Swing trading in crypto is a trading strategy that aims to capture short-term price movements. In this guide, I will walk through how crypto swing trading works, which tools you can use, how to do it, and the risks associated with it.
How does swing trading work in crypto?
Swing traders try to take advantage of “swings” or price fluctuations that occur within an established trend or range. For example, as a swing trader, you might do some technical analysis and decide that a specific crypto has reached the bottom and is about to start rising in price. You would then buy the cryptocurrency. Next, you would look out for signals that the crypto in question has reached a peak at which point you would sell.
Swing traders take multiple such positions across various cryptocurrencies and trade in and out of them. The time horizon depends on each trader’s strategy but they usually have a short to medium time frame.
Some swing traders engage in day trading where they enter and exit multiple positions in a day. Day traders often end up spending a lot in fees which can often outweigh any returns they make.Also see Is There a Day Trade Limit on Crypto?
Swing traders love the cryptocurrency market because of its high volatility. There is also no established way to value digital assets, unlike other financial assets such as stocks.
In crypto or trading speak you would say a swing trader trades between resistance levels.
What’s a resistance level?
A resistance level is like a stubborn barrier that the price of a cryptocurrency struggles to break through. It’s as if the market is saying, “Nope, you’re not going any higher!” .
Traders look at historical price charts and notice these levels where the price seems to hit a ceiling and bounce back down. It’s like the crypto token is saying, “I can’t break through this level right now.”
So, what happens if the crypto manages to break through the resistance?
Ah, that’s where it gets interesting.
When a cryptocurrency successfully breaks through the resistance level, it’s like you finally getting that cup of coffee. The path is clear, and the price might continue rising because it overcame the stubborn resistance
Traders often pay attention to these levels because they can signal potential shifts in the market.
What’s interesting about swing trading is that you don’t need to consider fundamental analysis. You might look at the fundamentals of a meme coin like Dogecoin or Pepe and think it is complete rubbish. Swing traders don’t care though. As long as people are trading the coin you can swing trade it.
How to swing trade
The first thing you want to do is identify the resistance and support levels of the cryptocurrency you are trading based on historical data.
Next, you want to keep an eye out for when the coin breaks through that level. You can log in daily to check or you can set up a price alert.
Once a coin breaks through its resistance level you would start buying it and sell when it approaches the next level of resistance.
Let’s take a look at an example.
Swing trading example
In the image below note how bitcoin has historically seen support at $25,000 and resistance at 30,000. But recently Bitcoin has broken through the 30,000 barrier. Now the previous resistance level has become the support level and the new resistance is $38,000. If Bitcoin were to break that barrier a swing trader would enter and wait to exit until Bitcoin went all the way up to $50,000 which is the next level of resistance.
Swing trading can also involve taking a short position if you expect the price of an asset to drop.
If done properly, swing trading can result in sizable returns.
However, most beginners will lose money and there is no guarantee that it will work for you. It depends on your trading style and risk tolerance.
Order types that swing traders use
There’s a few order types you need to be aware of if you want to do swing trading right
Market order
A market order just executes at whatever the coin’s current price is in the crypto market. Swing traders hardly ever use Market orders.
They use what’s called a limit order instead.
Limit order
A limit order executes when the price of the asset reaches the limit price. See how to set a limit order on Coinbase app and Binance Limit Vs Market Order: Understand the Difference for more detailed instructions
For example, if I set a buy limit order for 2 ETH at a limit price of $5,000 my order will go through if ETH hits $5,000.
Then I can wait until the price hikes up to the resistance level and sell. Say the resistance level is $6,000. Then I could set a limit order to sell 2 ETH with a limit price of $6,000.
Sounds great!
But because things don’t always go your way, to protect yourself from prices going in the opposite direction you can set a stop-loss order
Stop-loss orders
A stop loss order executes a market order when the market price reaches your stop price.
It’s like you are telling the exchange “ok, stop now I want to exit the trade”.
In our previous example, you could have also added a stop-loss order at $4,800.
That way if the price of ETH shot up to $5,000 your limit order would buy it.
Then if the price started to drop and hit 4,800 the stop loss order would instruct the exchange to sell.
This way you only lose $200 (4%) rather than losing everything while you sleep if the price continues to tumble.
Also, see how to set a stop loss on Robinhood crypto.
Smart traders are patient. They automate their trading strategy, stick to it, and are prepared to accept painful frequent small losses to win those less frequent big wins.
Useful technical indicators for swing trading
Swing trading relies heavily on technical analysis to identify potential entry and exit points based on short-to-medium-term price movements. Here are some useful technical indicators for swing trading:
- Moving Averages:
- Types:Simple Moving Average (SMA), Exponential Moving Average (EMA).
- Use:Moving averages help smooth out price data and identify trends. Crossovers between short-term and long-term moving averages can signal potential entry or exit points.
- Relative Strength Index (RSI):
- Use:RSI measures the magnitude of recent price changes to evaluate overbought or oversold conditions. Readings above 70 may indicate overbought, while readings below 30 may indicate oversold conditions.
- Moving Average Convergence Divergence (MACD):
- Components:MACD line, signal line, histogram.
- Use:MACD helps identify changes in the strength, direction, momentum, and duration of a trend. Crossovers and divergences can be signals for potential trend reversals.
- Bollinger Bands:
- Components:Upper band, lower band, middle band (SMA).
- Use:Bollinger Bands help identify volatility and potential overbought or oversold conditions. A price near the upper band may suggest overbought, while a price near the lower band may suggest oversold conditions.
- Stochastic Oscillator:
- Components:%K, %D.
- Use:Stochastic Oscillator measures the current closing price relative to the price range over a specific period. It helps identify overbought or oversold conditions.
- Fibonacci Retracements:
- Use:Fibonacci retracement levels help identify potential reversal levels in a trend. Traders use key Fibonacci levels (38.2%, 50%, 61.8%) as potential support or resistance.
- Average True Range (ATR):
- Use:ATR measures market volatility, helping traders set stop-loss levels based on current market conditions. It provides insights into the potential range of price movement.
- Ichimoku Cloud:
- Components:Tenkan-sen, Kijun-sen, Senkou Span A, Senkou Span B, Cloud.
- Use:The Ichimoku Cloud provides a comprehensive view of potential support, resistance, and trend direction. It helps traders assess the overall market sentiment.
- Volume Analysis:
- Use:Analyzing trading volume alongside price movements can provide insights into the strength of a trend. Volume spikes can confirm or signal potential reversals.
Chart patterns
Chart patterns are graphical representations of historical price movements that help you identify short-term price movements.
- Head and Shoulders:A reversal pattern with three peaks—a higher peak (head) between two lower peaks (shoulders). Indicates a potential trend reversal from bullish to bearish or vice versa.
- Triangular Patterns:
- Symmetrical Triangle:A continuation pattern where the price forms lower highs and higher lows, converging towards a point. Breakout can be either bullish or bearish.
- Ascending Triangle:A continuation pattern with a flat top (resistance) and rising bottom (support). Typically a bullish pattern.
- Descending Triangle:A continuation pattern with a flat bottom (support) and falling top (resistance). Typically a bearish pattern.
- Flags and Pennants:
- Bullish Flag:A rectangle-shaped consolidation pattern after an uptrend typically indicates a bullish trend’s continuation.
- Bearish Flag:Similar to the bullish flag but occurs after a downtrend, indicating a potential continuation of the bearish trend.
Alternatives swing trading
- Day Tradinginvolves opening and closing positions within the same trading day. Day traders seek to capitalize on intraday price movements and typically do not hold positions overnight.
- Position Tradingis a longer-term strategy where traders hold positions for weeks, months, or even years. This approach is based on the analysis of broader economic trends and fundamental factors.
- Scalpingis an ultra-short-term trading strategy where traders aim to make small profits from very quick price movements. Scalpers often make numerous trades in a day, holding positions for only a few minutes.
- Trend Tradinginvolves identifying and following the prevailing trend in the market. Traders enter positions in the direction of the overall trend, aiming to ride the trend for the long term
- Algorithmic (Algo) Tradinginvolves using computer algorithms to execute trades automatically based on predefined criteria. Algorithms can analyze market data and execute trades at speeds impossible for manual traders.
Please keep in mind that swing trading cryptocurrency is highly risky. Make sure you only invest a small amount of your crypto assets in any single trade. A good rule of thumb is 1%.
Is crypto swing trading profitable?
Yes, experienced traders do make a profit using swing trading. However, it does require a steep learning curve and investment in terms of time and money lost until you learn how to do it right.
You are not going to become a millionaire overnight.
To get some practice you could open a demo account with an exchange.
However, keep in mind that your emotional psychology is a massive component that affects your trading decisions and that a demo account does not simulate real-life situations with real money on the line.
Do swing traders trade every day?
No, you don’t have to trade daily to swing trade. In fact, it’s a good idea you don’t because day trading results in spending a lot of any winning on fees.
Is swing trading like gambling?
No, while you might get a similar high from winning or losing when you swing trade cryptocurrencies professional traders would argue it’s not completely up to chance. There is an art to discerning bottoms and tops and experienced traders do manage to make an income this way. If you want to compare it to gambling think of it more like poker in the sense that involves both experience, strategy and luck.
What is the downside of swing trading?
Here are some potential downsides of swing trading:
- It involves exposure to market risk, and prices can be influenced by various factors, including economic events, geopolitical developments, and market sentiment. Sudden and unexpected market movements can lead to losses.
- Swing traders often rely on technical analysis to identify potential entry and exit points. However false breakouts often occur whereby a price appears to break through a support or resistance level but then quickly reverses
- The nature of swing trading, with its short- to medium-term holding periods, can expose traders to emotional stress. Market fluctuations and the need to make quick decisions can contribute to stress and anxiety.
- Successful swing trading requires time and attention to monitor the markets. It may not be suitable for individuals who prefer a more hands-off approach.
- Frequent trading can lead to higher transaction costs, including commissions and fees.
- Swing trading requires a good understanding of technical analysis, chart patterns, and market dynamics. Traders need to invest time in learning and practicing before becoming consistently successful.
Useful resources
- Check my trading basics section under crypto basics.
- I found The Crypto Trader by Glenn Goodman to be very easy to follow. In there he talks a lot about swing trading and how to do it right. I have based a lot of this article based on the knowledge I acquired from reading that book.
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