Financial markets are extremely complex, but most trading strategies tend to fall into one of two categories: trend following or swing trading.
Each strategy has its advantages and disadvantages, as well as specific requirements that investors must always follow to avoid mistakes. However, many investors arbitrarily apply these opposite strategies without understanding how this can undermine profitability. Determine whether you are a trend trader or a swing trader in order to properly hone your strategy.
- Trend traders usually trade in an upward or downward trend, and the transaction lasts for more than a few months.
- Swing traders usually trade within ranges, buying at support levels and selling at resistance levels. Their transactions are usually short-term.
- Trend traders tend to focus on broader economic news, while volatility traders focus on short-term price changes.
- Compared with trend traders, swing traders have higher trading frequency, shorter trading hours, and also hold larger positions, and more accurately grasp the timing of their positions.
Trends and fluctuations
Theoretically, trend traders take risks in an uptrend or downtrend and keep their positions until the trend changes. In contrast, swing traders work within the boundaries of range markets, buying at support levels and selling at resistance levels.
Swing trading tends to work best in a short time frame, while trend-following strategies can be applied for several months. However, in recent decades, the boundaries have become blurred due to the availability of real-time graphs for all time intervals.
Which one suits your style
Novice and intermediate traders should choose one of these disciplines early in their market education and stick to it until they master it or until they find that they are more suitable for another method. Experienced traders can mix and match these strategies at will, and will usually construct efficient hybrid strategies that require strict discipline but produce excellent bottom-line results.
This dual effort is most suitable for those with strong multitasking skills. They can include each strategy within the appropriate boundaries while adjusting risk management to address the unique characteristics of mixed strategies.
For example, a typical long swing trade requires a quick exit at resistance levels (such as old highs), while trend followers sit in their hands and allow the security to test and break through these levels. A hybrid approach may be to sell half of the position at the resistance level, giving the other half the hope of a breakout.
Trend Trader and Swing Trader
Still confused about the main difference between swing traders and trend traders? The following trading characteristics will help you determine your current approach.
The 80-20 rule states that approximately 20% of the market is in a trend state, while the other 80% is spent on trading ranges, pullbacks, and other counter-trend actions that test boundaries. The rate of price change increases in the trend, attracting trend traders, and decreases in the trading range, attracting swing traders.
Trend traders are concerned about a wide range of economic, political, and environmental issues that may affect position selection or risk management. Swing traders safely ignore these macro effects and focus directly on short-term price action.
Swing traders execute more positions but hold them for a shorter time, while trend traders execute fewer positions but hold them for a longer time.
Trend traders hold or short the securities with the strongest upward and downward trends, while swing traders hold or short the securities that are at support or resistance levels.
Swing traders hold larger positions in a shorter time frame, while trend traders hold smaller positions in a longer time frame. Swing traders apply leverage more frequently than trend traders.
Swing traders seek the perfect timing, because the average win or loss will be smaller than trend traders, trend traders may miss the beginning or end of the trend, but still make considerable profits.
Trend traders open positions when momentum is strong or wait for a contrarian trend to reduce risk. Swing traders take risks at support or resistance levels and remove obstacles by positioning in the opposite direction and setting stop losses where they prove to be wrong.
When the stop loss is reached or the profit target is reached, the swing trader exits the position. Regardless of the time frame, trend traders will hold positions until the trend changes. They set a stop loss at a price level that indicates a trend change.
Swing traders and trend traders execute market timing strategies that require different skills. Although experienced players can successfully mix and match these strategies, novice and intermediate traders should focus on one method and stick to it until fully mastered.
Whether you are a trend trader or a swing trader, your profitability depends on your ability to apply a series of technical tools to specific markets or securities analysis.To learn more, check out technical analysis Course in Investment Encyclopedia Academy, Which includes educational videos and interactive content to help you improve your trading skills.