There are many trading strategies trading experts have developed to suit different traders, one of the trading strategies is swing trading, which many professional and expert traders use.
Swing trading is a simple strategy that even new traders can learn, and practise in their trading plans, and effective in many financial markets.
What is swing trading?
Swing trading is trading the upswings and downswings in the primary trend. It involves going long on a swing low and short on a swing high. Swing trading is a trading strategy that is almost like a hybrid between day and trend trading.
While day trading is opening and closing positions within a day, swing trading can take more than a day and can go up to one or two weeks. Swing traders profit from swings in a market within a particular time, and the trade can take a month based on the type of security traded.
Characteristics of swing trading
- It requires a trader to hold an open position for periods between one or two days to two weeks and in extreme cases, a month. It is trading the swings of price action, and sometimes the swings take days or even weeks based on the time frame you use.
- This strategy only needs a few trades, unlike the day trading strategy in which traders can open many positions. However, the few open positions are in place to ensure that you maximise the profits from a single trade.
- It has larger stop losses which can be unsettling for some traders since it increases the risk of a trade.
- It is a trading strategy in which a forex trader has to master emotional discipline when trading and wait out temporary swings without interfering with trade.
- If the open position takes more than a few days, a forex trader has to remain patient during the entire period.
Types of swing trading strategies
Swing trading a reversal
A reversal is when the price action is on a trend, either uptrend or downtrend and reaches a point it losses momentum and changes the direction. The point where it changes the trend direction is known as a reversal.
Swing traders look for reversals in price action, and open positions to profit from the incoming trend. The trend can be short term or long term, but the trader has to ensure that they confirm that it is an actual reversal before trading.
This swing trading strategy is effective if the swing trader can tell that the price action is reversing and not a minor pullback. Sometimes traders can confuse a trend reversal with a pullback. When the prices resume the original trend, and it is a temporary breakout it can lead to massive losses if they open large positions.
Swing trading a pullback
A pullback is a temporary reversal in a dominant trend. Swing traders also look for the positions when the price is retracing for a short time, and they open positions and close before the price returns to its original trend.
This trading strategy requires swing traders to apply technical analysis when predicting the reversals. The difference between a pullback or a retracement and a reversal is it is temporary, while a reversal is a complete change in trend.
How to swing trade
Open a trading account
Start by opening a trading account with a forex broker if you don’t have one. It is a simple process as long as you have identified a regulated and reliable broker to work with. Deposit on the trading account, and open a margin account if you want to use leverage to swing trade.
Chose an asset you want to swing trade
The swing trading strategy is applicable in any financial market, such as indices, stocks and forex. Choose a trading asset, which you know about its background knowledge, but before choosing an asset to swing trade, it is crucial to research different financial markets.
The research will give you insight into the type of asset with enough volatility depending on the trading strategy you want to use.
Technical and fundamental analysis
When swing trading, it is crucial to conduct a comprehensive technical analysis. This is using technical indicators such as the MACD, MA, RSI, EMAs and the support and resistance. It is also imperative to understand to predict price actions using candlestick patterns.
You can also conduct a fundamental analysis by evaluating the history of the asset in the market. It also includes looking at events, news and announcements to know when the market will be active and prepare for the trade.
Fundamental analysis is crucial, although swing trading depends more on technical analysis. Forex traders use technical analysis to evaluate demand, supply, volume and volatility of the market and predict the direction of the price action.
Open the daily/4 hour time frame
Many forex traders use the daily time frame because it offers a clear picture of the price action to the hourly timeframe. It is also a flexible timeframe since it opens and closes once a day.
You have to find some time within the day to enter or exit when the bars open or close. It is flexible because it is longer, and traders don’t have to monitor the market every five minutes like the hourly time frame. It requires enough time to plan for a trade, and you can find many strategies to use when swing trading.
Monitor the momentum and trend
Trend and momentum are crucial when trading any security and help the trader know which strategy to use when entering or exiting the market. An uptrend has the high swing highs and the high swing lows. A downtrend has the low swing highs and low swing lows.
In an uptrend, swing traders go long, while on a downtrend, they go short. Trading every swing high or swing low on a trend is possible, but is better to choose between the swing highs in an uptrend and swing lows in a downtrend when swing trading.
Apart from the downtrend and the uptrend, there is also the range also known as the consolidation. It has swing highs and swing lows, but the dominant trend is hard to define. This period is when there is almost a balance of the bulls and the bears in the market.
Trading a range can be lucrative since the upswings and the downswings are more defined than in a downtrend or uptrend. If you draw the resistance and the support levels, you can tell the swing highs and the swing lows apart.
The momentum of the trend is simply the strength of a trend. This is using technical indicators such as the Relative Strength Index and Stochastics. These indicators help traders predict when the market will change or if the market is losing momentum.
Scan for trading signals
If you have identified the dominant trend, you are ready to enter the market. You have to start looking for signals to enter the market. Some of the trading signals you can use to enter the market include candlestick patterns.
Pin bars enable you to predict swing highs and swing lows. Another candlestick for predicting trend reversals is the bearish or bullish engulfing candlestick. Confirm these signals with technical indicators before you start trading, or wait for confirmation from the market before opening a position.
Enter the market
If you have enough research on the market action, look at a potential point you can enter the market. Draw the resistance and support levels to analyse the market. Open a position when you feel conditions are good, but most advanced traders prefer during a breakout or breakdown formation.
The breakout mostly happens on an uptrend, especially in its early phases and the bulls and bears trying to control the market. A pullback is a temporary reversal from the overall direction. To see the breakout clearly, draw the resistance touching the upswings.
Once the price action breaks through the resistance, open a position as it retraces back to the resistance line. A breakdown is the same as a breakout and occurs on a downtrend. Open a trading position when the prices break down from the support in a downtrend.
Apply risk management tools
Swing traders need to protect their open positions from volatility by placing a stop loss or a take profit. It is crucial, especially if you open a trading position that might last long, for example, a day or a week. The market is unpredictable, and any announcement could lead to high volatility.
Swing trading has larger stop losses placed at the lowest prices at an uptrend and highest prices in a downtrend.
There is also a take-profit which is the ideal point when the trader feels they have achieved their trading goals. It should be strategically placed such that it does not lead you to exit prematurely and miss a potential price action wave.
The take profit also requires the trader to calculate the risk to reward ratio of the trade. It is effective when you evaluate it before you place the trade. Calculate the risk to reward ratio, before opening a position because if you do it during a trade you might get misled by false signals.
Swing traders have to incorporate risk management in their trading strategy, especially when the trade is long, and the trader can monitor the open positions for a few hours a day. More risk management tools are like the stop limits and the guaranteed stop-loss, which are beneficial in a volatile market.
Exit the market
For forex or any asset trading, exiting the market plays a role in how much you can make in a trade. A trader needs to know how to identify the proper time to exit the market if the stop-loss is not triggered.
Use the candlestick patterns that show whether the market is about to change direction. For example, bullish and bearish pin bars, where the bearish pin bars signal an upcoming bearish reversal while the bullish pin bar indicates an incoming bullish reversal.
The place to take profit after a bearish pin bar forms if you were trading a swing low or at the bullish pin bar if you were trading a swing high. These points are the potential profit points to place a take-profit order. They also ensure that you make the most profits from the swing high or swing low.
Which are the best securities to use the swing trading strategy?
Stocks are financial assets that attract many investors and were one of the first assets traders invested in before some currencies came to the market. It is also one of the markets where traders can use the swing trading strategy and profit.
Stocks trading means buying the stocks of a company and selling when its value has increased. Some stocks can increase in value over three days, which swing traders search for when trading.
When swing trading stocks, traders should consider the type of stock, liquidity and volatility. Stocks with high volatility carry a lot of risks, which search for a stable stock, with a little bit of movement.
Some of the stocks that swing traders apply this strategy are large-cap stocks with high liquidity in the stock market. Stocks attract swing traders because it is easy o identify the swing highs and swing lows.
It is also possible to swing trade currency pairs, although not all forex pairs. When swing trading currency pairs, you have to look for a currency pair with liquidity with two currencies with strong economies.
One of the forex pairs swing traders use is the GBP/USD, it has high liquidity and is stable with small price movements to capitalise on. When trading currency pairs, swing traders track the economic calendar to find trading opportunities and periods when it is risky.
Other financial markets include indexes and commodities.
Technical indicators to apply when swing trading
Relative Strength Index (RSI)
It is one of the popular indicators for day, trend and swing traders. The relative strength index is a momentum indicator with a scale from 0 to 100 to show whether the market is oversold or overbought.
It can also help to predict the direction of the price action. Its calculation is based on the average of the closing prices and has a default period of 14 days. Traders can set up the prefered period for the relative strength index according to their trading strategies.
Moving Average (MA)
It is a technical indicator consisting of a line that follows the price action and helps traders know the overall trend direction. The moving average is also the average of prices within a period, such as from 15 to 200 days.
It helps traders predict the trend by calculating and drawing a line following the price action. Traders use this line to know if the prices are moving to a reversal. Short periods such as ten days make the moving average sensitive to price movements.
It is possible to apply two moving average lines on a price chart. If the MACD moves upwards, it shows the prices are on an uptrend, while if it moves downwards, the price is on a downtrend.
Swing traders can use the moving average to confirm the market signals from other sources, such as candlestick patterns.
The simple moving average (SMA)
It is a moving average and a technical indicator used for identifying the trend direction. It gets derived by calculating the average of prices, although its calculation is more complex than the moving average.
It also follows the price action and allows traders to know when the price action is in an uptrend or downtrend. Swing traders can use it to identify the potential positions to enter or exit a position, and it can also help when drawing support and resistance levels.
The Moving Average Convergence Divergence (MACD)
It is also another type of moving average that consists of two lines. It is a momentum indicator which means it assists swing traders to know the strength of the trend. The first line is an Exponential Moving Average (EMA), set at 12 periods, the MACD line.
Here is also another 9 days EMA is called the signal line, if these lines cross, they indicate the buying and selling signals for traders. The two lines work with a histogram to show the market momentum if the bullish or bearish market is strong.
When the MACD line crosses above the signal line, it indicates a strong bullish market which means traders should go long. If the MACD moves below the signal line, it shows the bears are taking over, an indication for traders to go short.
Advantages of swing trading
It takes a short time to set up and open a trading position for swing trading. Swing traders can do other activities as long as they use some hours in a day to track the progress of the trade. Compared to day trading, the trader spends less time watching their screen.
It uses smaller swing highs/swing lows, and the trader does not have to wait for a trend to form to trade it. Swing traders can profit from the swings in the market without opening many trading positions.
When swing trading, the stop-loss is large, reducing the chances of a premature exit. It is a trading strategy that students and traders with jobs during the day can utilise when they don’t have time for trading.
It relies on technical analysis, which is easier to work with, unlike fundamental analysis, which requires the trader to monitor announcements and events. It makes swing trading efficient for traders who have no time to track the market.
Disadvantages of swing trading
Swing traders who open positions for longer, for example, a few days or weeks have to bear the charges. It includes rollover charges applied when you have an open position overnight. There are also the effects of gapping when the markets open and close.
Swing trading also carries some risk if executed for long periods. If there is any announcement overnight or the interest rates change, and the price action goes against your trade, it could lead to massive losses, especially if the trader uses high leverage.
It also requires extensive knowledge of technical analysis before you can apply this strategy and profit from it. It is difficult for new traders to use this trading strategy if they do not know how to enter or exit the market using technical analysis.
It can make the trader lose profits from the long term trends if they only focus on the smaller swing highs and swing lows.
Forex traders must understand how to apply the swing trading strategy to increase their trading knowledge. Swing trading is a promising strategy for traders who are willing to put in the effort to learn and practice trading. It is not as simple as it sounds, but any trader can use it, new or advanced traders.
It requires traders to master trading discipline as anything can happen within the period that the trade is open. Swing trading requires the trader to be calm and patient and follow their trading strategy and market signals instead of following their biased judgement.
Frequently Asked Questions
What is the difference between day trading and swing trading?
Day trading is when a forex trader opens numerous trading positions and closes them within a single day. While swing trading has fewer positions and can take more than a few days to a week for an open position.
Which is the best financial market to swing trade?
Most swing traders trade the stock market because of its well-defined swing highs and swing lows, but some trade forex, commodities and indices.
Can you make a living by swing trading?
It is possible to live off swing trading, although it requires time to practice and master it. Swing traders can make good profits from the swing highs and swing lows. It also requires the trader to have a strict trading discipline and expert level money management skills.