Without a clearly defined option trading strategy you will face a lot of confusion when dealing with markets. This confusion will cause you to lose money. This article Trend Follower or Swing Trader, will help you clear up this confusion.
Every trader has to make one basic decision about his option trading strategy: He can either apply a trend follower or swing trader approach.
Both techniques are equally valid and can generate good results. Still, there are significant differences between both techniques, and your character and trading style might not be equally well-suited for both types of option trading strategies. While the trend is the fundamental element of both approaches, they differ on the way they use a trend to make investment decisions.
Trend-followers: If you are a trend-following trader, you want to use the entire range of a trend for your trading. As soon as you have identified a trend, you have to predict how long you think the trend will last. There are a number of ways to do that, such as support and resistance levels, trend lines, Bollinger bands, and many other technical indicators.
When you know how far the trend is likely to move, you can invest in a binary option such as touch or boundary option or a high / low option to benefit from this prediction. In trendless periods, trend-following traders stay out of the market. They will look for trend in other assets or on other timeframes. If they cannot find any, they will not invest.
Swing traders: Swing traders do not trade the trend in its entirety. Instead, they trade each part of the trade individually.
Every trend moves in a zig-zag movement, thereby constantly creating new highs and lows. A swing trader will try to benefit from each movement from high to low and from low to high. This means, when the market is in a downtrend, for example, swing traders are still willing to invest in rising prices if they find signs of an impending correction.
Trend-followers, on the other hand, would never do that. They only invest in the main direction of the trend. If the current market is not trending, swing traders still invest. They try to find the support and resistance level, the continuation pattern or the reversal pattern the market is currently moving in. When they find it, they invest in the swings the market will make within these patterns.
Swing traders also use indicators like Bollinger bands and rely heavily on momentum indicators to predict how far the market can move and if a reversal is impending. Mixing trend-following indicators with swing trading indicators can be very confusing, especially to new traders, since they tend to contradict each other often. When a market is in an uptrend but could go through a correction soon, trend-following indicators will tell you to stay long while swing-trading indicators will tell you to go short.
Often, one indicator such as a moving average can be used as a trend-following and a swing-trading indicator. If you use it with more periods, it will become a trend-following indicator. If you use it with fewer periods, it will become a swing-trading indicator. This is one of the main reasons why you have to clearly define yourself as a trend-following trader or a swing trader. Otherwise you will constantly get confused about which indicators to use.
Whether you should choose a trend follower or swing trader approach largely depends on which method you feel more comfortable with and which method you can generate the best results with. Keep in mind, though, that on the same time frame, a trend following approach will generate significantly less trading opportunities than a swing-trading approach.
While you can make up for this disadvantage by simply switching to a smaller time frame, market movements tend to become more erratic on smaller time frames, which makes trends harder to trade. Therefore, it is hard to apply the usual attributes of “risky, but high potential” and “secure, but less potential” to both trading forms. In this case, risk and potential are solely determined by your ability to trade the strategy correctly.