Lesson 5: Swing Trading: The Art of Timing the Market

Definition and core concepts

What exactly is swing trading? 

At its core, swing trading is a strategy where investors aim to capture the ‘swings’ or fluctuations in prices. Instead of holding onto an asset long-term, swing traders hold it for a shorter period, typically days to a few weeks, hoping to capitalise on its price movements.

Imagine a pendulum that swings back and forth. The market, in many ways, behaves similarly. Prices don’t move in straight lines. They make new highs and new lows. And it’s these short to medium-term waves that swing traders try to ride.

But it’s not just about jumping in and out of trades. Successful swing trading requires a keen understanding of a few core concepts:

1. Trend recognition: spotting the general direction in which the market is moving is crucial. Is it on an upward trajectory? Or spiralling downwards? Knowing the trend helps you make informed decisions.
2. Support and resistance: These are the invisible lines or barriers where the price seems to bounce off. Think of them as the floor and ceiling for prices. Recognizing these can help predict potential price reversals.
3. Technical analysis: This involves studying price charts and tools called indicators to predict future price movements. It might sound intimidating, but with a bit of practice, it becomes second nature.
4. Risk management: It’s not just about the gains. Knowing when to exit a trade to minimise losses or secure a profit is equally, if not more, important. Setting stop-loss points helps preserve your capital.

In the coming videos, we’ll dive deeper into each of these concepts, equipping you with the knowledge and tools to embark on your swing trading journey. Remember, swing trading is both an art and a science, blending keen observation with strategic action. And as always skill, practice and patience go a long way.

Benefits and risks involved in swing trading

Swing trading, like any strategy in the financial world, comes with its own set of benefits and potential pitfalls. Let’s unpack them to understand why some traders swear by it, and why others tread with caution.

The main benefits of swing trading are:

1. Shorter exposure: With positions held for days to weeks, there’s less risk from long-term adverse market conditions. Your capital isn’t tied up indefinitely.
2. Profit from both ups and downs: Unlike long-term strategies, swing trading allows you to capitalise on both rising and falling markets. Spotting a trend, whether it’s bullish or bearish, can lead to potential gains.
3. Flexibility: Swing trading doesn’t demand constant monitoring like day trading does. You can maintain a balance between trading and other commitments.
4. Compounding gains: Regularly capturing smaller profits can lead to significant compounded gains over time, growing your portfolio steadily.

Risks, on the other hand, include:

1. Market unpredictability: Cryptocurrencies are volatile. Prices can shift rapidly, sometimes even before you’ve had a chance to react.
2. Emotional decisions: Swing trading demands discipline. Letting emotions drive decisions, like chasing losses or getting overly greedy, spells disaster.
3. Overnight risks: Prices can swing dramatically overnight when you’re not actively watching. Global events, regulatory changes, or major news can impact the market while you sleep.
4. Requires skill and knowledge: Successfully identifying trends and making informed decisions requires a solid understanding of technical analysis and market indicators.

In a nutshell, while swing trading offers opportunities for substantial gains in a short time frame, it’s not without its challenges. The key is to approach it with a well-informed strategy, balanced by a healthy respect for the risks involved. As we progress, we’ll arm you with techniques to maximise the benefits and navigate the potential pitfalls.

When to enter and exit for optimal gains

Let’s venture into one of the most crucial questions every trader faces: when to jump in and when to get out for the best gains. Timing, as they say, is everything!

Let’s discuss strategies that can help you pinpoint those golden opportunities.

1. Recognize the trend: A trend is the general direction in which the price of an asset is moving. Trends can be upward (bullish), downward (bearish), or sideways. Identifying the prevailing trend is paramount, as it dictates our approach to entry and exit. One of the most used tools by swing traders to determine the general trend is the 200 daily moving average or MA. If the price is above the 200 MA, you can consider the asset to be in an uptrend, and vice-versa, the price below the 200 MA signals a downtrend.

2. Identify support & resistance levels: Within these trends, you’ll find support and resistance levels – the price boundaries within which an asset typically trades. In swing trading, support and resistance levels are pivotal. The support represents a price point where an asset often struggles to fall below, signalling strong buying interest. Conversely, resistance is where price usually tops, indicating selling pressure. To identify these levels, study historical price points where the asset reversed direction. Once identified, trade by buying near support levels (anticipating an upward bounce) and selling or shorting near resistance (predicting a downward turn). Always use stop-loss orders to minimise potential losses, and remember that once broken, a support can turn into resistance and vice-versa. Keep an eye out for these transitions, as they often indicate strong market movements.

3. Confirm with Indicators: Imagine the price approaches a support level in an upward trend. Don’t jump in immediately. Wait for confirmation from indicators, such as an RSI. We’ll look more closely at indicators in the next video.

4. Asses Volume: In swing trading, volume acts as a verifier of price action. High trading volumes during a price rise indicate strong buying interest, affirming the bullish trend. Conversely, a price dip with increased volume suggests a genuine bearish sentiment. To use volume effectively, observe for discrepancies: if prices rise without significant volume, the upward trend may lack strength. Similarly, falling prices with low volume might not signal a true downturn. By aligning price movements with corresponding volume spikes, traders can better discern genuine shifts from false alarms, positioning themselves for more informed buy or sell decisions.

5. Set Realistic Targets: Always set a target exit price. It gives a clear profit goal and serves as a reevaluation point if things deviate from the plan. Analyse historical data, consider potential resistance levels and use tools such as Fibonacci retracement. Remember, consistent moderate gains often outperform risky, elusive “home runs.” It’s crucial to strike a balance between ambition and market realities to protect and grow your capital. 

6. Use Stop-Losses: A stop loss is a pre-set order to sell an asset when it reaches a specific price, minimizing potential losses. Using stop losses in swing trading is essential for risk management. By predetermining a selling point, traders minimize potential losses during unexpected downturns. It’s about protecting capital, and ensuring you remain in the game long-term. Always set a stop loss based on volatility and your risk tolerance.

7. Consider the Broader Market: When swing trading, it’s essential to consider the broader market context. Macroeconomic events, industry news, and overall market sentiment can greatly influence individual asset movements. Being attuned to these larger forces helps traders anticipate potential market shifts and make more informed entry and exit decisions in their trades.

8. Review, Learn & Adapt: In swing trading, consistent review and learning are pivotal. By analyzing past trades, traders identify what worked and what didn’t. This retrospective approach not only sharpens decision-making skills but also fosters adaptability. In an ever-evolving market, continuous learning ensures traders stay ahead and refine their strategies effectively.

A quick note on “Optimal Gains”: It’s tempting to chase the peak, but remember, no one can consistently buy at the lowest and sell at the highest. ‘Optimal’ is about making consistent, solid gains over time, not chasing perfection.

To wrap up, swing trading is about strategy, patience, and flexibility. You might not nail the perfect entry and exit every time, but with research, practice, and by leveraging Kriptomat’s robust tools, you’ll grow more confident in your decisions.

In the next section, we’ll dive deep into how to swing trade on Kriptomat. But first, let’s look at the most used technical indicators and chart patterns used in Swing trading.

Key technical indicators to watch

In the next minutes, we’ll explore some of the most used and game-changing indicators that could redefine your trading approach.

First up are Moving Averages or MAs. Essentially, MAs provide an average of an asset’s price over a specified period. In swing trading, the most common MAs used are the short-term (like the 50-day MA) and long-term (such as the 200-day MA). A bullish swing trade signal is generated when the short-term MA crosses above the long-term MA, indicating potential upward momentum. This is the so-called Golden Cross. Conversely, when the short-term MA dips below the long-term, it might signify a downward trend, suggesting a bearish stance, also called a Death Cross. By assessing the interactions and crossovers of these MAs, swing traders can gain insights into potential entry and exit points, capitalising on short to medium-term price fluctuations.

Next up, we have the Relative Strength Index or RSI, a momentum oscillator that measures the speed and change of price movements, ranging from 0 to 100. In swing trading, RSI is invaluable for gauging overbought or oversold conditions. Traditionally, levels above 70 indicate an asset is overbought and may be primed for a sell-off, while levels below 30 suggest it’s oversold and might be ripe for a buy. However, in strong trending markets, these thresholds might shift to 80 and 20 respectively. Swing traders often watch for RSI divergences from price as a hint that the current trend may be weakening, providing potential trade opportunities.

Now, let’s discuss the MACD or Moving Average Convergence Divergence. A fascinating tool, the MACD plots the difference between the 26-day and 12-day exponential moving averages. It consists of the MACD line, signal line, and histogram. For swing trading, a common method is to watch for crossovers: when the MACD line crosses above the signal line, it can signal a bullish move, while a crossover below can indicate a bearish trend. The histogram, representing the difference between the MACD and signal lines, provides insight into momentum strength. Increasingly positive histograms might suggest bullish momentum, whereas negative values hint at bearish momentum. Divergence between MACD and price is also pivotal: if the price reaches new highs but MACD doesn’t, it might indicate a potential trend reversal.

On to Bollinger Bands, a tool that brilliantly wraps an asset’s volatility. These bands comprise a middle band being a Simple Moving Average (SMA) and two outer bands representing standard deviation levels from the middle band. In swing trading, Bollinger Bands can identify potential entry and exit points. When prices touch or exceed the upper band, it may indicate an overbought condition, hinting at a potential sell. Conversely, touching the lower band can signify an oversold condition, suggesting a possible buy opportunity. The “squeeze,” a narrowing of bands, can foreshadow a significant price move. Trading within the bands helps in identifying consolidating markets, while price breakouts from the bands can guide in capturing substantial trends.

The mystic Fibonacci retracements are next. Originating from the Fibonacci sequence, these are used to identify potential reversal points in the market. In swing trading, they’re crucial for pinpointing where a price might pause or reverse after a move. To apply it, draw horizontal lines at key Fibonacci levels using the Fibonacci retracement tool – typically 23.6%, 38.2%, 50%, 61.8%, and 100% – between a significant peak and trough. Prices often retract and find support or resistance at these levels. For instance, after a bullish swing, traders might look for a pullback to the 38.2% or 50% retracement levels before entering a buy position, anticipating the next upward swing. These levels, when aligned with other indicators, increase confidence in trading decisions.

Lastly, the Average Directional Index (ADX) is a vital tool in swing trading, indicating the strength of a trend regardless of its direction. Values above 25 suggest a strong trend, while below 20 imply a weak one. Swing traders typically leverage ADX in conjunction with the Positive Directional Indicator (+DI) and Negative Directional Indicator (-DI). When +DI crosses above -DI and the ADX is above 25, it signifies a strong bullish trend, making it an opportune time to buy. Conversely, when -DI surpasses +DI with a strong ADX reading, it suggests a potent bearish trend, signalling a potential sell. For swing traders, ADX aids in distinguishing between strong trends worth trading and weaker, more volatile movements to avoid.

Mastering these indicators is a gateway to becoming a proficient swing trader. While each tool offers unique insights, combining them paves the way for a holistic view of market dynamics. Harness them, practice regularly, and remember: informed trading is always the best trading.

Essential chart patterns to master

By mastering chart patterns and combining them with technical indicators, you’ll be better equipped to predict potential price movements, helping you make more informed decisions. Let’s dive right in!

1. Head and Shoulders is a crucial pattern for swing traders as it often indicates a trend reversal. Comprising three peaks—the middle one (the “head”) being the highest and the two others (the “shoulders”) being roughly equal in height—this formation can predict significant price movements. In an uptrend, the formation of this pattern can signal a bearish reversal. Once the pattern is complete, and the price breaks below the neckline – support level connecting the lows of the shoulders – it’s an ideal time to enter a short position. Conversely, the inverse head and shoulders, formed in a downtrend, signals a bullish reversal, providing an optimal entry point for a long position.

2. Cup and Handle is a bullish continuation pattern that swing traders prize for its potential to herald an upward breakout. Visualise it as a tea cup: the “cup” is a U-shaped formation representing a consolidation or mild pullback after a strong upward trend. This is followed by the “handle”, a slight downward drift or consolidation. For traders, the ideal entry point is when the price breaks above the handle’s resistance. The depth of the cup and the height of the breakout provide clues on potential price targets. However, always use other indicators to validate, ensuring you’re not caught off-guard by false breakouts.

3. Double Top and Double Bottom are vital reversal patterns in swing trading. The double top, resembling an “M”, forms after a strong uptrend and signals a potential bearish reversal. When the price fails to breach a high twice and then declines below a support level (the valley’s base), it’s a selling cue. Conversely, the double bottom, shaped like a “W”, emerges post-downtrend, indicating a potential bullish reversal. After the price fails to dip below a low twice and then ascends past a resistance level (the peak’s top), it suggests a buying opportunity. Traders should wait for a confirmed breakout beyond these levels, accompanied by significant volume, before making a move, ensuring more precise entry and exit points.

4. Triangles are crucial chart patterns in swing trading, signalling potential continuation or reversal. They’re characterised by converging trendlines drawn from price peaks and troughs. There are three main types: ascending (higher lows), descending (lower highs), and symmetrical (both sides converge equally). The breakout direction from the triangle often determines the potential price move. Traders typically enter a position when the price breaches one of the triangle’s trendlines. The price target can be estimated by measuring the widest part of the triangle and projecting that from the breakout point. As always, use other indicators and set stop-losses to minimise risk.

5. Flags: Flags are short-term continuation patterns in swing trading, indicating brief pauses within a larger trend. Visualise short, rectangular shapes titled against the prevailing trend. A bullish flag slopes downward, suggesting a future upward breakout. Conversely, a bearish flag slopes upward, hinting at a potential downward breakout. For trade execution, enter a position once the price breaks out from the flag pattern in the direction of the prevailing trend. Combining flags with volume can enhance the pattern’s reliability.

6. Wedges: In swing trading, wedges are invaluable reversal or continuation patterns that provide traders with hints about potential price movements. Consisting of two converging trendlines, wedges can be ascending (with the resistance line steeper) or descending (where the support line is more slanted). An ascending wedge typically signals a bearish reversal after an uptrend, while a descending one hints at a bullish reversal post-downtrend. For continuation, the wedge will usually break in the direction of the preceding trend. To maximise success, traders should await a confirmed breakout, supported by increased volume. Setting a stop-loss near the most recent high or low can further safeguard against unexpected reversals.

Chart patterns offer valuable insights into potential price shifts. While no tool is infallible, mastering these patterns can significantly enhance your swing trading strategy. Keep practising, stay observant, and recognizing them will soon become second nature.

The psychology behind swing trading

Swing trading isn’t just about charts, trends, and numbers. At its heart, it’s deeply intertwined with psychology. Let’s dive into the mindset of a swing trader and understand the emotions that come into play.

1. Patience: It’s tempting to jump into every perceived opportunity, but successful swing traders understand the virtue of patience. Waiting for the right entry and exit points is crucial. Remember, the market will always present opportunities; rushing can lead to costly mistakes.

2. Discipline: Setting rules and sticking to them, no matter the allure of potential gains, requires discipline. Whether it’s setting a stop-loss or resisting the urge to overtrade, staying consistent is key.

3. Objectivity: The market doesn’t care about individual emotions. It’s vital to approach swing trading with an objective mindset. This means basing decisions on analysis and strategy, not on how you feel on a given day.

4. Stress Management: Let’s face it, watching the volatile swings of the cryptocurrency market can be nerve-wracking. Successful swing traders have techniques to manage and mitigate stress – whether it’s meditating, running, or gardening – ensuring that stress doesn’t cloud their judgement.

5. Continuous Learning: The crypto landscape evolves rapidly. Adapting and learning from both successes and failures is essential. Every trade, whether profitable or not, provides a lesson.

6. Acceptance: No trader, no matter how experienced, can boast a 100% success rate. Accepting losses as part of the journey is vital. What’s more important is the ability to bounce back, analyze what went wrong, and refine strategies.

In essence, swing trading isn’t just a test of your market knowledge, but a test of character. It’s a dance between the mind and the market, and understanding this interplay can make all the difference. As we move forward, remember that mastering the psychology is just as important, if not more so, than mastering the technical aspects.

Swing Trading Bitcoin: Real-World Examples Since 2018

Let’s journey back in time and walk through some critical moments in Bitcoin’s price movements since 2018, highlighting how key indicators might have guided our swing trading decisions.

Bitcoin reached an all-time high of around 17,000 EUR in December 2017. However, by February 2018, it plummeted to around 5,000 EUR.

At the end of 2017, a head and shoulders pattern was formed and when its neckline was broken in Jan 2018, it provided a clear bearish signal. This was confirmed by a Death Cross in March. 

In October 2018, however, The RSI dipped significantly below 30, hinting that Bitcoin was potentially oversold. Bollinger Bands started creating a Squeeze that lasted until April 2019 when the price broke higher, out of its range. This was quickly followed by a Golden Cross, confirming the bullish momentum. 

In mid-2019, Bitcoin formed a double top and started consolidating. The neckline was broken in September, followed by a Death Cross, signaling a bearish trend. 

After the COVID dip to 3500 EUR in March 2020, the price and trading volume started rising. From May onward, the price consistently stayed above the 200-day MA and in October, it broke the range and started its meteoric rise towards 50,000 EUR. 

After breaking the neckline of the head and shoulders pattern in May 2021, the price plummeted to 25,000 EUR. The price then bounced perfectly off the 61.8% Fibonacci retracement level and attempted another swing higher.

Bitcoin then hit almost 60,000 EUR at the end of 2021 before starting its long correction back toward the 16,000 EUR zone. The break of the Head and Shoulders neckline in December 2021 and a Death cross in January 2022 confirmed the bearish bias. 

After the MACD and signal line both crossed above the central line at the end of 2022, and a Golden Cross was formed in February 2023, Bitcoin’s price and volume started picking up momentum with the price recently reaching 33,000 EUR.

While historical data and indicators offer valuable insights, it’s essential to remember that cryptocurrency markets are volatile and unpredictable. Using a combination of indicators, staying updated with news, and maintaining a disciplined approach are keys to effective swing trading.