Swingers have more fun.

No, not that kind of swinging (where’s your mind?). We’re talking about swing trading, a common investment strategy and one quite different from day trading or position trading.

As you’re likely aware already, day trading is perhaps the most well-known trading approach and involves buying and selling a relatively large volume of short and long trades all within the same day. Largely the domain of professional traders, day trading has drawn the attention of crypto traders, who can leverage the power of algorithmic tools like crypto trading bots via a platform such as Trality, which offers opportunities to code them from scratch or with the help of our drag-and-drop Rule Builder.

Unlike day trading, position trading is undertaken with a longer view in mind. As the name suggests, traders take a position, one that is largely unconcerned with daily fluctuations, preferring instead to use longer term charts, trends and tools in order to buy and hold until an investment or asset peaks. Entry and exit prices are identified in advance and stop-loss orders mitigate risk.

What is swing trading?

Sitting comfortably between day trading and position trading is swing trading. But what exactly is it? A speculative strategy, swing trading entails holding an asset for a period of time, typically between a few days to several weeks or even a couple of months, in an effort to capture short- to medium-term gains and thereby profit from price changes or “swings.”

The key here is being able to identify or predict an asset’s movement, ride the wave, and then exit the wave at the opportune time in order to position yourself favorably for the next wave. These routine price fluctuations or swings define markets, which rise and fall like waves. If you can spot when a market trends up or down, then you can capitalize on gains and cut your losses just as quickly. However, you don’t need perfect timing. Small gains can compound returns over time.

Cryptocurrency market activity can be extremely volatile, meaning that swing trading within this context can be inherently profitable or risky and is therefore commensurate with market conditions themselves. Luckily, though, traders have a number of tools at their disposal that both minimize risk and ensure the best chances at profitability. Whereas technical analysis, for example, can be used to look for trading opportunities, fundamental analysis is useful when analyzing price trends and patterns.

Technical analysis versus fundamental analysis

Simply put, technical analysis focuses on price and volume. By studying statistical trends, traders try to better understand the ways that supply and demand can impact changes in price, volume and volatility. Price patterns and trends based on historical performance are then used to identify signals according to things like market sentiment and psychology.

The intrinsic value of any given asset or security is largely irrelevant, while patterns and trends are key, and traders are able to carry out complex analyses thanks to a toolkit that includes various techniques and indicators (we’ll highlight five of the best ones in the next section). In fact, many crypto traders use the same technical indicators found in legacy financial markets, including Relative Strength Index (RSI) indicator, Moving Average Convergence Divergence (MACD) indicator and Bollinger Bands (BB).

Although there is disagreement as to the exact number, it’s important to bear in mind that using one indicator is insufficient when attempting to identify future price movements. On the flip side, using too many indicators can muddy the waters and prove ineffectual or even counterproductive.

Fundamental analysis, on the other hand, is a strategy that is concerned with the intrinsic value of an asset. Through an analysis of various internal and external factors, traders aim to determine whether an asset is over- or undervalued, and the resulting information can then be used for entry or exit positions. However, crypto fundamental analysis presents certain challenges, particularly since cryptocurrency cannot be evaluated in the same ways as traditional businesses.

Given the shorter-term nature of the trades, swing traders primarily use technical analysis, which is one reason why we won’t get too bogged down in the finer points of fundamental analysis in this article (although the latter can complement technical analysis). There’s plenty of sound information out there for those interested in exploring a range of subject-specific topics, from the differences between quantitative and qualitative fundamental analysis to a comprehensive guide to cryptocurrency fundamental analysis.

Before we run through five of the best indicators for swing trading, let’s consider some of the strategy’s advantages and drawbacks.

Advantages and drawbacks of swing trading

We’d be remiss if we didn’t first describe some of the ways in which traders can benefit from swing trading as well as some of the strategy’s possible pitfalls. After all, a simple tally of pros and cons can inject your decision-making process with a healthy dose of objectivity, making it easier to reach a more informed decision.

+/-

Time: Day trading takes time, and time is money. Swing trading, on the other hand, doesn’t necessitate you spending hours glued to your screen since positions are held for longer than a day.

Stress: You already know that stress kills, and day trading is stressful work. By entering a position and establishing a stop-loss order, swing trading allows you to concentrate on other important things in life. Serenity now.

Simplicity: Rather than spending time on fundamental analysis and establishing intrinsic value, technical analysis indicators allow you to focus strictly on price and volume.

Agility: Unlike position trading in which you are committed to longer periods of time, swing trading allows for fleet-of-foot traders to buy or sell for small gains or small losses in order to optimize their strategy at any given time.

However,…

After-hours risk: Traders need to deal with overnight and weekend market risks.

Seesawing: More generally, given their inherently volatile nature, crypto needs to be watched consistently in order to ride trends or avoid abrupt market reversals, which can result in unexpected losses.

Missed opportunities: Making moves is all well and good, but short-term market moves can sometimes mean that swing traders miss long-term opportunities.

Now that you know some of the strengths and weaknesses of swing trading, let’s take a look at some of the best fit-for-purpose indicators.

Best indicators for swing trading

Technical indicators can be grouped into two basic categories, leading and lagging. Leading indicators are designed to anticipate the future direction of a market, giving trade signals when a trend is about to start. Conversely, lagging indicators provide delayed feedback, giving a signal once the price movement has already passed or is in progress.

A classic analogy for understanding leading and lagging indicators is to think of a car: leading indicators look at the road ahead through the windshield (or windscreen) and lagging indicators look back through the rear window at the road already travelled.

Stochastic, Williams %R, On-balance volume (OBV) and Relative Strength Index (RSI) are among the most popular leading indicators, with Moving Averages (MA), Moving Average Convergence Divergence (MACD), and Bollinger Bands (BB) among the most commonly used lagging indicators. A word of caution: relying exclusively on either leading or lagging indicators will likely have negative consequences. The aim here is to strike the right balance between the two.

Let’s take a closer look at three leading and two lagging indicators.

Momentum indicators

Relative Strength Index (RSI)

In order to identify whether a market is overbought or oversold, traders can use the relative strength index (RSI), which is a momentum indicator that falls under the oscillator category. When the RSI gives a signal, it is thought that the market will reverse, thereby providing a leading sign that a trader should enter or exit a position. In other words, the RSI is used primarily to help traders identify momentum, overbought and oversold market conditions, as well as divergence and hidden divergence signals in markets.

Stochastic Oscillator

One way to compare recent closing prices to the previous trading range is to use the stochastic oscillator, which assists traders in identifying the end of one trend and the beginning of another one. Based on the notion that market momentum changes direction quicker than volume or price, the stochastic oscillator can be used to predict the direction of market movements, making it a momentum indicator. The stochastic oscillator is a bound oscillator, which means it operates on a scale from 0 to 100. Anything over 80 generally suggests that the market is overbought, while a reading under 20 suggests oversold conditions.

On-balance volume (OBV)

As its name suggests, the on-balance volume (OBV) indicator uses volume changes to make price predictions. The focus for traders is on increases and decreases in volume without an equivalent change in price. The underlying logic of the OBV indicator is the notion that volume is the key force behind markets. When volume increases or decreases sharply without a concomitant change in an asset’s price, it is believed that the price will eventually increase or fall accordingly. The OBV indicator, however, can yield false signals, which can be balanced by lagging indicators.

Trend indicator

Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (MACD) is an oscillator-type indicator. It is a trend-following tool that uses moving averages to determine the momentum of an asset such as cryptocurrency. Because it tracks pricing events that have already occurred, the MACD is a lagging indicator. A moving average (MA) is essentially a line that represents the average value of previous data during a predefined period. Within the context of financial markets, they can be divided into two different types: simple moving averages (SMAs) and exponential moving averages (EMAs). And the correlation between moving averages can be described as either convergent or divergent, with convergent lines gravitating toward one another and divergent ones moving apart.

Volatility indicator

Bollinger Bands (BB)

The Bollinger band tool is a lagging indicator used to measure the “highness” or “lowness” of a price relative to previous trades. As such, they can be helpful when determining whether the market has high or low volatility as well as overbought or oversold conditions. The logic behind the BB indicator is to show how prices are spread out across an average value, and it consists of an upper and lower band along with a middle band (i.e. a middle moving average line). Reacting to market price action, the two side bands expand when volatility is high (moving away from the middle line) and contract when volatility is low (moving towards the middle line). According to the standard Bollinger Bands formula, the middle line is set as a 20-day simple moving average (SMA), and the upper and lower bands are calculated based on market volatility in relation to the SMA, which is referred to as standard deviation.

Swing trading with Trality

Equipped with a better understanding of swing trading and its benefits, you might be asking how you can get started today. At Trality, we offer a powerful and reliable platform for creating and automating your own swing trading strategy.

We’ve only scratched the surface in terms of the number of swing trading indicators that we offer. While the ones in this article are some of the best, we have a wide range of others to complement and advance your trading aims and strategy.

Our Rule Builder is a simple yet robust drag-and-drop graphic interface that lets you build algorithmic trading bots using technical indicators based on boolean logic, while our Code Editor is the world's first browser-based Python bot creator, which comes with a state-of-the-art Python API, end-to-end encryption and more.

Explore our offerings for free today and harness the many benefits of swing trading!