Trading on fluctuations: advantages and features
Swing trading, or swing trading, is a method of trading in which a trader tries to determine the most likely price movement and then use this movement to make a profit. The position opened when trading on the fluctuations that typically last from several days to several weeks. This is a medium-term trading strategy aimed at getting the maximum possible profit.
The term “swing trading” comes from the fact that this method of trading involves technical analysis of historical price movements and their tendency to repeat movements to a certain extent. In short, the market is evaluated only by the movement it shows and its volatility. Thus, it is one of the oldest trading methods and the purest form of trading.
Trading on fluctuations and how does it work?
You may ask, what is swing trading? This is a Forex trading methodology that relies entirely on technical analysis to predict the next price movement of a financial asset, be it a currency pair or a stock, and use this movement to generate some profit. The goal is always to trade on the fluctuation in the price of a financial asset that corresponds to the General trend of the market, in order to try to increase your profit from the transaction.
The main goal of trading on fluctuations is to consistently make small profits without having to constantly look at your trading screen every minute of the day. You perform a technical analysis of the market using your preferred tool, enter a position, and then track your position for profit over the next few days or even weeks.
Here are some of the most popular indicators used to analyze the market when trading on fluctuations:
- Fibonacci level
- Support and Resistance
- MACD crossover
How do I start trading on fluctuations?
When trading on fluctuations, the trader seeks to use the cyclical movement of the price to make a profit. These movements can be up, down, or sideways. This is a trading strategy that, if mastered and applied correctly, can be used for trading in all types of markets: bull markets, bear markets, and range markets.
The trick in swing trading is to learn to get involved in the action early enough and use the market momentum long enough to make some profit. For this to happen, the trader must make sure that his strategy includes the following key elements:
- Entry point and trigger
For example, a swing trader using support and resistance levels as the main trading instrument should set their stop loss 5-10 points below the support level, usually the previous minimum for an uptrend and the previous maximum for a downtrend. The entry point will be 50-100 points from this support level. Take profit should be set from 80% to 95% of the movement to the previous resistance level. In this example, the price action around the support level will determine whether to enter a position or not. Profit can also be obtained partially where the market’s volatility or momentum decreases, which allows you to go to the point of profit taking. This strategy is used to ensure that the trader always has something to profit from.
On the chart above, the price of the support level is 71.624, and the resistance is 72.085. If someone decided to take a bullish position now, the stop loss would be at 71.630, and the take profit level would be at 72.000.
Advantages and disadvantages of trading on fluctuations
Like everything else in the financial market, swing trading has both potential advantages when used correctly, and disadvantages as a trading strategy.
The main advantages that can be associated with this popular trading methodology include:
- Clear trading boundaries: the oscillation system clearly determines when to enter a position, determines the most strategic stop loss and the best take profit point. The strategy ensures that unprofitable trades are closed early enough and potentially profitable trades remain open for execution.
- Natural market movement: one of the main reasons why traders lose out in Forex trading is that they try to fight the market and its movement. Swing trading essentially uses the natural flow and movement of the market to take profitable trading positions. The whole point is to determine where the market was, where it is currently, and the likelihood that it will reconsider a previously defined position, and then take advantage of this.
- Smaller stop losses: with the exception of intraday trading strategies, swing trading has the lowest stop losses. This means that the risk associated with each open position is relatively low, and therefore the investment is better protected. The ideal strategy for trading on fluctuations also provides for a minimum profit-to-loss ratio of 3:1, each open position should bring three times more profit compared to the trading risk.
- More trading opportunities: as a medium-term trading strategy, swing trading allows you to detect trading opportunities as they appear, because you enter and exit a transaction relatively quickly. Due to its cyclical movements, the strategy also allows you to trade with the trend as well as trade against the trend – hence more trading opportunities.
As a swing trader, you should always remember the following to minimize potential losses associated with this trading methodology:
- High stop loss hit rate: swing trading has a tiny stop loss margin, which is sometimes not enough for the market time to roll back to get the necessary momentum. This means that the probability of hitting a position in a stop loss is high, and each hit leads to a loss of funds.
- The unpredictability of the market: swing trading is based on probabilities. Thus, the market does not always behave as technical analysis suggests. Transactions when trading on fluctuations are very sensitive to market reversals; the Market behaves exactly the opposite of what you would expect.
- Opening Gaps: trading on fluctuations involves holding positions for several days. Sometimes markets can open with significant price gaps, and if the gap occurred against the position, it means instant losses.