxed way to trade the market, swing trading might be the way to go.
- Do you have a full-time job or are you studying
If you don't have a lot of time to trade, then swing trading is a huge advantage! You do not need to sit at the charts for hours and monitor every tick.
You may NOT want to be a swing trader if:
- Looking for a showy (not boring) and fast trading style
There is nothing fast or fun or exciting about swing trading. This is a style in which slower, more disciplined traders win.
- You want to receive a small reward on every trade
As a swing trader, your average profit on a successful trade can be 2% or more. Most day traders, on the other hand, get a much lower amount for a profitable trade. They compensate for this with volumes, but the return per execution is relatively small.
- The idea of leaving open positions overnight does not seem good to you
Most swings last from a few days to several weeks. Thus, swing traders find that holding overnight is common. If you cannot sleep knowing that you have an open trade, swing trading is definitely not suitable.
- Are you worried when the market moves against an open trade
In most cases, the market will not immediately take off in the right direction. Drawdown is something that all traders must deal with regardless of how they approach the markets.
However, drawdowns can last longer for a swing trader. This does not mean that you will lose more money, but positions can remain negative for much longer than if you were trading intraday.
A few tips for swing traders
Swing trading can be very effective for investing in Forex. However, it is worth remembering to follow several rules that will reduce the risk of losing funds. That is why we have prepared some tips for beginners.
- Try your strategy on a demo account - you can experiment without worrying about losing money.
- Define entry and exit thresholds and stick to your strategy.
- Test several technical analysis indicators that will make it easier for you to confirm market trends.
One trading style is no better than the other; they just fit different needs. Day trading has more profit potential, at least as a percentage on smaller trading accounts. Swing traders are more likely to maintain interest income even if their account grows to a certain level.
Day trading takes longer than swing trading, while both require a lot of practice to get consistency. Day trading is the best option for action lovers. Those looking for an option with less stress and less time can use swing trading.