Trend Trading vs Swing Trading

FXOpen


When it comes to trading the financial markets, there are many different styles and strategies to choose from. Two popular approaches are trend trading and swing trading. In this article, we’ll take a look at both and discuss their differences to help you determine which style is best for you.

What Is Trend Trading?

Trend Trading vs Swing Trading: What Is Trend Trading?

Trend trading is a type of strategy used by traders to capitalise on a market trend. This strategy involves identifying a prevailing price direction and aiming to profit from it by entering positions in the corresponding direction. Traders will typically look for the hallmarks of a trend - higher highs and higher lows for a bullish move or lower highs and lower lows for a bearish one - to determine their directional bias before using other tools to find a suitable entry.

Trends are often established by fundamental factors, so many trend traders will also look to economic releases, financial data, and company earnings reports to guide their entries. For example, the Federal Reserve raising interest rates while the Bank of Japan commits to keeping them low could influence a trader to buy USD/JPY and ride the trend of an appreciating US dollar and depreciating Japanese yen.

While some trend traders rely solely on fundamental analysis, most also use some form of technical analysis in their strategies. This might include using trendlines, moving averages, or the Average Directional Index (ADX) indicator to gauge a trend's momentum and strength.

Since trends occur in virtually all tradable assets, this style of trading can be applied to forex, commodities, stocks, and crypto*. Trends can be found across all timeframes, but many traders stay in their position for weeks or even months at a time.  

The primary advantage of trend trading is its simplicity. By entering the market at the beginning of a trend and staying with it, traders can capture significant price movements in their favour. Additionally, trend trading is often considered to be less risky than other trading strategies because it is based on a well-established market direction rather than short-term fluctuations in price.

What Is Swing Trading?

Trend Trading vs Swing Trading: What Is Swing Trading?

Swing trading is another type of strategy that aims to profit from “swings” in the market. Generally speaking, these swings are short-term price movements from one support/resistance level to another, like in the chart above. For instance, a bullish swing trader might buy at support and sell at the next major resistance.

Swings can occur within a trend. The major difference between swing and trend trading is that swing traders buy and sell regardless of the trend direction, but trend traders trade in the direction of the trend.

The primary goal of this type of trader is to capture the bulk of a potential price move. To achieve this, swing traders rely heavily on technical analysis to identify potential entry and exit points. They might use various tools, like oscillators and chart patterns, to determine where the price is likely headed next, as well as support and resistance levels that may act as turning points in the market.

Many swing traders pay attention to the fundamental factors surrounding the asset they’re trading, but less so than trend traders. This is because, while understanding what may drive a market in a given direction is useful, these traders are more concerned with the technical factors that prompt short-term price movements.

Like trends, swings are found across the vast majority of assets. Most swing traders typically hold positions over a few days to a few weeks, allowing them to take advantage of these swings without constantly monitoring the market.

One of the most significant benefits of swing trading is its flexibility. Because it’s based on short-term price movements, this approach allows traders to enter and exit the market more frequently than other types of strategies, meaning they potentially have more opportunities to profit.

Trend Trading vs Swing Trading

Swing and trend trading can have significant differences that might make one more suitable than another for the individual trader. Let’s take a look at some of them.

Short-Term vs Long-Term

As discussed, a swing trader’s goal is to profit from short-term price movements that occur over days or weeks. In contrast, a trend trader will often stay in a position until the market reverses - something that can potentially take years to occur, depending on the trader’s time horizon. That’s not to say that trends can’t be traded intraday, but trend traders generally take a longer-term view of the market than swing traders.

Note: trend trading requires more funds to stay in the market  to cover the margin requirements when you trade with leverage. Your balance should be enough to cover significant price fluctuation that can occur within a trend.

Risk

Trend Trading vs Swing Trading

It can be argued that trend trading is a more conservative strategy since it’s based on following established trends in the market. But because these traders have a longer-term outlook than swing traders, they’re also more likely to use a wider stop loss. This, in turn, can reduce their position size and potential risk/reward ratio.  

Swing traders are likely to trade more frequently and use tighter stop losses, given that their approach is predominantly influenced by technical analysis. This can be a riskier strategy, but it may also enable them to generate a similar risk/reward ratio over a much shorter period.

In the example above, we can see a trend trader (left) using a buy stop to capture the breakout and start of a new trend. Meanwhile, a swing trader (right) observes the trend and buys at support (dashed line). The trend trader manages to exit just as the market reverses after being in their position for roughly two weeks, realising a risk/reward ratio of 2.08. The swing trader exits at the next major resistance with a risk/reward ratio of 1.95 after just a few days.

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Position Timing

As a consequence of taking on more risk, swing traders often have lower win rates than trend traders. This means optimising their risk/reward ratio is paramount to making the most of their winning trades. As such, many swing traders will seek the perfect entry setup, aiming to time the market as accurately as possible to capture the most profit.

Trend traders understand that they can mistime their entry and still profit if momentum is strong, as long as their stop loss is wide enough. They’ll still generally aim for optimal entries, but it’s less of a concern than it is for swing traders.

Entries and Exits

Swing traders will seek to enter at support or resistance levels using technical analysis to determine an area’s suitability to trade. They’ll exit when their stop is hit, or their profit target is reached.

Trend traders, on the other hand, tend to be more flexible with their entries. They might look to trade the breakout of a range in a larger trend, enter following a recent economic release, or use technical analysis to enter during a pullback. These traders usually exit after an opposing trend begins.

Swing vs Trend Trading: Which Is Better?

When it comes to trading strategies, there is no one-size-fits-all approach that works for everyone. The best approach depends on the individual trader's goals, risk tolerance, and lifestyle factors.

Swing trading may be more suitable for traders looking for more frequent trading opportunities if they are comfortable with shorter-term positions. If you pride yourself on your technical analysis skills but don’t have the time to commit to day trading, you might prefer swing trading. That said, it can be tough psychologically if you incur frequent losses.

Trend trading may be a better fit for traders looking for a longer-term approach if they are willing to hold positions for extended periods of time. If you prefer to trade based on fundamentals and aren’t too fussed about intraday price movements, then you could consider trend trading. However, taking a more laid-back approach and simply trading trends could result in fewer opportunities than a more active swing trading style.

Ultimately, only you can decide which style is best for you. If you’re just finding your feet in the trading world, then it’s best to stick with one approach over the other to avoid confusion. Once you feel ready, open an FXOpen account and put your skills to the test!

Final Thoughts

In summary, swing and trend trading are two popular trading styles that have some major differences, like time horizons, risk, position time, and entries/exits. Both approaches have advantages and disadvantages that can make either one more suitable for an individual trader. Before choosing a particular style, it’s important to consider which one will suit your trading goals and personality to have the best chances of success. Happy trading!

*At FXOpen UK and FXOpen AU, Cryptocurrency CFDs are only available for trading by those clients categorised as Professional clients under FCA Rules and Professional clients under ASIC Rules, respectively. They are not available for trading by Retail clients.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

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