Unlike day traders, swing traders are happy to run their positions overnight, and can hold for weeks if that is what their preferred technical indicators are telling them to do.
They tend to trade less frequently and this also means that they are generally prepared to take a larger risk in the hope of capturing a bigger percentage return.
As with day traders, the fundamental analysis takes a back seat to technical analysis. The latter is used to time entry and exit points and swing traders usually employ a range of indicators (usually chosen after extensive back-testing and trial and error) which can vary depending on the asset class they are trading.Underlays such as MACD, RSI, Stochastics and other momentum indicators are used in conjunction with overlays such as Bollinger Bands and moving averages to identify potential market turning points.
These can be used in many different ways – for instance, swing traders may use moving averages to mark significant areas of support and resistance. They may also use them as trade triggers – for example, where a short period moving average crosses over a longer-term one. Crossing from above to below is a potential sell signal, while from below to above as a buy signal. This can lead to profitable trading set-ups, particularly if combined with, say, negative divergence on the RSI or MACD.
But it’s important to note that what may work for one market may not for another. Swing traders find their favourite combinations by experimenting with different set-ups and extensively back-testing their strategies. The trick is to experiment, but also to understand fully what each indicator is trying to achieve.
Swing traders are also prepared to go against an underlying market trend. For instance, it could be that within a trend a technical indicator suggests that a financial instrument is overbought or oversold. This is where a swing trader steps in to take advantage of a counter-trend move.
Quite often these can prove to be very profitable. If a market sells off during an uptrend, it may loosen weaker hands and scare investors out of their positions. This can turn mild profit-taking into a more powerful corrective move.
However, there are dangers to trading against the trend. If the swing trade doesn’t work out as planned, say because your profit target wasn’t hit, then you could end up being on the wrong side of a trending market.
Once again this shows the importance of strict risk and money management.
