What is Swing Trading?

09 August 2021

    When studying trading styles, you will often come across the term “swing trading”. Swing trading is a trading style in which trades are kept open for more than one day, with the horizon varying from some days to some months. In contrast to day trading, where all trades are opened and closed within the timeframe of one day, swing traders leave their trades open for a much longer period of time. In other words, a swing trade is a position held from two day to even a few months. 

     

    Nevertheless, swing trading is still different from a long term buy-and-hold investment strategy that aims at holding assets over a long term investment horizon of up to some years, since swing traders focus mostly on generating profit from short-to-medium-term price fluctuations, also known as price swings.

     

    Swing trading is a trading style suited for traders that do not want or cannot spend their entire day in front of a computer screen, analyzing charts and looking for entry points, but still have an opinion about the upcoming market movements and would like to make an investment that does not require constant monitoring. Compared to day traders, for whom the use of technical analysis for trade placements is the dominant tool, swing traders usually use a combination of fundamental and technical analysis. Fundamental analysis is used to determine the short-to-medium-term price movements, while technical analysis is used to detect the appropriate entry and exit points. Swing trading differs from day trading since swing traders need to be aware of the news and data releases that are relevant to their traded instruments, so that they can make the necessary decisions and adjustments to their strategies and predict the short-to-medium-term trading direction.

     

    Advantages and Disadvantages of Swing Trading

     

    As with every trading style, swing trading has both advantages and disadvantages. You can find the most important ones listed below, and decide if swing trading is the trading style for you.


    Advantages:

    • Swing trading requires less time spent on technical analysis and price monitoring, since it takes place on higher timeframe charts. Therefore, it does not need to be a trader’s full time job, like day trading, and trading can be combined with other activities.
    • Bigger moves can be captured, thus more profit can be generated in each trade. Traders can capture trends spanning on multiple days, hence generating more profit from a single trade, something that also lowers trading costs.
    • Traders can capitalize on news, data releases and other fundamental analysis data. If a trader is familiar with fundamental analysis, he/she can capture significant movements that technical analysis provides no indication of.

     

    Disadvantages:

    • Holding positions overnight incurs additional trading cost, usually in the form of swaps. As a result, if your prediction does not materialize in a short amount of time after placing the trade, you might find yourself losing money by paying rollover costs on a ranging market.

    • Trades remain open during news releases, something that increases risk since they might turn out to be volatile events and result in substantial profits or losses. If your prediction about news announcements turns out to be wrong, then this might cause severe losses to your trading account.

    Swing Trading using the Zig Zag Indicator

     

    If you are keen to give swing trading a try, then there are some technical analysis tools that may be of help in your journey. One popular technical analysis indicator used by swing traders is the Zig Zag indicator. The Zig Zag indicator is an indicator that plots points on a chart, whenever prices reverse by a percentage greater than a pre-chosen variable. After the points are printed, straight lines are drawn, connecting these points. The Zig Zag indicator is used to smooth out price fluctuation and provide a clear picture of price trends, helping traders identify what the current dominant trend is.

     

    The ZigZag indicator is not available as a built-in indicator in Fondex cTrader but there are several open-source ones available in the cTrader community. In particular, we suggest you use this one. Installation is pretty straightforward and you can find instructions on how to install it here.

     

    After the indicator has been installed, you can add it to your cTrader Fondex chart by following the steps below:

     

    1. Right Click on the chart and navigate to Indicators> Custom > ZigZag

    2. Click on the ZigZag indicator and the following will pop up

     

    3. Select Source for High and Low points, Deviation and click OK. The indicator will be plotted on your chart.

     

    Below you can see the indicator plotted on EURUSD D1 chart with a deviation setting of 500 (5%).

     

     

    In the EURUSD D1 chart above, you can notice the red lines plotted that connect the dots of price reversal points of the Zig Zag indicator. The main purpose of the Zig Zag indicator is to help us identify the dominant market trend of the traded instrument. As you can see in the chart, at the current moment, the medium-term trend for EURUSD seems bearish. Therefore, a swing trader would consider looking for ideal short-entry points for his mid-term swing trades.

    Limitations of the Zig Zag Indicator

     

    The Zig Zag indicator, just like any other technical indicator, needs to be used in context. Zig Zag indicators can generate a lot of false signals that could lead to substantial losses if used out of context. Therefore, when using Zig Zag indicator strategies, always consider the market fundamentals that currently move the market and combine the signals with other confirmation signals, like oscillators, support/resistance levels and the relevant price action taking place on the chart.


    *The products advertised are only available to clients under Fondex Limited (SDL No: SD037). Trading CFDs involves significant risk of loss.

TAGS
#Educational#Swing Trading#ZigZac