Swing Trading

Up or Down or Sideways?

Swing trading up
Swing trading during an uptrend.
Swing trading is a short-term trading method that can be used when trading stocks, options and cryptocurrencies. Whereas day trading positions last less than one day, and long positions last weeks or months, swing trading positions typically last two to six days, but may last as long as two weeks or so.

That presumes, however, that you have your coins/tokens in a hot wallet on an exchange and are trading in that exchange’s interface.

The goal of swing trading is to identify the overall trend (up, down or sideways) and then capture gains during inevitable swings (corrections and retracements) within that trend. Technical analysis (TA) is often used to help traders gauge a correction or retracement and hopefully improve the effectiveness of their trades. Most swing traders work with daily or hourly charts.

Many times, neither a clear bullish or bearish trend is present, but the coin/token is moving in a range or channel going sideways, somewhat in a predictable pattern between parallel resistance and support areas. There are swing trading opportunities in this case too, with the trader buying near the support area.

If the overall trend is down, then the trader could short shares. However, newbies and beginners might not want to engage yet in the more complex and risky business of short trading. This type of aggressive trading requires experience and psychological resilience. Newbies and beginners can, however, buy and sell corrections or retracements.

What are Corrections, Pullbacks, Retracements and Reversals?

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Retracement in a downtrend.
A correction or pullback or retracement is a relatively short-term movement of the market in the direction opposite to the main trend.

A financial market’s value is always rising and falling. The crypto market is no different. Sometimes, a coin/token will experience short- and intermediate-term gains, even though nothing groundbreaking has happened. In an uptrend, these increases in value are often due to mass psychology on the part of investors and traders driven by anticipation of perceived gains. As more investors buy into the trend, the price increases. Once the price is rising high enough, buying slows, and some investors begin to sell to lock in their gains. This decrease in price, following a short- or intermediate-term increase, is called a market correction or pullback.

Needless to say there are minor and major corrections, and anything in between. A minor correction may also be called a retracement. A correction or pullback will be bearish in a bullish trend, while in the bearish trend a correction will be bullish. A correction in a coin’s price is indicative of the coins’s true market value and may not indicate a loss or gain in value so much as a market’s return to stability.

A reversal differs from corrections by its duration. In a shorter time frame, a major correction may be seen as a reversal. However, while a correction is largely temporary, reversal means that the trend has shifted more permanently to the opposite one: uptrend switched to downtrend or vice versa. So, always keep the associated time frame in mind.

What are Time Frames

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Zoom in for noise or detail.
Time frames play a significant role when looking at market charts. Imagine being an eagle soaring high in the sky. All you see is the larger picture and it looks good. As an investor, you might see a general long-term uptrend. Now, imagine being a sparrow. There is a lot more detail to mind while flying between and into bushes. As a trader operating in the same market as the investor, you might see a correction and mistake it for a reversal.

Trends can be classified as primary, intermediate and short term. There can be conflicting trends within a particular cryptocurrency depending on the time frame being considered. It is not out of the ordinary for a coin or token to be in a primary uptrend while being mired in intermediate and short-term downtrends.

The better technical analysis commentators will reference time frames in their analysis. They might say: “On the weekly chart, we see a confirmed uptrend. Perhaps nothing to worry about.” Following that in the same commentary, they might say: “However, on the hourly chart, we see volume rising, a death cross here, and a doji candle there. Is it time to sell?”

That is confusing to many newbies and beginners. Worse is, when no time frame is given because the commentator believes that s/he speaks to an audience that knows and trades the same strategy. The noise in many online forums used to be deafening to me.

So, I recommend that you, as a newbie or beginner, follow only a few professional commentators, look at monthly or weekly charts to define the primary trend, and daily charts to pinpoint entry and exit positions. Don’t pay much attention to commentary referencing charts run by the hour or even minute. The longer the time frame is, the more reliable the signals from indicators like the RSI or MADC are. As you drill down in time frames, the charts become more polluted with false moves and noise.

For example:

  • as a position trader, you may evaluate weekly charts for your decisions, use monthly charts to define the primary trend, and daily charts to refine entries and exits.
  • as a swing trader, you may evaluate daily charts for your decisions, use weekly charts to define the primary trend, and hourly charts to refine entries and exits.

What are Support and Resistance Levels?

Support & Resistance
Support & Resistance.
Support and resistance represent key junctures where the factors of supply and demand meet. Support and resistance levels can be identifiable turning points, areas of congestion or psychological levels (round numbers that traders attach significance to).

Like in the stock market, cryptocurrency prices are driven by supply (down) and demand (up). Supply can be thought of as bearish, bears and selling. Demand can be thought of as bullish, bulls and buying. As demand increases, prices rise and as supply increases, prices drop. When supply and demand are cancel each other out, prices move sideways as bulls and bears slug it out for control.

Support
Support is a narrow price range (often just a horizontal line on a chart) at which demand is thought to be strong enough to prevent the price from declining further. As a price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.

Support does not always hold and a break below support signals that the bears have won out over the bulls. A decline below support indicates a new willingness to sell and/or a lack of incentive to buy. Support breaks and new lows signal that sellers have reduced their expectations and are willing sell at even lower prices. In addition, buyers could not be coerced into buying until prices declined below support or below the previous low. Once support is broken, another support level will have to be established at a lower level.

Resistance
Resistance is a narrow price range (often just a horizontal line on a chart) at which selling is thought to be strong enough to prevent the price from rising further. As the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.

Resistance does not always hold and a break above resistance signals that the bulls have won out over the bears. A break above resistance shows a new willingness to buy and/or a lack of incentive to sell. Resistance breaks and new highs indicate buyers have increased their expectations and are willing to buy at even higher prices. In addition, sellers could not be coerced into selling until prices rose above resistance or above the previous high. Once resistance is broken, another resistance level will have to be established at a higher level.

Support Equals Resistance
It is typically acknowledged that support can turn into resistance and vice versa. Once the price breaks below a support level, the broken support level can turn into resistance. The break of support signals that the forces of supply have overcome the forces of demand. Therefore, if the price returns to this level, there is likely to be an increase in supply, and hence resistance.

The other turn of the coin is resistance turning into support. As the price advances above resistance, it signals changes in supply and demand. The breakout above resistance proves that the forces of demand have overwhelmed the forces of supply. If the price returns to this level, there is likely to be an increase in demand and support will be found.

What are Ranges or Channels?

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Trading the Range.
A trading range or channel is generally associated with the lack of market direction or the absence of a clear up or down trend. This is when the market is trading sideways. Newbies and beginners can still make some money in this scenario although it is a bit more tricky in contrast to a market in an uptrend.

Traders can time range-based buys and sells using a series of methods. One of the most popular and simplest ways is through the use of oscillators. Some of the most popular oscillators include the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD).

Using Limit Orders to Gain.

Prices inevitable drift no matter an uptrend or downtrend or if the action is going sideways. There is no way for a trader to time the absolute bottom or high of a correction or retracement. The trick, then, is not to avoid a temporary loss, but to manage it. Before a trader initiates a buy, s/he could (should!) decide how far s/he is willing to let the coin/token drift down before selling for a manageable loss, or rise before selling for a decent gain. Remember, swing trading is not a longer-term position strategy.

This is where so-called limit orders can help. As a newbie or beginner, you will want to get into the habit of placing limit orders for both profits and losses right after the buy, and regardless if you position or swing trade.

Limit Orders
Set you Limit Orders.
A stop-loss order is an order-in-waiting that tells the exchange to sell your position at your predefined price, naturally a bit lower than the actual buy price. A take-profit order is an order-in-waiting that tells the exchange to sell your position at your predefined price, naturally higher than the actual buy price.

So, here is an example. Let’s say Bitcoin trades at $6,000 in a general downtrend. It appears that price might be retracing to the upside. It most likely is not a trend reversal, just a minor correction. You can tolerate a 4% loss if probabilities do not pan out for you, and you would be pleased with a 10% gain. So, you might buy $1,000 worth of a bitcoin (satoshis, the smallest unit of the bitcoin cryptocurrency), set a stop-loss order $5,760 and a take-profit order at $6,600.

In the worst case scenario you lose $240, and in the best case you gain $600. Now, if you are right a little more often than not about the probabilities of your trading outcomes, you will make money – even in a downtrend. It is even easier in an uptrend!

All things being equal, you want your winners to earn double to triple the amount you’re willing to sacrifice on your losses. Using this swing strategy consistently will help you avoid losing money in the long run.

How do you Time the Dip?

Uh, that is the tricky part. Predicting market corrections are a big part of technical analysis (TA). Many investors will use leading (Elliot Wave, Fibonacci Retracement, etc.) and trailing indicators (RSI, MACD, etc.) to try to determine when the correction will begin and end so that they can buy when prices are lower and sell when prices are higher. You may rely on someone else’s or your own technical analysis or both for clues. For a newbie or beginner, it is really helpful to find a good technical analysis commentator or two to follow.

Some people say that you buy when investors fear is at it’s worst and sell when euphoria is at its height. There are now technical analysis indicators that even reflect investor’s mood.