What is Swing Trading

21 Jun 2019

What is Swing Trading

Swing trading is a trading method that tries to identify the most likely price movement and then attempts to exploit this movement for profits. Positions entered into through swing trading usually last a few days to a few weeks. It is a medium-term trading strategy geared to making profits as consistently as possible.

The term ‘swing trading’ is derived from the fact that this trading method involves technical analysis of the historical movements of prices, and their tendency to repeat movements to a certain degree. In short, the market is judged only on its merit, the movement it represents, and its volatility. It is thus one of the oldest trading methods around, and the purest form of trading.

Contents

What swing trading is and how it works
How to swing trade
Advantages and disadvantages of swing trading
Swing trading strategies
Day trading vs. swing trading
Which financial instruments are the best for swing trading?
Conclusion

What swing trading is and how it works

The goal is always to trade the swing that corresponds to the big picture market trend to try to increase one’s win rate.

What is swing trading, you ask? This is a forex trading methodology that relies wholly on technical analysis to forecast the next price movement and take advantage of this movement to gain some profits. The goal is always to trade the swing that corresponds to the big picture market trend to try to increase one’s win rate.

The primary purpose of swing trading is to make small profits consistently without the hassle of having to keep on looking at one’s trading screen every minute of the day. You do an analysis of the market using your preferred tool, enter into a position, and then monitor your position for profits over the next few days or even weeks.

Some of the most popular indicators used to analyze the market for swing trading are:

  • Fibonacci levels

  • Supports and Resistance

  • MACD crossover

  • Channels

How to swing trade

Just like the name suggests, when swing trading a trader seeks to exploit the cyclical movement of prices to make profits. These movements can either be upwards, downwards or sideways. It is a trading strategy that, when mastered, can be used to trade in all market types: bull market, bear market, and ranging market.

The trick in swing trading is learning to get in on the action early enough and ride the market momentum long enough to make some profits.

The trick in swing trading is learning to get in on the action early enough and ride the market momentum long enough to make some profits. For this to happen, a trader must ensure that their strategy has these key elements:

  • An entry point and trigger

  • A stop loss

  • A take profit point

How to swing trade

For example, a swing trader using supports and resistance levels as their main trading tool will have their stop loss 5-10 pips below the support level—usually the previous low for an uptrend and the previous high for a downtrend.  The entry point would be around 50-100 pips from this support. The take profit would be 80% to 95% of the movement to the previous resistance level. In this example, the price action around the support level will dictate whether to enter into a position or not. Profits can also be taken partially where market volatility or momentum decreases, allowing the rest to go all the way to the take profit point. This is a strategy used to ensure that even if the market reverses, a trader always has something to take home.

In the chart above, the support level price is 71.624, while the resistance is 72.085. If one decided to take a bullish position right now, the stop loss would be at 71.630 while the take profit level would be at 72.000.

Advantages and disadvantages of swing trading

Just like everything else in this universe, swing trading comes with both potential benefits if used wisely and also shortcomings as a trading strategy.

The major merits that can be associated with this popular trading methodology include:

Advantages:

  • Clear trading boundaries: the swing system outlines precisely when to enter into a position, the most strategic stop loss, and the best take profit point. Following this religiously ensures losses are cut short early enough and winning trades are left to run.
  • Natural Market Movement: one of the major reasons why people lose in forex trading is trying to fight the market and its flow. Swing trading at its core exploits the natural flow and movements of the market to get into profitable positions. It’s all about identifying where the market has been, where it is currently, and its probability of its revisiting a previously identified position, and then taking advantage of this.
  • Smaller stop losses: except for intra-day trading strategies, swing trading has the lowest stop losses. This means that the risk associated with every position taken is relatively lower and so one’s investments are better protected. The ideal swing strategy also advocates for a minimum 3:1 profit to loss ratio: every position taken should have the potential of bearing three times the earnings as compared to the trade risk.
  • More Trading opportunities: being a medium-term trading strategy, swing trading allows for the discovery of trading opportunities as they arise, because one is in and out of trades relatively fast. Due to its roots in the cyclical movement, it also allows for trading with the trend as well as trading the counter-trend—hence more trading opportunities.

Disadvantages:

As a swing trader, you always have to remember the following to minimize the potential loss associated with this trading methodology:

  • High stop loss hit rate: swing trading has tiny stop loss margins, which sometimes are not enough to allow the market time to pull back so as to get the required momentum. This means that the potential for a position to hit its stop loss is high and every hit leads to lost funds
  • Market Unpredictability: swing trading is about probabilities. As such, the market does not always behave how technical analysis suggests. Swing trades are highly susceptible to market whipsaws; the market behaves in a completely opposite way to what we expected.
  • Opening Gaps: swing trading involves holding positions over many trading days. Sometimes, markets may open with considerable price gaps, and if the gap is against a position it means instant losses.

Swing Trading Strategies

All strategies for swing trading can be traced to specific technical indicators, because this is a methodology rooted in the analysis of market movement. The most popular swing trading strategies are:

MACD Crossover

This is one of the most widely recognized and used swing trading strategies, because it shows both a trend direction and a trend reversal. The MACD indicator has two lines: a signal line set at zero, and, a moving average line. Any time the moving average crosses the signal line suggests the potential for a trade: a cross on the upside for a bullish position while a cross to the downside indicates a bearish position.

A crossover in the opposite direction given the position held signals for an exit point for that position.

MACD Crossover

In this chart, the moving average is in red while the white bars represent market volatility: the more significant the bars are, the higher the market volatility. From the chart, it is clear that anytime the moving average crosses over we are in a down or up-trend depending on the direction of the cross. However, the major disadvantage of this, as can be seen, is that by the time the crossover happens, the trend has been going for quite some time, meaning entry is delayed.

Fibonacci Retracement

This is a forex technical analysis tool used chiefly to identify levels of support and resistance. Over time, it has been observed that forex markets tend to pull back to some set levels before continuing in whichever long term trend the market currently is in. These levels came to be known as the Fibonacci levels and are in the form of a percentage of the overall market movement: 61.8%, 23.6%, and 38.2%. Recently, traders have also added a 50% level because of the high probability observed of a trade retracing after moving half of its former distance.

Swing trading uses these levels to define a position entry point and to set stop losses and take profit levels.

Fibonacci Retracement

  1. Previous resistance level

  2. Price comes down to previous resistance level that coincides with 50% FIB level (confluence) Then price pulls up

Looking at this image, for this uptrend, the Fibonacci drawing point is the lowest price of the last bearish candle. The second drawing point is the last swing high. From there, any time the price retraces to any of the levels you can take a bullish position to trend with the trend.

Supports and Resistance

This has long been regarded as the foundation of technical analysis for forex trading. A support level refers to a price level where buying pressure has already overcome selling pressure causing a change in trend. A resistance level, on the other hand, refers to a price level that has previously demonstrated selling pressure overcoming buying pressure leading to a bullish trend turning bearish.  

Swing traders use these points to map their entry, stop loss, and take profit. In a bullish position, a trader waits for the prices to bounce off the support level and enters a buy position with the stop loss a few pips below the support. Traders can then set their take profit within sight of the previous resistance level. The reverse is also true for bearish positions.

Of importance to know is that a considerable breach in either support or resistance level converts the level breached to its opposite: a support that has been broken becomes a resistance level while a resistance level broken becomes a support.

Channel Trading

This is a strategy that works best with market conditions that are clearly defined as either bullish or bearish. The trick here is to always trade with the trend. When you plot a channel on a bullish trend, you enter into a buy position when the price bounces off the bottom of the channel and you use the previous bounce of the channel top as your take profit level. The last bounce off the bottom is now used as the stop loss level. For a bearish position, the opposite is the way to go. On the chart below, the blue diagonal lines represent the channel for trade for this bearish market. Every time the price hits the channel, it bounces back off it.

Caveat: the best risk management method is to always trade with the trend. In the case below, the best trades would have been bearish positions taken after a channel bounce at the top.

For example, the moment the price hit the channel at 1.13152, channel trading dictates that the price will bounce off to the downwards. As a result, one should place a sell order a few pips below the channel hit, in this case, 1.12797. The stop loss should be a few pips above the previous channel hit, 1.13841, while the take profit is within the previous channel hit at the channel bottom, 1.11273. This is a trade that had 150 pips movement, translation, very profitable trade with the trend using channels.

Day trading vs. swing trading

Day trading vs. swing trading

The major difference between day trading and swing trading is the time frames that are analyzed, and the time a position is held. The other differences include:

Day TradingSwing Trading
Positions closed at end of trading dayPositions usually held overnight and longer
Larger position sizeRelatively smaller position size
Use both fundamental and technical analysisCan exclusively rely on technical analysis
More time on the screen required to monitor tradesLess on-screen trading time required

 

Which financial instruments are the best for swing trading?

This is a question that is as old as trading itself. It would be of no help to anyone to have knowledge of a winning strategy like swing trading, but not to know what instruments to apply it to. Historically, swing trading was mostly used for large-cap stocks trading: stocks of firms with large market capitalization, $10 billion and above. However, the opening up of forex markets to all has seen almost all the forex instruments conform to the market dynamics of supply and demand. As such, all one needs to do is identify if an instrument displays the telltale signs of normal market behavior of up and down, and voilà! You have an instrument to trade using swing trading.

Conclusion

With this guideline, you are on your way to becoming an excellent swing trader. All that remains now is for you to pick a forex broker that will give you not only all the instruments to use with your swing strategies but the best margins and fast market executions that will complement your strategy. That broker is Libertex. This is a broker that will ease your swing trading strategy to ensure consistent profits. Apart from the fast market execution times and superior margins, you get to enjoy an array of technical indicators to help you make all the analysis as well as real-time forex related news to ensure you are not caught off guard. Libertex also allows its subscribers to open demo accounts where they can practice their strategies and trading methodology to perfection before venturing into real money trading. You also get to have a broker of global repute providing instruments at zero spreads: Best crypto-currency broker two years running (2017 and 2018), Best Trading app (2017 and 2018), and recognized by the International Financial Commission.  

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