A Beginner's Guide to Swing Trading Cryptocurrency
Introduction
Swing trading is a commonly used trading strategy that can be ideal for beginner traders. It's a relatively convenient way to express opinions about the market due to the manageable time horizons involved. Swing traders are active in most financial markets, such as forex, stocks, and cryptocurrency. But is swing trading a suitable strategy for you? Should you start day trading or swing trading?
In this article, we'll explain what you need to know about swing trading cryptocurrency and help you decide whether it's the right choice for you.
What Is Swing Trading?
Swing trading is a trading strategy that involves trying to capture price moves that happen on a short to medium time frame. The idea behind swing trading is to catch market "swings" that play out over a few days to several weeks.
Swing trading strategies work best in trending markets. If there's a strong trend on a higher time frame, swing trading opportunities can be plentiful, and swing traders can take advantage of larger price swings. In contrast, swing trading can be more difficult in a consolidating market. After all, if the market is going sideways, it's harder to capture large price changes.
How Do Swing Traders Make Money?
As mentioned, swing traders aim to capture price swings that happen from a few days to several weeks. As such, swing traders will hold positions for more time than day traders, but less than buy and hold investors.
Swing traders will typically use technical analysis to generate trade ideas, though not necessarily to the same extent as day traders would do. As fundamental events can play out over weeks, swing traders may also use fundamental analysis in their trading framework.
Even so, price action, candlestick chart patterns, support and resistance levels, and technical indicators are very commonly used to identify trade setups. Some of the most common indicators used by swing traders are moving averages, the Relative Strength Index (RSI), Bollinger Bands, and the Fibonacci retracement tool.
Swing traders will typically look at medium to high time frame charts. Why? A strong uptrend or downtrend has to be confirmed on a higher time frame. But, they may also look at intraday time frames, such as the 1-hour, 4-hour, 12-hour chart, to look for specific entry and exit points. These triggers can be a breakout or a pullback on a lower time frame, for example.
However, the most important time frame for swing trading is likely the daily chart. Even so, trading and investment strategies can differ substantially between different traders. Note that what we've discussed here aren't strict rules, but just common examples.
Day Trading vs. Swing Trading – What's the Difference?
Day traders aim to capitalize on short-term price moves, while swing traders look for larger moves. In effect, day trading is a more active strategy, where traders need to frequently monitor the market, and they don't leave positions open for more than a single day.
In contrast, swing traders can take a more passive approach. They can monitor their positions less frequently, as their goal is to profit from price movements that take longer to play out. Since these moves tend to be larger, swing traders can bring in sizable returns from even just a few winning trades.
Day traders will almost exclusively use technical analysis. Swing traders will typically use a combination of technical analysis and fundamental analysis, usually with a stronger emphasis on the technicals. On the other end of the spectrum, investors may not consider technicals at all and invest only based on fundamentals.
Which one is better for you, day trading or swing trading? Well, where do you see yourself on this spectrum of smaller to larger time frames, and technicals and fundamentals? Answering these questions will help you find what trading strategy suits your personality, trading style, and investment goals the best.
You could consider what your strengths are and choose the trading style that best magnifies those strengths. Some prefer to get in and out of positions fast and not having to worry about open positions when they're asleep. Others make better decisions when they have more time to consider all possible outcomes and elaborate on their trading plans.
Naturally, you could switch between different strategies to see which one produces the best results. You could also do paper trading (i.e., trading with fake money) before implementing the strategies into your actual trading plan.
How to Get Started With Cryptocurrency Swing Trading
Swing trading can be an ideal way to start trading. How come? Due to the longer time horizons (that are still not too long), decisions can be made calmly, and trades can be monitored easily.
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Closing Thoughts
Swing trading is a commonly used trading strategy in the stock market, as well as it is in cryptocurrency. Swing traders will typically stay in positions for a few days or weeks, depending on the individual trade setup.
Should you start swing trading or day trading? The easiest way to find out is to try them out both and see which one fits your trading style best. It could also be helpful to learn about risk management principles before you start, such as using a stop loss and proper position sizing methods.