Timing the market is passe, time in the market is in. If you are familiar with crypto trading strategies, you might have come across the term swing trading—a crypto trading strategy popular among crypto traders.
Let’s discuss swing trading and how it can help you capitalize on crypto market volatility one trade at a time. In this blog post, we will define crypto swing trading, list the five thumb rules of swing trading, compare swing trading with day trading, and take note of popular swing trading strategies used by seasoned traders. Read on to learn more.
What is swing trading? How does swing trading work?
Swing trading, as the name suggests, is a crypto trading strategy that capitalizes on market swings or market volatility. It involves swinging from buying to selling at lows and highs of the market for a relatively short period, ranging from a few days to weeks.
Swing trading is a hybrid trading strategy falling between short-term “day trading” and long-term “trend trading” or “narrative trading”. Here, it is about buying a crypto asset at its support levels and selling it at its crest.
Most swing traders rely on technical analysis as the time frame is less. However, some traders also use fundamental analysis to factor in the latest developments. This helps them make the most of the price swings while ensuring that profits don’t slip away.
Five rules of swing trading
Swing trading strikes a balance between risky intraday trading and the long-term financial commitment of investing. Here are the five rules generally followed by professional swing traders that can help you start your crypto trading journey:
- Plan your swing trade based on the market situation
Cryptocurrencies are volatile. As a crypto swing trader, you can base your trading strategies around the general state of the crypto market. You can buy the dip in a bull market and short the rip in a bear market. You should watch out for crypto market indicators such as Bitcoin price volatility, Bitcoin market dominance, BTC/ETH ratio, Bitcoin’s 20-day SMA, etc, to gauge the state of the market.
- Get into your crypto swing trade gradually
Test the waters before going full throttle. This will help you test your strategy and limit the downside if the market doesn’t move in the expected direction. Additionally, swing traders would do well to employ the cost-averaging technique while entering a trade.
Cost averaging can help you build your position by identifying a safe entry point and reducing risks.
- Get out of your swing trade gradually
In a bull market, it is recommended that swing traders book their profits incrementally to capitalize on the profits while also maintaining cash for other opportunities.
In a bear or sideways market, it is advisable to cash in the position at once to capitalize on the price movement or to minimize losses due to spiraling prices.
- Book a loss if the strategy is not working
Keep your losses small. It is advisable to exit a trade if the market is moving contrary to your analysis. It is better to book smaller losses rather than wait for the market to turn—-which may or may not happen.
- Swing trade the chart, not the news headlines
There are leading market indicators and lagging market indicators. Price movement charts are lead indicators as they account for even the tiniest of price movements. On the other hand, news is a lag indicator. This is why crypto prices gain or lose a significant chunk of their valuation before major news breaks out. In other words, market participants have already factored in the news.
Advantages and disadvantages of swing trading
All crypto trading strategies have their fair share of risk. The classic rule of the higher the risk, the higher the return holds good for swing trading. Here are some advantages and disadvantages of swing trading:
Advantages of swing trading:
- Swing trading requires less time compared to day trading.
- It captures the short-term market potential by riding the swing. This also means it gives you more free capital compared to long-term investing.
- It simplifies the trading process as swing traders largely rely on technical analysis.
Disadvantages of swing trading:
- The crypto market functions 24*7. Therefore, swing traders are subject to overnight and weekend market risks.
- Trend reversals can lead to substantial losses.
- Swing traders are prone to myopic short-term moves, thus losing sight of long-term investment trends.
Swing trading vs. Day trading at a glance
One major distinction between swing trading and day training is the holding period for the position. Swing trade involves holding the position for more than a day (sometimes for a few weeks), while a day trader will close the position the same day.
Here are some of the key differences between swing trading and day trading
| Key Differences | Swing Trading | Day Trading |
| Time Horizon | Positions can be held for a few days to weeks | Positions are closed on the same day |
| Trading Frequency | Less frequent trading reduces the need for monitoring | High-frequency trading demands constant attention. |
| Psychological Stress | Less stressful as trades unfold over a longer time frame | Highly stressful as it requires quick decisions and frequent action |
| Risk Management | Better risk management as the holding period is longer | Involves risk as it requires quick decision-making |
| Profit Per Trade | Rewards higher profits per trade as the holding period is longer | Rewards smaller gains per trade, but the cumulative profits can be more as trading frequency is higher |
| Market Analysis | Broader market analysis to identify trends | Analysis focuses on intra-day price movements |
| Transaction Costs | Lower transaction costs as the frequency of trades is less | Higher transaction costs as the frequency of trades is high |
Swing trading strategies in crypto
Swing trading in crypto comes under the broad umbrella of technical analysis. We have listed some popular swing trading strategies preferred by crypto traders.
Fibonacci Retracement
This trading strategy has its roots in the Fibonacci sequence. These are horizontal lines that indicate where support and resistance are most likely to form for a crypto asset. In a swing trade, support and resistance levels will help traders determine their entry and exit plans.
Support and Resistance
Support and resistance lines are the turning points for crypto traders and thus are the most important things to look for in the price chart.
The support line indicates a price range that falls below the prevailing market price and the resistance line shows a range that is above the market price.
Bollinger Bands Method
Bollinger bands indicate the market direction based on prices. There are three bands—-the upper level, the lower level, and the moving average. When the prices move toward the upper band, the market is overbought, and when the prices move to the lower band, it is oversold.
Bollinger bands are frequently used in combination with the relative strength index (RSI) and the bandwidth indicator.
Trend-Catching Strategy
The success of a swing trading strategy depends on trend identification. Recognizing the trend can help the trader identify better entry and exit points, thus maximizing gains and minimizing losses. The trader will exit the strategy when the target price is reached.
However, a trend trading strategy will require continuous mentoring as trends can change quickly for a crypto asset.
How do I choose coins for swing trading?
The success of a swing trading strategy depends on choosing the appropriate crypto asset. Here are some guidelines that you can follow while evaluating potential crypto assets.
- Research Market Volatility
Swing trading thrives on market volatility. Identify crypto tokens with historical price volatility as high volatility increases the chances of profit.
- Technical Analysis
Use technical indicators like support and resistance price levels, relative strength index, and Bollinger Bands on the charts to identify the token’s trend.
- Market Capitalization and Liquidity
Look for tokens with higher market capitalization that are fairly liquid. Liquidity or higher trading volumes ensure entry and exit without price slippage.
- News and Market Sentiment
Swing trading capitalizes on market trends. Broader market trends—bullish, bearish, or sideways—-are generally driven by news and market sentiment. As a trader, you can monitor news and social media to discern trends.
- Diversification
Place your swing trade bets on multiple coins to spread risk across sectors and tokens.
How to know if a swing trading strategy is working
Swing trading is a promising strategy, but it is crucial to evaluate your bets to check their effectiveness. Here are some factors that you should consider when evaluating:
- Consistent Profitability
The success of your strategy depends on consistent profitability. Your trading strategy should give consistent profits. But if the strategy is giving you spiking profits and losses, it needs some attention. Traders can calculate the win-to-loss ratio ascension to the consistency of profits.
- Adherence to Plan
Sticking to the plan is one of the most important steps that will define the success of a trading strategy. Fear and greed can get the better of traders, so discipline is a must.
- Market Conditions
Test the performance of your strategy in different market conditions including bullish, bearish, or flat market.
- Adjustments and Optimization
Be flexible. If the market trend changes, adapt your strategy accordingly. Regular monitoring can help you achieve this.
What is the best time for swing trading?
Swing trading revolves around volatility and liquidity. So, the best time to swing trade is when market volatility and market participation are high.
- Volatility
Periods of increased volatility can benefit traders as these phases show significant price movements essential for the success of swing trading.
- Liquidity
Get in when the market participation is high as this will lead to high volumes, preparing the ground for smooth execution of trades with minimum to no price slippage.
- Timeframes
Look for trading timeframes based on the chosen crypto assets and strategy. Some traders prefer shorter timeframes for frequent trading, while some would want to wait and watch.
Identifying such market trends can help traders choose the appropriate time to execute swing trades.
Conclusion
Crypto markets are known for their volatility and swing trading is a trading strategy that capitalizes on the crypto market volatility. Small wonder then that swing trading finds favor in the crypto trading community.
