“I have two basic rules about winning in trading as well as in life: (1) If you don’t bet, you can’t win. (2) If you lose all your chips, you can’t bet.”

Larry Hite,
hedge fund manager and trader

Trading has never been an easy business. It takes years to learn to see the patterns, read the indicators, work out an efficient strategy, and hedge against risks. Today, many newbie traders enter the market in an attempt to multiply their capital with minimum effort, and without deep knowledge of how the market works, they are likely to fail. So, it’s worth starting with education and paper trading, which allows you to check how different strategies work without any risk.

Trading strategies are various and many. The most popular include scalping, intraday trading, investing, and — last but not least — swing trading. Swing trading is considered the perfect choice for individual traders, so let’s find out why.

What is swing trading?

Swing traders benefit both from uptrend and downtrend movements of assets and usually have their position opened for two to six days. In terms of timing, swing trading is somewhere between intraday and buy & hold investing. So, it can simply be described as an active short-term strategy.

Swing trading for dummies

The basic concept of swing trading is pretty simple: either buy low and sell high, or sell high and buy low. The market of derivative contracts (e.g., Xena Exchange’s XBTUSD contract) allows for short-selling, but on most spot markets, you never have the opportunity to first sell and then buy an asset. Derivative contracts allow you to “bet” on whether a given asset will go up or down in price, and the contracts themselves mirror the price of the underlying asset, such as Bitcoin.

Even though the concept of swing trading and the markets where you can implement this strategy seem pretty obvious, there’s one problem all swing traders face: determining the right time to buy or short-sell an asset. That’s where patterns and indicators enter the scene.

Swing trading strategies

Markets move in waves widely known as swings. No market — be it stocks or cryptocurrencies — will trend up without having some sort of retrace in price. The best swing-trading techniques and strategies attempt to ride either the swing up or the swing down.

It’s worth mentioning that some swing-trading strategies include both trend and counter-trend trading, which refers to trading against the main direction of the price trend.

So, the most popular swing-trading strategies include trend trading and breakout trading. Trend trading is widely used in other strategies, both long-time and short-time. The main idea is to identify the direction of the trend using technical indicators and open a position during either a high or low swing.

When the reversal is near, trend traders will exit a position and possibly open a new one in the opposite direction. To identify the trend, traders use the moving average and its modifications; overbalance indicators, which indicate whether an asset is overbought or oversold; MACD; the average directional index (ADX), and more. Patterns, such as flags, pennants, and triangles are also helpful, as are price actions.  

Breakout trading involves taking a position as early as possible within a given trend in order to capitalize on the market movement. Swing traders look to identify the points at which the market is about to “break out” from the range in which it has been trading – typically when a support or resistance line is broken. To find the breakout points, traders need to know how strong the momentum is, which requires analyzing the volumes. There are several volume-weighted indicators, such as the VWMA (volume-weighted moving average).

Other swing traders trade within a channel. That means they open a sell position when the price reaches the channel’s top line and close it when the price approaches the down line.

Note that many of the best swing-trading techniques have you hold a position anywhere from a day to several weeks. Ignore the small price increases and decreases and concentrate on the bigger price movements that most instruments make.

There are a number of rules swing traders need to stick to, including the following:

  • If your prediction is correct, the market should move favorably almost immediately. It may come back to test and/or exceed your entry point a little, but that’s OK – let it take its time.
  • If the market doesn’t perform as expected, exit on the first reaction.
  • Do not carry a losing position overnight. Exit it and plan for a better position the next day.
  • Use tight stops when trading counter-trend and wider stops when trading trend.

Day trade vs. swing trade

The main difference between day trading and swing trading is the amount of time you have a position opens for. Day traders trade within a single day and never leave positions open overnight, while swing traders have no need to stick to time limitation and can hold their position relative to the lifetime of the given trend.

Eager to swing trade cryptocurrency? Let’s start with Bitcoin

The basic rules of swing trading on the cryptocurrency market are similar to those described above. But the volatility of cryptocurrency makes it a more attractive — and simultaneously riskier — instrument for many traders. If you want to learn to swing trade Bitcoin, keep that in mind. The best cryptocurrencies to swing trade are those that have most liquidity, such as BTC, ETH, and XRP.

In an active market, these coins will swing between broadly defined high and low extremes, and swing traders will ride the wave in one direction for a couple of days or weeks and then switch to the opposite side of the trade when the crypto price reverses direction.

The overwhelming majority of traders are inclined to think that a strong level formed by several swing highs or lows will break only because the market has aggressively approached it and that they will be able to buy or to sell “the breakout” afterwards. But in fact, the market is often misleading and forms either a bull or bear trap.

A bull trap is formed on an ascending tendency when traders cannot resist the temptation and enter the market above or below the swing highs, as they forecast the inevitable break to be higher. However, the market suddenly stops slightly above the level and fills in all the buy orders before slicing down below the key resistance, thus leaving the majority losing long positions.

Let’s take a look at trading BTC swing highs using bull traps as an example. On the chart below, there is a strong BTC/USDT resistance of swing highs at 4300, formed on December 23, 2018, that is slightly broken by a new high on Christmas Eve. But just a few hours later, the market reverses.

Xena Exchange is a great place to swing-trade Bitcoin, as the exchange offers XBTUSD contract short-selling — so you can benefit even on the bear market. Additionally, the contract can be traded with max 20x leverage, thus increasing your possible returns (or losses).

How to swing trade using a Bitcoin trading bot

Bitcoin trading bots allow traders to deploy trading strategies in a fully automated manner using predetermined parameters. To use a Bitcoin trading bot for swing trading, you first need to decide on the indicators you want to use to provide buy and sell signals.

Bitcoin trading bots are an excellent tool for traders to test and deploy technical indicator-based trading strategies and execute them on a variety of exchanges for a wide range of digital currency pairs. To deploy your trading bots in swing trading on Xena Exchange, please visit the API section of our customer support portal.

Summary

Swing trading is based on the assumption that the market never goes straight: The prices go up and down, and swing traders do their best to benefit from both uptrend and downtrend price changes. You might not always pinpoint the exact high and low of every swing move, but the idea is to capture as much of the price movement as possible and ignore the minor price moves.

Learn more about the technical indicators that can be used in swing trading as well as about risk management on the Xena Exchange blog.