What is Swing Trading?swing trading strategy
Swing trading is a style of trading that involves holding a position for a period of time ranging from a few days to a few weeks. It is a more or less active trading approach, in which the trader tries to capture a good part of a market trend that has established itself.
The swing trader looks for a good entry point, then closes his position at key levels where the market could change. Swing means wave. Since a trend is formed by a series of waves, the swing trader's goal is to make the most of it.
The 3 best brokers for Forex swing trading
eToro, Capital.com and Libertex are brokers suitable for swing trading.
Swing traders generally use technical analysis in combination with other fundamental factors.
Swing traders typically work on four-hour (H4) and daily (D1) charts. They can use fundamental analysis and technical analysis to guide their decisions.
The swing trader has prolonged exposure to the markets as he can hold his positions for several days. As prices can move strongly against his position, he takes a lower position than the day trader or scalper, who often uses more leverage.
That said, swing traders can use low leverage. Trading on margin in swing trading can be risky. Especially if the volatility increases significantly after taking a position.
To analyze the markets, the tools most commonly used by swing traders are chart patterns and technical indicators such as moving averages. Congestion figures such as triangles, rectangles and bevels are the starting point for new trends, which swing traders can take advantage of. Likewise, the head and shoulders pattern and the double top are game changers that offer attractive trading opportunities.
The Stop Loss and Take Profit
Swing trading requires setting a wider stop to avoid prematurely exiting a position. While scalpers have tight stops of a few pips, swing traders have stops placed sometimes hundreds of pips from their entry point. This obviously implies reducing the size of the positions. Therefore, the swing trader is less affected by market noise.
Take profit can also be positioned hundreds of pips from the entry point. Swing trading positions often offer a better risk / reward ratio than day trading and scalping.
A better reward / risk ratio?
The swing generally allows you to have a take profit positioned at a greater distance than the stop loss. This means that we are aiming for much more than what we risk losing. A risk / reward ratio greater than 1 is and chances of success greater than 50% are often required to be profitable as a trader.
Which tool should you use for swing trading?
All tools can be used for swing trading. Each market behaves differently. Indices can be established for several weeks, currency pairs can set regular waves during a trend. Stocks can fluctuate quickly in a short period of time.
The best environment is when the financial instrument describes regular bullish and bearish waves and there is volatility in the market. In this way, swing traders can anticipate reversals, position themselves to buy or sell.
How to swing the trade effectively?
For swing trading, there are two options available to traders.
Focus on one instrument and use different patterns.
Specialize in a model you are looking for on different tools.
In the first case, we can for example follow the daily chart EUR / USD, on which we can trade breakouts, pullbacks, but also ranges. We try to take advantage of all the movements of the instrument.
In the second case, we are satisfied with a graphic configuration, for example the breaking or breaking of a triangle pattern. We look for this pattern on a selection of different financial instruments, for example on the stocks that make up the Nasdaq 100, or on cryptocurrencies.
By proceeding in this way, we organize our trading better and avoid taking random configurations.
The Qualities of the Swing Trader - Is Swing Trading Right for You?
There are many resources to learn all about swing trading: podcasts, books, blogs, etc. They will teach you the technical aspect of swing trading. But this is not enough. The psychological aspect is also important and it is essential to swing trading profitably.
Stick to your trading plan
There will be ups and downs, it is inevitable when trading on the stock exchange. But it is important for a swing trader to stick to his trading plan at all times. There will be times when you will not have trading signals. In these moments it will be necessary to fight against the temptation to take positions of little relevance.
Also, in the H4 and D1 time units, trading signals can take a long time to fully form. The swing trader must be patient enough to wait for the desired pattern to be fully formed and validated.
Consider the volatility
Risk appetite is different for everyone. You need to find the right level of risk for you. For example, you can start by risking no more than 2% of your account on a single position. There is no common figure for all traders. Some would be perfectly comfortable risking 5% per trade.
When setting the stop loss, however, remember that market volatility can increase at any time after an event that shakes the markets. The 100 stop points you imagined could turn out to be much more when slippage is taken into account.
Take a long-term approach
Swing trading is different from scalping where you expect to generate small profits throughout the trading session. The swing trader has to measure his results over the medium and long term, over several months. The trader should not be obsessed with a particular position. In jargon we say “don't fall in love with your position or your profession”. This means that the trader should remain pragmatic and apply their trading plan objectively.
Pay attention to economic news
Swing traders hold their positions longer in the market. This means that they can be influenced by the different economic events, company results, news, etc. Markets are constantly moving in reaction to the news.
Many sources, including brokers, provide analysis and commentary on the markets. If used correctly, the news could help you identify interesting trading opportunities. They can also help you plan your entry and exit or exit positions to limit your losses.
Never stop learning
There is a wealth of information available to help you develop swing trading strategies. Consult various Internet resources and books to discover different swing trading strategies.
The idea is to see which approaches or strategies work best for you. You can use a free demo account to test different strategies. For a given approach, it may need to be tested for several months to see if it works or not.
Don't trade trades if you have these traits
While less demanding than scalping or day trading, swing trading requires patience and discipline.
Impatient
Outside of long-term investing, swing trading is the least active approach to trading. A single operation can take days, or even weeks, before the goal is reached or the transaction is closed.
Swing trading therefore belongs to patient traders who do not feel the need to close their position until their goals are achieved. If you change or close your positions on impulse or feel the need to quickly take your profits, swing trading is probably not for you.
Eager to actively negotiate
You may find it necessary to analyze and intervene on the markets very often. Swing trading doesn't need to be very active on the stock market. Many swing traders only look for opportunities once a day when US markets close. If you want to trade actively enough, it would be best to switch to scalping or day trading.
Things to consider in swing trading
The ability to spot a trend and buy or sell early is essential for effective swing trading. The trader must also be able to anticipate rollovers.
Follow the trends
The swing trader often needs a sustained trend to make sufficient profits. To maximize his profits, he has to follow the trend. This involves positioning yourself on the right side of the market fluctuation and maintaining your position to take advantage of much of the price extension.
Following the trend has several advantages. Reduce trading costs because your positions last longer. Also, historically, the biggest gains on the stock market have come about this way. You cannot expect to earn 20% on a scalping position unless you take insane risks. But this is possible with swing trading, without taking risks with leverage.
Momentum
Momentum is very related to the trend. Momentum trading is a strategy that relies on the strength of price movements. Momentum trading concerns the purchase and sale of instruments based on the current strength of the trend. If the trend is bullish, we wait for pullbacks to buy the instrument. If the trend is bearish, we also expect a retracement to sell towards momentum.
The idea
is that the trend will move in the same direction. Momentum traders try to identify the strength of the trend in a given direction, then open a position to take advantage of the underlying trend. Then close their positions when the price starts to retreat. They restart the operation at the end of the pullback.
Mean Reversion
A return to average is a concept in which the price of an instrument will always return to its fluctuating average after being overbought or oversold. It is somewhat the opposite of momentum, which states that the generated trend is likely to continue.
Return to average followers buy a stock after an unusually high drop in its price. When a sharp drop occurs, there is usually a good chance it will return to a normal level. The same logic applies to a sharply rising stock.
The latest events related to Covid-19 are an example of this. Markets fell sharply in March. But from mid-March prices began to correct the decline to stabilize at a level certainly lower than the pre-crisis level, but which can be considered a "normal" level for a period of decline linked to this epidemic. The excessive decline therefore creates an opportunity for investors who hope that prices will recover.
Volatility
Volatility can affect the swing trader as he often has long exposure to the markets, unlike short-term traders who close their position after a few hours.
On January 15, 2015, the Swiss National Bank (SNB) abolished the minimum rate of 1.2 Swiss francs at 1 euro. This unexpected move resulted in a drop of over 2,000 pips on some CHF currency pairs. Some traders then saw their balance enter the negative zone, because the stop losses were not guaranteed.
We must be aware of this type of phenomenon, although rare, it can still shake the markets.
Discipline
Swing trading does not have the same intensity as scalping or day trading. But it requires discipline. You must take care to organize yourself to monitor the markets during a period of the day, in the evening for example.
Outside of this period, you should not change or manage your intraday positions. Otherwise, you will switch from swing trading to day trading, which probably wouldn't be in your trading plan.
Risk management
Choosing the optimal position size, depending on the volatility, is important. Some tools are more volatile than others. They therefore require a stop loss and take placement of profits further away from the entry point. Likewise, when market volatility increases, you have to reduce the size of your positions and move the stop loss and take the profit away.
Manual or Automated Swing Trading?
Very often, swing trading does not require automation of your strategy, because in theory you do not intervene very often in the markets. Swing trading can be done with a basic platform, which allows you to do analysis and place orders. You may need a screener to find the stocks that interest you.
Comparison between Day Trading and Swing Trading
There is no trading style that is better than the others, it all depends on your goals and psychological skills.
The time frame in which you trade can affect your profitability. Day traders open and close multiple positions during the same session. Conversely, swing traders take a few positions per month. These two trading styles can be suitable for a variety of traders depending on the amount of capital, time and risk aversion.
It cannot be said that one trading style is better than the other. In fact, it is a question of knowing which style suits you best based on your availability and risk aversion. However, one does not exclude the other. A day trader may very well hold swing positions for several days.
Swing Trading Strategies
There are several methods for swing trading. The use of supports and resistances, combined with the Japanese candlestick figures, is very popular among traders.
Support and resistance
Trading the support and resistance levels is very simple and works well for swing trading. In major time units such as the daily or weekly chart, support and resistance are more relevant and are followed by most market participants.
The most common use of S / R is the concept of support that turns into resistance and vice versa. When a support is crossed to the downside, it tends to become resistance. Likewise, when resistance is crossed to the upside, it tends to become support. These levels therefore offer relevant entry points for traders.
Fibonacci retracements
This indicator is widely used in technical analysis. Allows you to anticipate the resumption of a trend after a pullback. The most followed retracement levels are: 23.6%, 38.2% and 61.8%. These are the retracement percentages of an already formed extension.
When a Japanese candlestick reversal pattern forms at these levels, it is a relevant trading signal that can be exploited.
Channels
Channels are formed when the trend is very regular, with ascending and descending waves of the same amplitude. In an uptrend, the low points of a channel are entry points that swing traders take advantage of. Likewise, in a downtrend, channel highs are attractive entry points for selling.
By applying the momentum principle, the swing trader can exploit a channel multiple times, until the price exits.
The breakout
The breakout of the support and resistance can be very profitable, as it is often accompanied by a rapid rise or fall in prices. The most relevant breaks are those of graphic patterns, triangle, rectangle, bevel, etc. These are congestion figures, the breakdown of which by the price is accompanied by a rapid fluctuation.
Some swing traders specialize in breakouts because they allow you to make relatively quick wins.
The advantages of swing trading?
Saving on trading costs and flexibility are some of the main benefits of swing trading.
Swing trading allows you to naturally benefit from stock fluctuations. These never follow one direction, they go up and down. The swing trader is not affected by minor retracements within a trend.
Swing trading is cheaper than short-term active trading. In a month we can only take a few positions. We therefore pay much lower costs than a scalper.
It is a flexible trading approach, which you can do without interrupting your usual schedule (work, family, etc.). The same cannot be said for day trading.
The swing trader often has a good return / risk ratio for his positions. Its stop loss can be 150 pips from its entry point and its take profit of 500 pips.
Disadvantages of Swing Trading
Swing traders are exposed to stock market crashes and other market turmoil.
Prolonged exposure to a stock can maximize your earnings, but increases the risk of enduring a stock market crash. It increases the risks of encountering an economic or gain event outside trading hours when the markets are closed and you cannot close your position.
Swing trading can be boring, with many months without any profit.
Conclusion
Swing trading is recommended for beginners, as it is a trading approach that requires less risk. Plus, you can do it without interrupting your schedule. Of course, in the beginning, it will take some time to learn swing trading and test strategies.
If you have a profitable and sustainable method, you can generate more or less passive income every year, as it is an inactive trading style. However, you should be aware of the risk of trading in the markets.
