Swing trading, like other trading strategies, has been in use for decades. Brokers could purchase a stock and hold their positions for a while, usually between a few days to several weeks, before selling it for a profit.
Swing Trading (Source: InvestmentU)
Over the years, advancements in technology have simplified this strategy and made it easier for the average person to trade. As a result, it is now easier for swing traders to monitor different financial instruments, enter and hold positions over an intermediately long period such as a week, and determine when to liquidate them.
Moreover, with access to the right tools, swing traders can now effectively assess information needed for both the technical and fundamental analysis of a financial instrument before deciding whether to buy or sell it.
How Does Swing Trading Work?
Swing traders predict the price movement of a financial instrument using technical analysis. Usually, they assess the trends and patterns of the asset rather than its intrinsic value before they buy. After buying, they then hold on to it for a period longer than a day, possibly up to a few weeks, before they sell. A swing trader aims to exploit a large chunk of the potential of the financial instrument before he liquidates his position.
Swing trading requires the trader to develop a plan before trading. The trading plan is usually on a risk/reward basis, which helps determine the potential reward against the risk involved. Unlike scalping, where the risk is similar to the bonus, swing traders opt for a more favorable ratio that promises more rewards than the risk involved.
Swing trading varies from short-term to long-term. For a long-term trade, the swing trader uses the fundamental analysis of a financial instrument to support its technical analysis before purchasing it. While making the trading plan, the swing trader also determines the stop-loss price. This is the price at which he will sell the cryptocurrency or stock as soon as he loses a certain amount of money on the trade to prevent further loss.
10 Questions to Ask Yourself Before Adopting Swing Trading
- What Is Your Trading Plan? Swing trading requires the trader to make a trading plan that will guide his decisions throughout the trade. The trading plan should include the entry, exit, and stop-loss prices. It should be solid.
- Can You Adhere to the Plan? Discipline is essential in Swing trading. A swing trader should not be eager to sell his cryptocurrency or stock as soon as he makes a small profit. If the plan requires you to hold for a more extended period to make a better profit, then you should do so.
- Do You Have Good Research Skills? A swing trader needs to invest only in a financial instrument with the potential to rise after a specific time. Research is required in order to choose the right cryptocurrency or stock. Hence, a swing trader must have good research skills so that he doesn’t make bad decisions.
- Do You Have Access to the Required Tools? As a trader, you should have access to the right tools for trading. These include a computer, tablet or phone, internet, and real-time price data to monitor the movement of his investment.
- Can You Spare the Time? A swing trader should be available to monitor real-time changes in his assets’ market price and take advantage of any favorable changes in market trends.
- Can You Keep Your Emotions in Check? One of the most important trading rules is to avoid being swayed by emotions or making decisions based on them. Following only emotions in trading is ruinous.
- Do You Panic Under Pressure? A swing trader constantly faces pressure situations that can force him to consider deviating from the plan. However, he must make sure that he does not buckle under the pressure as that may lead to bad trading decisions.
- Have You Tested Your Trading Strategy on a Demo Account? It is advisable to try out your trading strategy on a demo account to determine its feasibility and efficiency. If it yields a positive result, then you have a good chance of success when you start using your real, live account.
- Do You Have a Good Exit Plan? With a good exit plan, you can successfully trade an asset to its maximum potential and also minimize your downside risk. This is because you will be exited out of a trade once your stop-loss price is reached.
- Can You Bear the Risks Involved? Swing trading is susceptible to risks because a swing trader does not close his trades at the end of each trading day. Since the trades could take days or weeks, the swing trader runs the risk of overnight reverses and market gaps that can result in severe losses.
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