Swing Trading Strategies for Short-Term Traders
In the trading universe, there is a strategy that fits every investor profile. Some investors prefer longer-term strategies that eliminate a large degree of the noise generated by intraday volatility and periodic news announcements whereas others favor short-term day-trading strategies that rely solely on order flow and technical analysis instead of fundamental analysis. Depending on the time horizon of the trader and expectations in relation to investment returns, all strategies are not necessarily one-size fits all. For beginners, it is often useful to be aware of both technical and fundamental indicators before selecting the correct strategy. One of the more prominent strategies, especially amongst newer investors are swing trading strategies.
Swing trading derives its definition from the nature of the opportunities it seeks to capitalize on. Instead of focusing on longer-term trend trading or deep fundamental analysis to determine an instrument’s intrinsic value, swing trading utilizes technical analysis to take advantage of momentum from multi-day swings and short-term price developments. As a result of the time horizon, which is classically described as 1 to 4 trading sessions, fundamental analysis takes a backseat to pricing patterns and trends. As a result of the abbreviated time frame, the strategy necessitates a degree of flexibility and nimbleness when it comes to pursuing swing trading opportunities.
Swing trading is heavily rooted in technical analysis and indicators, important tools that help traders identify potential opportunities, timing of execution, entry points, and exit strategies for trade setups. One of the minor drawbacks to this form of analysis of potential trades is that historical performance is not necessarily always indicative of how price action will behave in the future.
Despite its shortcomings, technical analysis is very useful for swing trading as it oftentimes helps determine risk and reward characteristics before execution of a trade. Some of the popular technical indicators used in swing trading include moving averages, Fibonacci levels and retracements, dojis (candlestick patterns), the relative strength index, and stochastic oscillator to name a few.
Many of these indicators help to spot turning points in momentum that can be applied by traders to take advantage of shifts in pricing trends.
Moving averages in particular are a very admired indicator for giving an impression of whether an instrument is trading in a more bearish or bullish environment. Two of the most prominent swing trading patterns include the “golden cross” and “death cross” formations which typically indicate a sharp directional movement over time. This pattern forms when a shorter-term moving average crosses a longer-term moving average, typically 50-day and 200-day measurements respectively.
The “golden cross” is typically a strongly bullish indicator formed when the 50-day moving average crosses the 200-day moving average to the upside with both moving averages trending higher. The subsequent rally typically experienced by prices oftentimes leads to a medium-to-long term trend higher. The “death cross” is the opposite situation in which the 50-day moving average crosses the 200-day moving average to the downside. Both moving averages must be trending lower for a strong signal which is predominantly very bearish and leads to substantial downside momentum.
Timing is Everything
Investing in general requires successful timing to maximize potential returns. This is one area that is a constant struggle for most traders. Calling tops and bottoms of price action is exceedingly difficulty and oftentimes even though the idea is right, the wrong timing can beckon disastrous results. One of the benefits of swing trading is that the indicators are helpful in timing both entry points and exit strategies which are essential for success. Fundamental factors are largely irrelevant when it comes to swing trading which relies predominantly on a thorough evaluation of the technical factors.
It is important to remember that technical analysis is better on long time horizons, not shorter time frames. Making sure the trading opportunity is appropriate for the desired time period is crucial especially when considering certain swing trading indicators give stronger signals for lengthier time frames such as 1-hour and 4-hour candlesticks at the minimum. Shorter-time frames have a tendency to produce mixed and false signals.
At its core, success investing requires a disciplined effort and swing trading strategies are no different. Before getting involved in a potential trading opportunity it is necessary to evaluate all aspects of a trade. This involves evaluating risk and reward characteristics, determining an entry point, an exit strategy, and finally having the discipline to stick with the established game plan. Swing trading is an optimal strategy for short-term traders looking to take advantage of largely technical moves, but requires discipline to ensure optimal results.